Question

Is Social Security an Entitlement?

Background

Alan Simpson, Senator from Wyoming, Co-chair of Obama’s deficit commission, called senior citizens “the Greediest Generation” as he compared Social Security to a Milk cow with 310 million teats”. The following is a response1 from a unknown fellow in Montana:

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“1. As a career politician, you have been on the public dole for FIFTY YEARS…

2. I have been paying Social Security taxes for 48 YEARS (since I was 15 years old. I am now 63)…

3. My Social Security payments, and those of millions of other Americans, were safely tucked away in an interest bearing account for decades until you political pukes decided to raid the account and give OUR money to a bunch of zero ambition losers in return for votes, thus bankrupting the system and turning Social Security into a Ponzi scheme that would have made Bernie Madoff proud…

4. Recently, just like Lucy & Charlie Brown, you and your ilk pulled the proverbial football away from millions of American seniors nearing retirement and moved the goalposts for full retirement from age 65 to age 67. NOW, you and your shill commission is proposing to move the goalposts YET AGAIN…

5. I, and millions of other Americans, have been paying into Medicare from Day One, and now you morons propose to change the rules of the game. Why? Because you idiots mismanaged other parts of the economy to such an extent that you need to steal money from Medicare to pay the bills…

6. I, and millions of other Americans, have been paying income taxes our entire lives, and now you propose to increase our taxes yet again. Why? Because you incompetent bastards spent our money so profligately that you just kept on spending even after you ran out of money. Now, you come to the American taxpayers and say you need more to pay of YOUR debt…

To add insult to injury, you label us “greedy” for calling “bullshit” on your incompetence. Well, Captain Bullshit, I have a few questions for YOU…

1. How much money have you earned from the American taxpayers during your pathetic 50-year political career?

2. At what age did you retire from your pathetic political career, and how much are you receiving in annual retirement benefits from the American taxpayers?

3. How much do you pay for YOUR government provided health insurance?

4. What cuts in YOUR retirement and health care benefits are you proposing in your disgusting deficit reduction proposal, or, as usual, have you exempted yourself and your political cronies?

It is you, Captain Bullshit, and your political co-conspirators who are “greedy”. It is you and they who have bankrupted America and stolen the American dream from millions of loyal, patriotic taxpayers. And for what? Votes. That’s right, sir. You and yours have bankrupted America for the sole purpose of advancing your pathetic political careers. You know it, we know it, and you know that we know it.

And you can take that to the bank, you miserable son of a bitch.

Always say what you mean !! Always mean what you say !! NEVER COMPROMISE ……… “____________________________________________-

The above letter makes many claims but offers no numbers to help us to decide who is right. Below is a more substantive angry email I received that attempts to quantitatively “expose” the “Social Security Scam”.

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Remember, not only did you contribute to Social Security but your employer did too. It totaled 15% of your income before taxes. If you averaged only $30K over your working life, that's close to $220,500.

If you calculate the future value of $4,500 per year (yours & your employer's contribution) at a simple 5% (less than what the govt. pays on the money that it borrows), after 49 years of working you'd have $892,919.98.

If you took out only 3% per year, you'd receive $26,787.60 per year and it would last better than 30 years (until you're 95 if you retire at age 65) and that's with no interest paid on that final amount on deposit! If you bought an annuity and it paid 4% per year, you'd have a lifetime income of $2,976.40 per month.

Washington has pulled off a bigger Ponzi scheme than Bernie Madoff.

Entitlement?? NOT!!! I paid cash for my social security insurance!!!! Just because they borrowed the money, doesn't make my benefits some kind of charity or handout!!

Congressional benefits ---- free healthcare, outrageous retirement packages, 67 paid holidays, three weeks paid vacation, unlimited paid sick days, now that's welfare, and they have the nerve to call my social security retirement entitlements?

They call SS and Medicare an entitlement even though most of us have been paying for it all our working lives and now when it's time for us to collect, the government is running out of money. Why did the government borrow from it in the first place? Imagine if the *GOVERNMENT* gave 'US' the same support they give to other countries.

Sad isn't it?

99% of people won't have the guts to forward this.

I'm one of the 1% -- I Just Did.

Discussion

The above email asserts that any claim that Social Security pays retired people who worked all their adult lives more than their contributions to the system actually merit, is bogus. Their mathematical argument in support of this assertion is as follows:

1) The combined contribution to Social Security by workers and their employers is about 15% of before tax income.

2) If a worker averaged as little as $30K per year in his working life, the combined contribution to the Social Security system on his behalf would be about $4,500 per year (i.e. 3,000*.15) and $220,500 after 49 years of work.

3) The future value of $4,500 per year after 49 years at an interest rate of 5% per year (less than what the govt. pays on the money that it borrows) is $892,919.98.

4) $892,919.98 distributed at the rate of 3% per year, $26,787.60 (i.e. 892,919.98*.03) would last more than 30 years (until 95 if you retire at age 65) without interest paid on the on the final amount on deposit!

Assignment

Your group has been hired by the AARP to write a report that looks into the merit of the above analysis. Your report should:

1) Address the mathematical consistency of the assertions made in steps 1) through 4). If you find any inconsistencies please state and explain them.

2) One member of the AARP group reaching out to you recently retired at age 65 after 40 years of work where he averaged roughly $30,000 per year. His Social Security Taxable Income is given in Table 1 on the next page. Using the assumptions about Social Security made in the email analysis, calculate the current value of his Social Security Contributions and whether it can support 30 years of annual Social Security Income of $26,787.60 (without interest paid on the current amount of deposit). If not,

a) Explain the difference between this portfolio and the one in the above analysis.

b) Assuming a 5% return on current monies in the Social Security Account and a 30 year payout period, how much annual payout could this portfolio support?

3) Look up how much Social Security would actually pay each of the 2 people described above.

4) Based on all of the above, what is your conclusion as to the merits of calling Social Security and entitlement.

5) The above email claims a 15% combined contribution to Social Security by both employee and employer and 5% yearly interest rate on money in the fund.. Check to see whether these numbers are historically correct. If not, using the correct values recalculate the numbers for the AARP member in Table 1.

6) Based on current interest rates, is an assumption of 5% on Social Security funds realistic? If not, recalculate using what you consider to be a realistic interest rate.

In the concluding section of your report, based on all of your analysis and fact finding, state yo

Table 1

Social Security

Year Salary

1972 $ 4,121.40

1973 $ 4,680.00

1974 $ 5,400.00

1975 $ 6,480.00

1976 $ 7,920.00

1977 $ 8,069.40

1978 $ 9,180.00

1979 $ 9,900.00

1980 $ 10,620.00

1981 $ 13,740.00

1982 $ 15,540.00

1983 $ 17,075.40

1984 $ 19,440.00

1985 $ 21,420.00

1986 $ 22,680.00

1987 $ 23,760.00

1988 $ 25,200.00

1989 $ 26,280.00

1990 $ 27,000.00

1991 $ 28,800.00

1992 $ 30,780.00

1993 $ 32,040.00

1994 $ 33,300.00

1995 $ 34,560.00

1996 $ 36,360.00

1997 $ 36,720.00

1998 $ 37,620.00

1999 $ 39,240.00

2000 $ 41,040.00

2001 $ 43,560.00

2002 $ 45,720.00

2003 $ 48,240.00

2004 $ 50,940.00

2005 $ 52,200.00

2006 $ 52,740.00

2007 $ 54,000.00

2008 $ 56,520.00

2009 $ 58,500.00

2010 $ 61,200.00

2011 $ 64,080.00

Answer 1

1	In Step 3) Future value of social security benefits can not be calculated using average income throughout the period, as income will vary for each year. Only actual amounts for each year shall be used when arriving at future value of Social Security benefits.
	Since actual amounts are not used for future value calculation, the mathematical accuracy of the Social Security benefits amounting to $892,919.83 is not correct.
	This can be well understood with the help of below calculation
2	Assumed that contribution to social security is made at the end of the year
	Statement showing Current Value of Social Security
	Year	Income		Social Security Contribution per year @15% on Income	No of years money invested	Future value @5% rate
	1972	4,121.40		618	39	4,144.94
	1973	4,680.00		702	38	4,482.61
	1974	5,400.00		810	37	4,925.94
	1975	6,480.00		972	36	5,629.65
	1976	7,920.00		1,188	35	6,553.03
	1977	8,069.40		1,210	34	6,358.70
	1978	9,180.00		1,377	33	6,889.39
	1979	9,900.00		1,485	32	7,075.94
	1980	10,620.00		1,593	31	7,229.10
	1981	13,740.00		2,061	30	8,907.52
	1982	15,540.00		2,331	29	9,594.71
	1983	17,075.40		2,561	28	10,040.67
	1984	19,440.00		2,916	27	10,886.76
	1985	21,420.00		3,213	26	11,424.38
	1986	22,680.00		3,402	25	11,520.38
	1987	23,760.00		3,564	24	11,494.26
	1988	25,200.00		3,780	23	11,610.36
	1989	26,280.00		3,942	22	11,531.38
	1990	27,000.00		4,050	21	11,283.15
	1991	28,800.00		4,320	20	11,462.25
	1992	30,780.00		4,617	19	11,666.93
	1993	32,040.00		4,806	18	11,566.21
	1994	33,300.00		4,995	17	11,448.63
	1995	34,560.00		5,184	16	11,316.02
	1996	36,360.00		5,454	15	11,338.47
	1997	36,720.00		5,508	14	10,905.46
	1998	37,620.00		5,643	13	10,640.72
	1999	39,240.00		5,886	12	10,570.41
	2000	41,040.00		6,156	11	10,528.85
	2001	43,560.00		6,534	10	10,643.20
	2002	45,720.00		6,858	9	10,639.01
	2003	48,240.00		7,236	8	10,690.87
	2004	50,940.00		7,641	7	10,751.65
	2005	52,200.00		7,830	6	10,492.95
	2006	52,740.00		7,911	5	10,096.66
	2007	54,000.00		8,100	4	9,845.60
	2008	56,520.00		8,478	3	9,814.34
	2009	58,500.00		8,775	2	9,674.44
	2010	61,200.00		9,180	1	9,639.00
	2011	64,080.00		9,612	-	9,612.00
		1,216,666.20		Current Value		384,926.53
	Average Income per year	30,417		Social Security Income per year without interest paid on current amount for 30 year period		12,830.88
a)	The portfolio considered in 1 and 2 vary with respect to the income earned across the period. In portfolio 1, every year income is considered as $30,000 whereas in portfolio 2 it is based on actuals which is more realistic
b)	Annual payout @5% return for 30 years shall be (384926.53/15.3725)					25,039.94
	(present value Annuity factor for 30 years at 5% interest rate is 15.3725)