Will all my readers out there who think Rick Perry's
ruggedly handsome mug should be carved onto Mount
Rushmore
please stop sending me emails about
Social Security as a Ponzi scheme? The astute governor
from Texas, apparently one of the country's leading
experts on Social Security, has been running around
comparing the federal retirement program to such a
doomed investment plan.
I've addressed this issue many times before in this
column. I don't want to bore my regular readers with
another long dissertation on this topic. But since
Gov. Rushmore broached the subject, I'll make three
quick observations.
First: Social Security is not an investment
scheme. It's a social insurance program. (The word
"social" in "Social Security" means something!)
In addition to providing workers with a basic and
stable income in retirement, Social Security was
established to achieve larger goals for our country as
a whole. One of those goals was to raise the standard
of living of lower-income workers in retirement. This
is accomplished with a weighted benefit formula that
gives those retirees a higher "replacement rate" —
when comparing their average income with their Social
Security retirement benefit — than their more
well-to-do fellow taxpayers can expect.
Second: Many emailers wrote to tell me how Social
Security started out with thousands of taxpayers for
each Social Security beneficiary, how we now suddenly
find ourselves at a three-to-one ratio, and how the
entire scam will implode when we reach two to one.
That's a classic Ponzi-scheme scenario, they say.
Well, obviously, in the earliest days of the
program (the early 1940s), workers far outnumbered
Social Security beneficiaries — but the ratio was more
like 40 to one, not "thousands" to one. But as more
and more people quickly qualified for benefits, the
taxpayer-to-beneficiary ratio rapidly dropped, and by
about 1970, it had matured to the three-to-one ratio
that has held strong for 40 years now.
As the baby boomers retire, we are indeed heading
toward a two-to-one ratio. But with some modest
adjustments to benefits and/or tax rates, the system
can continue to operate quite well at such a
worker-to-beneficiary ratio.
Finally, third: Ponzi schemes, by their very
definition, have short life spans. Social Security has
been around for 75 years now.
Q & A
Q: I paid maximum Social Security taxes from the
time I started working in 1971. I plan to keep working
until the end of 2011, when I will retire at age 66.
How much will I pay in Social Security taxes? How long
will it take for me to get that back?
A: I normally don't like answering this kind of
question, because I think it just lends credence to
the Social-Security-as-an-investment-scheme scenario I
just spent the first part of this column debunking.
On the other hand, I totally understand that people
want to know if they're getting their money's worth
out of the program. That's just human nature. But
before I answer your question, I have to make the
following points.
First, in addition to what you get out of the
program, you have to consider what the country gains
from a national social insurance system. I alluded to
one of the program's social benefits above. In a
future column, I will spell out more.
Second, these "payback" numbers can be presented in
all sorts of ways. For example, some insist the
employer's share of Social Security taxes should be
factored into the equation. This is the amount your
employer kicked into Social Security to match your tax
payments.
I disagree. After all, it's not like your employer
was sending your money to the government. The
employer's share is simply another tax a business
pays. Think of it this way: if Social Security were
abolished tomorrow (or when Gov. Perry is elected
president), do you think your employer is going to
increase your salary by the amount of that matching
share of Social Security tax? Will he say, "Oh, here's
that money of yours we've been sending to the
government for you! You can have it back now!" I don't
think so.
But if you disagree with my take on this, then
simply double the number I give you when I present the
amount of Social Security taxes you've paid.
I also must point out that I fully understand that
I'm presenting the "payback times" for someone who
works for wages. A self-employed person pays twice as
much in Social Security taxes — although, over the
years, that rate's been reduced by various tax
write-offs.
And finally, I must make it clear that in adding up
the "taxes paid" column, I used the Social Security
tax, which varied from 4.6 percent when you first
started working in 1971 to 6.2 percent in 2010. (And
in 2011, you paid only 4.2 percent, due to a provision
in last year's economic stimulus package.) When some
people attempt to do these payback times, they
mistakenly add in Medicare taxes paid. Medicare is a
completely separate program and is entirely separately
funded. It makes absolutely no sense to factor in
Medicare taxes when trying to figure out Social
Security payback times.
Having said that, here are the numbers. Assuming,
as you said, that you paid Social Security taxes on
maximum earnings from 1971 to 2011, you will have paid
$132,740 in Social Security taxes during those 40
years. You should expect to get a monthly Social
Security retirement benefit of about $2,400. That
means you will recoup all the taxes you paid in about
55 months, or a little more than four and a half
years.
If you have a Social Security question, Tom
Margenau has the answer. Contact him at
thomas.margenau@comcast.net. To find out more about
Tom Margenau and to read past columns and see features
from other Creators Syndicate writers and cartoonists,
visit the Creators Syndicate website at
www.creators.com.
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