I received this meme in my Facebook feed yesterday…
As you can see this was posted in the Thomas Sowell Foundation group, a libertarian-minded group espousing the ideas of free minds and free people. I am a huge fan of Thomas Sowell, even have an autographed book from him.
So, naturally, I should agree with what the meme stated, right?
This meme writer is making the classic mistake I see over and again. The same mistake I also made for many years. Sadly, it’s because of the Social Security Administration that this happens and thus people WAY undervalue the actual benefits they’ll receive. Ultimately, because of this people to do bad retirement planning!
Howso? You may be asking.
Well let’s go to the crux of the meme. By the time he is 67 $600,000 will have been paid into Social Security on this person’s behalf. Now, I’ve no idea how old this person is so I can’t even begin to guess how long he’s been paying into the system. But suffice it to say, the maximum taxable wage for Social Security in 2019 is $132,900.
So, the maximum amount paid into the system on his behalf is $16,479.
Let’s say he made the maximum amount of compensation in today’s dollars for 35 years, he and his employers would have paid into the system $576k. If he worked for 40 years at the maximum amount of taxable income, $659k would have been paid into the system on his behalf.
Now, remember, he is only paying 6.2% into Social Security. The employer is paying the other 6.2%. Secondly, while total FICA taxes are 15.30%, only 12.4% of that are actually going into the Social Security system. The rest is going for HI, Part A of Medicare.
So, number 1 is this guy is actually only paying around $300k into Social Security of his own money and that’s assuming he’s making the MAXIMUM taxable wage each year over a 35-40 year working career. Hard to imagine, but we’ll assume he is a special employee.
The other $300k is coming from his employer. And I’ve got news for you, my friends, if you think your employer would just hand over that $300k if Social Security taxes weren’t mandated, you really need to come back to reality.
Employers are not in the business of making their employees have a wonderful retirement, and they shouldn’t be. Employers are in the business to make a profit…for the owner, the person(s) who risked the capital to start the enterprise. If the employer can get by without putting anything into your retirement plan, he certainly would do so
If he can get by with only putting $100k into your retirement plan, he would do that too. Just because it’s a mandate from the Feds that the employer needs to come up with an extra $300k to fund your Social Security benefit, doesn’t mean the employer would do that voluntarily. The fact a person writing in the Thomas Sowell Foundation group page doesn’t get this shows the amount of work that needs to be done by us free-thinking individuals .
Secondly, and here is the big, and very typical, mistake. This guy says his Social Security benefit will be only $3,067 a month at his Full Retirement Age(67) but if were to have invested his money with a 5% rate of return, he’d get at least $95k annually from interest alone.
Wanna take a gander at what is wrong with this picture??? Scroll down to see the answer…
He is comparing his Social Security benefit in TODAY’S dollars to a portfolio that grows at 5% annually over so many years. This would be the same as comparing my actual Social Security benefit at my Full Retirement Age to my granddad’s actual benefit at his Full Retirement Age and saying he got screwed. In actual dollars, my benefit will be significantly higher than his. But in terms of purchasing power, it’s the same. Why? Because of inflation.
To compare what you could get from an inflated portfolio a number of years down the road to what your Social Security benefit is in TODAY’s numbers is completely apples to oranges. You are allowing your portfolio to grow all the while keeping Social Security constant. That’s not how it works.
Social Security benefits will ALSO grow at an inflated rate. Initially your benefit will increase each year by the change in the Average Wage Index (AWI). Once you hit 60 years old, your benefit will increase by the Cost of Living Adjustments (COLA) that the BLS reports.
Because we do not know what the future increase in AWI will be year over year, we use the Social Security Trustees report to give us a gauge of expected COLAs. The Trustees report has three thresholds they consider, Low, Intermediate and High.
Whenever you read about Social Security being “insolvent” or whatever by 2034 it is based on the Intermediate numbers. Those numbers include a COLA of 2.6%.
So, if we use a 2.6% COLA we need to increase that $3,067 Social Security benefit by 2.6% a year, the same way this guy is using a 5% rate of return.
Let’s say this guy is my age, 49. In 18 years, when I am 67, my $3,067 monthly benefit will pay, in actual dollars, $4,868. If we times that by 12 we get an annual benefit of $58,000 or so. Not as good as the $95k interest this guy was assuming he’d get, BUT,
A. It’s guaranteed.
B. It may provide a significant Spousal and Survivor benefit too
C. If I wait until I’m 70 that $58k a year will actually be $73k a year because of the 8% Delayed Earnings Credits
D. It’s taxed MUCH more favorably than his interest payment. In fact, check this video I did just yesterday on how you can pay NO tax simply by working the tax code. It’s incredible actually.
So, remember, what the Social Security statement shows you is your benefit in TODAY’S dollars. That is NOT what your actual benefit will be once you start taking it. To compare a portfolio with whatever growth rate you want to use vs. a Social Security benefit in today’s dollars is meaningless.
Lastly, I also want to point out his contention that the government is stealing form him. He asks “How is this not THEFT?” The irony is, HE is the one actually advocating theft by using these numbers to begin with!
How? Because half the money contributed to his Social Security benefit is coming from his employer and yet he just moves those contributions over to HIS personal balance sheet. But the employer payments are NOT HIS! You can’t gripe about the government “theft” and use the same money the government purportedly “stole” from your employer as part of YOUR personal balance sheet.
Gripe all you want about the government’s mismanagement of Social Security. But you can’t then turn around and say it’s theft what the government is doing because it’s not giving you enough returns but it would not be theft if you were able to get 5% a year returns.
It’s NOT YOUR MONEY! It’s the employers money. If you were truly comparing apples to apples you’d only use the money YOU are contributing to your retirement to compare to what Social Security provides. You would not have the luxury of using your employers because you have no legal right to take what is not yours in order to fund your retirement.
There are basic principles of freedom, #1 What’s mine is mine, what’s yours is yours. When people who should know better don’t understand how this works, I realize how far removed from true liberty we are.
Once you realize that, you can gnash your teeth and yell at the clouds, or you can do what you can to maximize the freedom you, and your countrymen, do have.
For me, it’s the latter. And that’s to show people how their Social Security benefit actually works so they stop discounting it as a red-headed step child and realize it for the incredible benefit it is. And how you can use it to advance your own personal freedom, like getting out of your crappy, old job.