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Social Security Reform: If the Poor Must Work, Let It Be for Me!

Posted on 02/14/2005 3:56:58 PM PST by freeholland

Yielding to my contrarian impulses, I decided to see if I could figure out a good reason for Republicans and other Conservatives to oppose the privatization of Social Security.

And I did!

Going to the Social Security Administration website and using the Quick Calculator there to estimate what I’m likely to receive when I retire, not too many years from now, I see that I will receive the maximum benefit, about $2,000 a month in 2005 dollars.

Now, my other investments, including my PRAs (Private Retirement Accounts, but I call them my “401k” and my “Roth IRA”) will yield a fairly nice income, several times my Social Security benefits. I don’t really “need” the Social Security money, I will have “enough” already, from a purely existential perspective. But, as everyone knows, except the most devoted ascetics, “enough” is never quite enough.

So I shall look upon my Social Security benefits as gravy on the roast, or icing on the cake, or raspberries in the sabayon, or maybe bubbles in the champagne, and I figure they’ll be just about right to pay for a modestly luxurious three month vacation to Europe, or Bali, or some other interesting place every year for twenty years or so, assuming I live about as long as the average age of my recent ancestors.

Yes, folks, that’ll be at least four or five years of vacations, all paid for by the poor workin’ stiffs who are out there totin’ them barges and liftin’ them bales, and paying 12.6% of their gross income into the Social Security “Trust” Fund so I can take a 3-month vacation every year on their money!

Thank you, thank you, I will surely be grateful! And I will think of you and raise a toast as I sit sipping Patron margaritas in the shade at Cabo San Lucas!

Yes, and if you’re older than me, and poor enough that you can’t afford to retire, guess what? You’ll still be working to pay for my vacation! And your children, and your grandchildren, and maybe your great grandchildren, too . . . yes, I can almost see ‘em now, in their teens and early twenties, working at their entry level jobs for seven bucks an hour, bussing tables, flipping burgers, mowing lawns, and handing twelve cents of every dollar over to me for my vacations! - thanks to Democrat senators and representatives and senior rights activists and the AARP who killed Social Security Reform!

The Social Security Tax is the most regressive tax in America - a flat tax on all income up to $85,000, with no deductions or exemptions - it takes a bigger bite out of what would otherwise be discretionary income for the working poor than for the rich - and it’s the only tax imposed on low income workers to pay for the luxuries of the affluent!

Social Security, as it is now, works on the exact opposite of the Robin Hood Principle, which, I assume, is not the way Democrats and Liberals should think it should. The Robin Hood Principle is that money is taken from the rich to give to the poor.

But Social Security takes money from the poor to give to the rich! And FDR did it!

If the Democrats and other Liberals understood this, I think they’d be out in front leading the charge of the enlightened brigade to reform Social Security. But this fact is so obvious that it is apparently quite beyond the ken of those champions of the proletariat, the Democrats and other Liberals.

The most important ideological and policy reason to support Social Security reform, or reorganization, is that it would eliminate the unfairness of taxing the working poor to benefit the retired rich. Unless, of course, like me, you think that taxing the working poor, like you, to subsidize the retired rich, like me, is perfectly fair.

Privatizing Social Security on the Chilean model (which goes even farther than the Bush model) would eliminate this fairness, or unfairness, depending on how you see it. It would pretty much eliminate the current practice of taking (taxing) one person’s money to pay for another person’s retirement. And it would completely eliminate the practice of taxing the Working Poor to subsidize the vacations of the Retired Rich.

Since most Democrats and Liberals apparently do not know how it works, I will explain. But you don’t have to take my word for it. The basic information can all be found at the Social Security Administration website on the information page for Chile’s social security system (“Social Security Programs Throughout the World”) - and in the article by Jose Pinera, who was Chile’s secretary of labor in the late 1970s and oversaw the reorganization of Chile’s social security system, at the Cato Institute website, “Chile’s Social Security Lesson for the U.S.,”

This is the nutshell version:

1. 10% of your income is deducted from your payroll and deposited in your Personal Retirement Account (PRA). This is slightly less than the 12.6% that you pay now (yes, even though half of it is “paid by your employer,” a neat trick to keep the size of the hit from showing up on your pay stub - it’s all money you earned, and your boss wouldn’t pay it if you didn’t).

This is your money, your savings, your investment - it does not go in one window and out the next to feed the Retired Rich. It’s yours for life, and if you don’t spend it all you can leave it to your wife, or husband, or kids, or Greenpeace.

2. Your PRA is like a 401k or an IRA. You can’t play with it. You can’t speculate with it. It is managed by one of several authorized, regulated, PRA management funds, and invested in a broad diversity of stocks and bonds, just like your Union Pension Funds, Public Employee Retirement System Funds, 401ks, and IRAs are today. You can pick which fund, or funds, you want to put it in, but you can’t buy commodity options.

3. The analysis at the Social Security Administration website estimates that the PRAs would yield about 7% after inflation, about three (3) times the 2.3% “yield” of the existing Social Security system.

But, in order to get even that “yield” from Social Security, you have to live out your full actuarial life expectancy. If you die a little too soon, your “yield” is negative, and if you die before you retire, it’s “infinitely negative” - neither you nor your family (with a couple of exceptions) get back any of the scores or hundreds of thousands of dollars you paid in. Poof! - money all gone!

And you sure can’t leave it to Greenpeace.

4. When you are young, your PRA is invested mostly in growth stocks. As you grow older, the portfolio balance shifts to bonds, so that by the time you retire it’s all bonds, mostly government bonds, with fixed interest rates, so it is not affected by stock market volatility, just like the “Lifestyle” IRAs and 401ks many fund managers are offering now.

5. Some pundits, like Paul Krugman, have tried to scare you with fantastical stories about the administrative cost in Chile eating up “20%” (his number!) of the money in the PRAs. The Social Security Administration estimates an administrative cost of 0.3%, competitive with other 401ks and IRAs and major pension plans.

6. When you retire, your PRA can be converted into an annuity, to pay you a fixed income for life, or you can draw approximately 5% per year, or some other percentage calculated by dividing the money in your PRA by your actuarial life expectancy.

7. What if you run out of money before you die? What if you don’t have enough in your PRA to retire on?

Under the Chilean model, the government guarantees a minimum benefit, set by statute. If you don’t earn enough during your lifetime to take the minimum monthly benefit from your PRA, the Social Security Administration makes up the difference. If you live a really long time and exhaust your PRA, the Social Security Administration pays the minimum benefit.

This transforms Social Security benefits from a primary retirement system to a true “safety net,” which is what it was originally supposed to be.

How do the two compare?

Under current Social Security tables, a person born in 1950, retiring in 2015, and earning $30,000 in 2005 (median income), will get about $947 a month (2005 dollars) when he retires.

Under the Chilean PRA model, if it had been in place in America over the last thirty or forty years, so our hypothetical guy was fully invested in his PRA, a person born in 1950, with an averaged income of about $30,000 (median income), retiring in 2015 after working 45 years, would have somewhere between $600,000 and $900,000 in his PRA (depending on high and low earning curve assumptions).

If his PRA was all in T-bills earning 4% at retirement, it would yield $2,000 to $3,000 a month in interest only - $24,000 to $36,000 a year - two to three times as much as his Social Security benefit now, without even touching the principal. If he tapped into the principle, too, it would yield a retirement income of $4,000 to $6,000 a month, $50,000 to $70,000 a year, for twenty years, i.e., four to six times what he would get from Social Security now.

With the average household income at about $40,000, the average married couple in America - at median income - would retire with about a million dollars in their PRA, maybe a little more. About half of all Americans could retire as, literally, millionaires. That would be enough to pay for a retirement income of maybe $80,000 a year. Under the PRA system, the average working stiff could retire after 40-45 years with roughly twice his averaged income during his working life, or roughly five times what he can expect to get from Social Security now.

What about the working poor?

Today, a person born in 1950, retiring in 2015, earning $10,000 a year in 2005, can expect a Social Security check for about $543 a month (per the Social Security Quick Calculator).

Under the PRA system, the same person would have about $300,000 in their PRA, enough to pay about $2,000 a month over 20 years, approximately four times what they’ll get from Social Security as it is. A person who had worked 45 years at an average of today’s minimum wage (California minimum wage $6.75 per hour, working 2000 hours, earning $13,500 a year) would have about $400,000 in his PRA, enough to draw about $30,000 a year in retirement.

[Note: the above calculations are based on standardized earning curve assumptions, and will vary if you change the assumptions - but very few people work for minimum wage their whole lives.]

I haven’t amassed the data I need to do the calculations, but my rough estimate is that if we adopted a system in which 10% of everybody’s income up to some cap, say $100,000, were deducted from payroll and put into their Personal Retirement Account, and a 1% Social Security Tax was imposed on all Adjusted Gross Income (after exemptions and deductions) with no cap, it would: (a) fully fund the retirement at least 80%, maybe 90% or more of all working Americans from their own Personal Retirement Accounts, and (b) fully fund the Social Security Administration guarantee of a minimum benefit at least equal to the HHS Poverty Level income now, about $775 a month for a single person, or $1550 a month for a married couple, which is well above minimum Social Security benefits today. The rich would get more, and the poor would get more. Win, win.

The cost of Social Security would shrink to 5% or less what it is now, since most people would have their own PRA that would pay them more than Social Security could ever dream of doing; and most of the rest would have a PRA that would pay part of the minimum benefit, and Social Security would just have to make up the difference, not pay the whole thing.

The problems, of course, appear to be, first, getting the Democrats and Liberals to understand why the existing Social Security plan is regressive and unfair to the Working Poor (although it is quite fair, even if it’s a bad investment, for the Retired Rich!), and, second, financing the transition.

I won’t get into that, here, but we’re going to have to figure out how to either pay for trillions of dollars of unfunded Social Security obligations, either by raising taxes, raising the retirement age, or cutting benefits, or some combination of all three, or figure out how we should finance the transition to a Personal Retirement Account system so Social Security no longer has trillions of dollars of unfunded obligations. There is no free lunch in this picture. We pay if we do, and we pay if we don’t. But in the long run we pay a lot less if we do.

If we keep the system we have, and raise taxes or cut benefits, we are still stuck with the fact that the Working Poor will still be totin’ them barges and liftin’ them bales to pay Social Security taxes to embellish the lives of us Retired Rich.

And I thank you very much. Wish you were here! No, no, I don’t, that’s much too generous. Keep workin'!

About the Writer: Raymond Kraft is a lawyer and writer living and working in Northern California. Raymond receives e-mail at

TOPICS: Business/Economy; Constitution/Conservatism; Culture/Society; Government; News/Current Events; Philosophy; Politics/Elections
KEYWORDS: 401k; aarp; arguments; benefits; chileanmodel; democrats; ira; opposition; pensionfunds; principle; privatization; reasons; reform; retirees; robinhood; socialsecurity; tax; union; youngerworkers

1 posted on 02/14/2005 3:57:03 PM PST by freeholland
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To: freeholland

Excellent analysis.

2 posted on 02/14/2005 4:22:07 PM PST by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
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To: freeholland

Democrats reject changes in social security because when people are self sufficient, they don't need Democrats any more!

3 posted on 02/14/2005 4:28:23 PM PST by JimRed (Investigate, overturn and prosecute vote fraud in the State of Washington !)
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To: freeholland
Interesting that FDR originally wanted Social Security to be an insurance program for senior citizens.

Mr. Inspectorette and I went to the Social Security office today to apply for his benefits - he'll be full retirement age in April.

The place was packed, but surprise, surprise: we were the ONLY older people there! It was packed with young people - can someone tell me why this ratio was so skewed?

4 posted on 02/14/2005 5:51:54 PM PST by Inspectorette
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To: freeholland

Bookmark for later.

5 posted on 02/14/2005 5:57:04 PM PST by Califelephant (What's freedom worth?)
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To: Inspectorette
It was packed with young people - can someone tell me why this ratio was so skewed?

Disability? One of unmentioned drains on SS is disability payments.

6 posted on 02/14/2005 6:01:08 PM PST by Harmless Teddy Bear ( At least now we know that migrating elephant herds react badly to flaming motor homes...)
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To: freeholland

I have a suggestion for those who won't need their SS - how about setting up a foundation and donating the money to worthy students from your hometown's high school ..??

That's a good way to recycle the money. You help to educate people - who make a better living - who also won't need their SS - who can donate it to their local high schools.

$2000 a month could be divided between 2 students. I would just love to be able to do that.

7 posted on 02/14/2005 6:42:26 PM PST by CyberAnt (Pres. Bush: "Self-government relies, in the end, on the governing of the self.")
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To: freeholland

Mr. Kraft seems to forget that for more than forty years he and his employer will have been "contributing" to SS. Is he so charitable as to consider this $300,000 or more as a gift to the US Treasury or to the Retired Rich who were frolicking in Bali as he flipped burgers in his younger days?

8 posted on 02/14/2005 7:11:37 PM PST by Greedy Geezer (Gimme, gimme, gimme)
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To: NonValueAdded

Self ping for later reading.

9 posted on 02/15/2005 6:24:00 PM PST by NonValueAdded ("We're going to take things away from you on behalf of the common good" HRC 6/28/2004)
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