The Interest in Social Security

The US Social Security Administration sent me a statement, about three months before my birthday. You used to have to ask them for a statement, but now they will apparently send one every year. (Or did I just get old enough to get one every year? My "full retirement age" is getting close to "only" 20 years away.)

It shows my "earnings record at a glance," starting with the $75 I earned as a 15-year-old. It shows the estimated (?) taxes my employers and I have paid for Social Security and Medicare. It shows my estimated monthly benefits for retirement, disability, for my family, and my survivors. For the retirement benefits, it showed different projected monthly benefits if I retire early (age 62), "on time" (66yr 2mo), or late (70).

In the debate about allowing workers to invest part of their Social Security tax, I read about the effective interest rate of the current program being something pitiful, one-point-something percent? I figured I could do my own calculation from the numbers the SSA sent me.

Here's what I did:


Not too surprisingly, 8% was way too high a number for the interest rate, for either method of payout. For the perpetual payment approach, an interest rate of 3.4 to 3.8% gave me the same monthly payments as the SSA had for the three retirement ages.

For the "pay till you drop" method, the range was 0 to 0.3% to match the three SSA values. In other words, if I keep working at my current pay rate until I'm 62, and then collect SS for 18 years, they'll pay out just what I and my employers paid in, over about twice that long. With no interest.

Maybe I set the life expectancy too low? For a given interest rate, you can find an arbitrary payment amount (as long as it's less than the "perpetual" result) by increasing the number of years of payments. At a 1% interest rate, my life expectancy needs to be in my mid-80s for my numbers to match the SSA's. At 2%, I'd have to live well into my 90s.

So what?

Part of the debate about "privatizing" Social Security concerns allowing people to invest their contributions in the market. Those against argue that the market may be way high right now (it was more true in March than now, but it may still be true), and if we have a Japan-like decade of market flatness, we'll all be worse off.

Certainly, past performance is no guarantee of future results, but steady investing (and the benefit of dollar-cost averaging) is very likely to do better than the pseudo-insurance scheme we have now.

Any investment scheme will have winners and losers, and there'd be a ready supply of dramatic anecdotes for either side. I suspect tales of the losers would be more persuasive, on average, for a net argument "against."

Maybe if we had 2% (of our 2x6.2 = 12.4%) to freely invest, and the rest of it were getting certificate of deposit rates? Or even passbook savings rates?! We'd have the upside with downside protection.

The problem, of course, is performing an individual calculation on a collective enterprise. In pessimistic moments, I'm not planning on anything from SSA, but the political will of my generation will almost certainly do better than that. The SSA projects building their trust funds to $4 trillion by 2014, and then depleting that over 20 years. And then? "We're working to resolve these issues." On the cover page of the statement, the commissioner, Kenneth S. Apfel writes:

Will Social Security be there when you retire? Of course it will. But changes will be needed to meet the demands of the times.... in about 30 years, there will be nearly twice as many older Americans as there are today....

We'll all be older then, eh? Maybe even wiser.

May 21, 2000

A couple of interesting related pieces from the New York Times site (free subscription required):

A Paul Krugman column, pointing out that the system is more than just a retirement annuity.

A Times editorial, "Campaigning on Social Security", pointing out that things are well short of desperate, as well as the significant fact that S.S. provides the majority of income for most retirees, and all the income for about a fifth.

Tom von Alten      tva_∂t_fortboise_⋅_org

Monday, 29-May-2000 11:52:00 MDT