Social Security was long termed the third rail of politics: touch it and you are dead.
No more.
Everyone from presidential candidates George W. Bush and Al Gore to Minnesota Senator Rod Grams has a plan to revamp the 60-year-old system.
While contact with Social Security no longer fries one’s political career, it apparently does burn out some people’s logic and common sense.
Much of the public debate seems to be about the return on dollars paid into Social Security vs. the return on similar amounts invested in private financial instruments such as stocks or bonds. Many of these comparisons seem to assume that Social Security’s only function is that of an old-age retirement program.
The comments of one man, speaking at a recent meeting in Minnesota are typical. “I’ve paid over $114,000 into Social Security,” he noted, “and I am sure that I would get a much bigger return if I had invested it myself.”
I am sure that he would have, although it was clear from the context of his other remarks that his idea of potential investment returns was that of the stock market’s performance over the last 10 years, not more modest long-term averages. But he made a more fundamental mistake. He ignored the disability and survivorship benefits of Social Security as well as health care in retirement.
To make a more accurate calculation, he should first deduct the cost of a life insurance policy large enough to buy an annuity that would give his spouse and children payments equal to their survivors’ benefits from Social Security.
The individual in question seemed to be in his 50s, in which case the survivorship question is somewhat moot. But for a young couple in their 20s or 30s with two or more small children, the cost of a term life policy to provide equivalent benefits is substantial.
Second, he should also deduct the cost of a private disability insurance policy that would equal the level of disability payments he would get from Social Security. Most permanently disabled workers get from $800 to $1,300 per month from Social Security and are eligible to participate in Medicare. A private policy that provides an equal level of benefits is not cheap.
I have made these calculations for myself at different times over the past 15 years, and the cost of such private insurance policies amounted to 25 percent to nearly 50 percent of my FICA contributions. This is consistent with data from the Social Security Administration, which show that about one-third of total benefits are paid under the survivors and disability rubrics rather than for old age.
Another factor should be accounted for when calculating the returns to one’s personal Social Security contributions, that of inflation.
Congress chose to index benefit payments to the Consumer Price Index nearly three decades ago. That was a reaction to perceived high levels of inflation in the early 1970s, though it was to get much worse before improving. Much more subdued inflation in the 1990s has lulled many into disregarding it in their personal financial planning. This exhibits great confidence in the nation’s future economic management, confidence that I don’t completely share.
Of course, indexing is not guaranteed. Any Congress and President can end it whenever they please. But it has gained some standing of time and is not likely to be ended soon. Thus any potential benefits received will increase with the CPI. This is not true with most private disability policies. nor with the annuities that might be purchased with private life insurance proceeds to protect survivors.
Now to be fair, I should also point out that when making such calculations, employed people should also include the matching FICA submitted by their employers. This doubles the funds available for insurance and retirement investment. Self-employed people are aware of the full burden.
The point of these arguments is not to say that Social Security is a perfect program and that it should not be altered in any way. But when making calculations about how one might fare under some of the alternatives proposed, be careful to consider all the features of the existing program. Politicians who focus only on the old-age provisions of Social Security reform, without mentioning what they would do with its survivors and disability components should be taken with a large grain of salt.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.