Sunday, April 24, 2016

Social Security

Above is an interesting article on social security for the wealthy versus everyone else. If the top 1% retire at the age of 66 and live until the age of 87 then they will end up with more money than they and everyone else paid in social security tax. Their internal rate of return would be 1.07%.

For those who are making about $30,000 per year, their internal rate of return would be 2.57%, which is significantly higher. This is nice to see, but these numbers are only true if they both live to be the same age.

Studies have shown that the rich tend to live longer, therefore receive more social security benefits.

After reading this article what do you guys think? Is social security another scam?


  1. I was talking with Dr. Apps about Social Security the other day. Rich people pay more into it so it is natural they get more out of it over time. If they are living longer, then you are right that they are collecting more than people who do not live as long.

    If you look at Social Security as an investment, it is a terrible program. One could privately make nearly risk free investments and earn a higher rate of return. However, if you look at Social Security as an insurance policy for people who do not have other assets to cover their retirement or those who have a disability then the rate of return does not matter as much.

    For people our age, I am not sure what Social Security looks like in the future. Either benefits will be reduced, retirement age will be prolonged, or part of the program could be privatized. It will need to be tweaked eventually.

  2. I found the section that talks about the insurance aspect of social security very interesting because it can be a hard thing to think about sometimes. It is a social insurance policy that pays out for retirement. I agree with Kenny that it is not a good investment program but it is good for those who do not have other items in their portfolios to help them with retirement. It will drastically change within the next decade though.

  3. Like Rachel brought up, the fact that the rich have longer life span with lower return on investment is interesting. However, this made me think do those top 1% really need the Social Security? As Kenny and Brian said, the Social Security is much better investment for those cannot afford themselves after their retirement. But more fundamentally, should the government really add upon the wealth of top 1%, when they can have more than enough wealth, like the article said, "in some circumstances, the program can actually be regressive, offering richer benefits to those who are already affluent."
    This issue about social security in the US makes me think of the controversy around Free Meals program in South Korea. (It may be out of topic, but I thought they were somewhat parallel.)Yes, free meals for everyone sounded great at first, but it added great burden on the local government's expenditures and opponents added that it should be selective where "those who need" should be only getting the benefits.

    1. Whether to make programs means-tested or universal is a really tough question. Means-tested programs are only given to people who are below a certain income/wealth level whereas universal programs are given out to everybody. I think this debate with reference to social security is very interesting.

      There are two key advantages to universal programs that are important to consider here. First, it makes administrative costs much, much lower. If literally everybody qualifies for it, it makes figuring out who gets it much easier. Because of the complexity of social security, differing amounts being given out based on income so they're keeping track of that information anyway, I don't really know if this key benefit helps it as a universal program. So switching to means-tested may not raise the costs of running the program by that much.

      The other benefit is reduced stigma. In the UK, much like in the US, they had a free and reduced-price lunch program for student of parents living under a certain income. Until they relatively recently expanded it to include all students in the program. When they did that, take-up among students who already qualified for the program went up by about 10%. It would be a shame if switching social security to a means-tested benefit did something like this in reverse, causing people who still qualified to stop receiving benefits.

      It's a tough question, but to keep social security solvent it probably needs to be answered.

  4. I disagree with Kenny in that Social Security is a terrible program. Risk free investments do not exist, nor is the average person educated enough on finance and investment to understand how to save for retiring. Financial planners and investment managers are luxuries that not everyone can access/afford. The upside of Social Security is that your retirement is backed by the federal government.

    1. Let me clarify. because I think there was a misundersatnding. That is why I divided my answer into two parts. For most people Social Security is just a return on principle. Hence, why it is a bad "investment". However, if you look at social security as an "insurance" program backed by the federal government then the return does not matter and the program is fine. The main issue is what needs to be done to keep the "insurance" program solvent for future generations.

      When referring to risk free investments, I was referring to treasury bills which return 1-2% a year. These are the same types of investments made by the people who run the Social Security Trust Fund.

    2. I would have to say that Social Security in theory is a very good program, however, exogenous factors have caused people to distrust or no longer support it. FDR created Social Security to raise millions of disabled and elderly out of poverty, because back then there was literally no plan for people once they could no longer work. Today, the program is estimated to keep 20% of Americans age 65 and older above the poverty line. That's approximately 8 million people out of poverty.
      For some reason, politicians like to look at Social Security as a bloated government program that sucks money out of the federal budget. As an investment program it's effect on the budget is zero since it's simply Americans putting money in and receiving it later. I think it's good that lower income Americans get a higher rate of return, but yes, we must also consider life expectancy as an important factor. I believe with better healthcare, this program can be more effective, but with Republicans demanding cuts and our ever-present gridlock, it's hard to say what the outcome will be. I'd like to believe that one day I'll get that money back.