Social Security: Is it that bad of an investment?

[Zaphod]

ENT Doc wrote:

Lithium wrote:

My fear with the long-term solvency of Social Security is that people are just going to keep living longer and that birth rates are just going to keep dropping.  How would Social Security have survived in Japan?  Yeah, extreme scenario, different country and different culture, but even a minor version of that has to give people pause.

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No doubt.  The ratio of workers to retirees has declined since the inception of social security.  And since it’s a Ponzi scheme rather than an investment of your money any disruption to either end of that balance will destroy the system.  It’s already insolvent.  Now imagine people not just living longer but having workers replaced by automation.  It’s nice to take care of people, but the solvency issue needs to be addressed in a dynamic fashion.

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They just increased the earned income limit exposed to SS by 10k+, expect similar in the future as well as age changes. Easiest (though not politically obviously) is to raise ages and earnings thresholds.

[jfoxcpacfp]

ENT Doc wrote:

Lithium wrote:

My fear with the long-term solvency of Social Security is that people are just going to keep living longer and that birth rates are just going to keep dropping.  How would Social Security have survived in Japan?  Yeah, extreme scenario, different country and different culture, but even a minor version of that has to give people pause.

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No doubt.  The ratio of workers to retirees has declined since the inception of social security.  And since it’s a Ponzi scheme rather than an investment of your money any disruption to either end of that balance will destroy the system.  It’s already insolvent.  Now imagine people not just living longer but having workers replaced by automation.  It’s nice to take care of people, but the solvency issue needs to be addressed in a dynamic fashion.

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Stay tuned - this is in our November newsletter coming out on Monday, will post a link. Also, an article focusing specifically on the parts of the tax bill that are especially of interest to physician families and ideas to benefit. 

[Kamban]

How is this called an investment. Investment is one that one voluntarily purchases and if you have done the right homework and invested wisely and the investment grows you can withdraw money from it.

Social security is an involuntary money grab. The amount one needs to pay keeps growing higher and higher each year as you earn more, and might become a portion of whole earned income in the future with no cap. The age at which you can claim benefits gets postponed. There is no promise it will be ever paid to you and may become means tested in the future which might mean most physicians who practice FI might see that disappear. It is a modified Ponzi scheme and in the future when the number of people earning drops to the point that it is not sustainable to pay the current retirees it is going to become a tax to sustain the poor with no hope of recouping it.

[MPMD]

Can you guys give me another example of a Ponzi scheme that has kept tens of millions of people out of poverty?

It's an entitlement, it has good aspects and bad aspects. There are things about the program that are strong and things that could be improved. My wife's grandparents worked full time their whole lives as immigrants and retired on their SS income. It kept them in a nice little house and allowed them to have some dignity and control over their lives. Why do you find this concept so offensive?

If any of you ever want to read a good book I would recommend Orwell's under-rated classic "The Road to Wigan Pier." It's a wonderful piece of longform journalism about a community where regulations are non-existent, corporations control everything, and social safety nets are non-existent. But the tax burden was low, so the families crammed together in coal-saturated apartments could at least count their ha-pennies in freedom while they waited for trickle down econ to kick in.

[FIREshrink]

Some of the hyperbole about SS in this thread is either very ignorant or very partisan.

It’s not insolvent - it can pay 3/4 of its promised benefits indefinitely.

It’s not a ‘money grab’ though it does have progressive components which would naturally make it less popular among higher earners. On the other hand it’s extremely favorable to healthy, long-lived, high earning married couples where one spouse does not work, and that might describe a number of physician households, so spare me the crocodile tears.

It is not a ‘Ponzi scheme’ or an outright fraud. It’s a forced savings account with a low to moderate rate of return.

It has been extremely successful in its intended purpose, which is to reduce poverty among the elderly. Before social security, the demographic with the highest rate of poverty was the elderly. Now the elderly are the demographic with the lowest rate of poverty.

It has some challenges, and there will be changes, and maybe some of them will be unfavorable to high earners.

There are easy ways to game the system if you don’t like it. Get married and have one spouse not work; stay healthy; and quit working after you reach the second bend point. Then defer payments til FRA or later, and live to be 100. You, too, can reap very positive benefits from the system.

[Hatton]

Social Security is very important.  My mother was widowed with 2 little boys in the 50s.  My brothers got SS survivor benefits until age 22.or 23.  After marrying my father she saved all that money and it put my brothers through college.  No way could my father have afforded 3 college educations.  I also think it was rare for someone like my mother to have done this with the money.

[ENT Doc]

FIREshrink wrote:

Some of the hyperbole about SS in this thread is either very ignorant or very partisan.

It’s not insolvent – it can pay 3/4 of its promised benefits indefinitely.

It’s not a ‘money grab’ though it does have progressive components which would naturally make it less popular among higher earners. On the other hand it’s extremely favorable to healthy, long-lived, high earning married couples where one spouse does not work, and that might describe a number of physician households, so spare me the crocodile tears.

It is not a ‘Ponzi scheme’ or an outright fraud. It’s a forced savings account with a low to moderate rate of return.

It has been extremely successful in its intended purpose, which is to reduce poverty among the elderly. Before social security, the demographic with the highest rate of poverty was the elderly. Now the elderly are the demographic with the lowest rate of poverty.

It has some challenges, and there will be changes, and maybe some of them will be unfavorable to high earners.

There are easy ways to game the system if you don’t like it. Get married and have one spouse not work; stay healthy; and quit working after you reach the second bend point. Then defer payments til FRA or later, and live to be 100. You, too, can reap very positive benefits from the system.

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Insolvent, according to Websters:

"unable to pay debts owed"

Previous quote:

"It's not insolvent - it can pay 3/4 of its promised benefits indefinitely."  To support your claim:

https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

Therefore, it is, by your definition and the definition of Webster's, insolvent.

Also, Ponzi Scheme:

"A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading."

Replace "operator" with "US Federal Government" and you have social security.  Other Ponzi schemes - Medicare.

And this is perhaps the most important part - providing definitions so that we can all recognize Social Security and Medicare for what they are, is not to say they offer no benefit, aren't well-intentioned, and shouldn't exist.  But I think if you're being honest you can call it what it is right now, with all pros and cons, and at the same time advocate for more fiscal discipline so that the "cons" start to fade away.

[MPMD]

ENT Doc wrote:

FIREshrink wrote:

Some of the hyperbole about SS in this thread is either very ignorant or very partisan.

It’s not insolvent – it can pay 3/4 of its promised benefits indefinitely.

It’s not a ‘money grab’ though it does have progressive components which would naturally make it less popular among higher earners. On the other hand it’s extremely favorable to healthy, long-lived, high earning married couples where one spouse does not work, and that might describe a number of physician households, so spare me the crocodile tears.

It is not a ‘Ponzi scheme’ or an outright fraud. It’s a forced savings account with a low to moderate rate of return.

It has been extremely successful in its intended purpose, which is to reduce poverty among the elderly. Before social security, the demographic with the highest rate of poverty was the elderly. Now the elderly are the demographic with the lowest rate of poverty.

It has some challenges, and there will be changes, and maybe some of them will be unfavorable to high earners.

There are easy ways to game the system if you don’t like it. Get married and have one spouse not work; stay healthy; and quit working after you reach the second bend point. Then defer payments til FRA or later, and live to be 100. You, too, can reap very positive benefits from the system.

Click to expand…

Insolvent, according to Websters:

“unable to pay debts owed”

Previous quote:

“It’s not insolvent – it can pay 3/4 of its promised benefits indefinitely.”  To support your claim:

https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

Therefore, it is, by your definition and the definition of Webster’s, insolvent.

Also, Ponzi Scheme:

“A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.”

Replace “operator” with “US Federal Government” and you have social security.  Other Ponzi schemes – Medicare.

And this is perhaps the most important part – providing definitions so that we can all recognize Social Security and Medicare for what they are, is not to say they offer no benefit, aren’t well-intentioned, and shouldn’t exist.  But I think if you’re being honest you can call it what it is right now, with all pros and cons, and at the same time advocate for more fiscal discipline so that the “cons” start to fade away.

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In the first case you are describing a gov't benefit with a shifting population that will likely need to change and adapt to continue to operate. I'm not sure this qualifies as "insolvent." You're telling me we have a successful program that has made elderly poverty plummet and that after a few decades of consistent operation it needs some tweaks? Stop the presses.

In the second you are describing the behavior of any society that provides any sort of gov't benefit to the elderly citizens. You also seem to gloss over the fact that the younger investors in this "Ponzi scheme" have an extremely high chance of getting in on the hot action. All they have to do is not die before 65. So yeah, not exactly Bernie Maddoff stuff in my mind. This reminds me of when people who don't understand risk pools say stuff like "why should healthy young people have to subsidize care for sick old people?" It's like some people genuinely don't understand how life on earth works.

Yeah yeah yeah I know the house of cards is all going to collapse soon. Just like you guys have been saying for 60 years.

[q-school]

FIREshrink wrote:

Some of the hyperbole about SS in this thread is either very ignorant or very partisan.

It’s not insolvent – it can pay 3/4 of its promised benefits indefinitely.

It’s not a ‘money grab’ though it does have progressive components which would naturally make it less popular among higher earners. On the other hand it’s extremely favorable to healthy, long-lived, high earning married couples where one spouse does not work, and that might describe a number of physician households, so spare me the crocodile tears.

It is not a ‘Ponzi scheme’ or an outright fraud. It’s a forced savings account with a low to moderate rate of return.

It has been extremely successful in its intended purpose, which is to reduce poverty among the elderly. Before social security, the demographic with the highest rate of poverty was the elderly. Now the elderly are the demographic with the lowest rate of poverty.

It has some challenges, and there will be changes, and maybe some of them will be unfavorable to high earners.

There are easy ways to game the system if you don’t like it. Get married and have one spouse not work; stay healthy; and quit working after you reach the second bend point. Then defer payments til FRA or later, and live to be 100. You, too, can reap very positive benefits from the system.

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i agree with much of what you say here.  in fact, generally i agree with you and appreciate your wisdom.

however, if something can pay 3/4 of promised benefits and not 100% of promised benefits, than I think it would be reasonable to ask the question of solvency.

it certainly has shielded the elderly from poverty, and for that i appreciate it.  perhaps ssi for qualified immigrants is even more striking example of elderly support in that my experience is that these beneficiaries have not contributed much and are receiving way more than they directly contributed.  the government has decided we want to support the elderly.

as such, i don't like applying the term ponzi scheme--which to me at least implies a specific person or business receiving the profits.  however, i recognize that reasonable minds can differ.

i also agree with the poster who suggests SS is not an investment.

jmo

ymmv

 

[jfoxcpacfp]

After a request from a participant and a review of the comments, I'm moving this to The Lounge. Then you all can really tell us what you think  

[Kamban]

FIREshrink wrote:

It’s a forced savings account with a low to moderate rate of return.

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Is there any guarantee that they will pay me the money at the age, when I retire. Just because it has occurred till now does not mean that it will in the future. Show me a document by the SS stating that payments are guaranteed, provided the money has been paid in. If they can pay only 3/4 of the benefits, one rule they can bring in is means testing before any payments are handed out. In that case many people on this board who have achieved FI will be screwed. Then one cannot even call it a low savings account. So let us be honest about what SS is, even if it helps a lot of people

Just because it is a scheme that helps may people does not mean it is not a modified Ponzi scheme. If an illness strikes today that disables half the working people there won't be any money coming in to pay those people and the other half that is continuing working from collecting any benefits when they retire, when it can pay only 3/4 with current working people.

For the record, I like SS to help the elderly, poor and disabled. I can retire without needing the benefits. But being forced into contributing into something that is touted as saving when it is really insurance is not something I like. Maybe a better savings scheme would be collect 9 % as SS from employee and 9% from employer instead of 6.2%. State that 2.5 % would go into a pool for helping the poor and 6.5% would go into a savings account where one will be guaranteed to get the benefits when the reach the stated age. Make the intentions more open and honest instead of the numbo jumbo they put out now.

[VagabondMD]

I have always been of the mindset that it is a tax to support the elderly that will may benefit me in the future. As a high earning professional, it might be best to take this position, as a hedge for future disappointment.

[Hatton]

I think the cola will be adjusted (chained), all income will be taxed like medicare (this is defacto means testing), age will slowly creep up to 70.

[FIREshrink]

Kamban wrote:

FIREshrink wrote:

It’s a forced savings account with a low to moderate rate of return. 

Click to expand…

Is there any guarantee that they will pay me the money at the age, when I retire. Just because it has occurred till now does not mean that it will in the future. Show me a document by the SS stating that payments are guaranteed, provided the money has been paid in. If they can pay only 3/4 of the benefits, one rule they can bring in is means testing before any payments are handed out. In that case many people on this board who have achieved FI will be screwed. Then one cannot even call it a low savings account. So let us be honest about what SS is, even if it helps a lot of people

Just because it is a scheme that helps may people does not mean it is not a modified Ponzi scheme. If an illness strikes today that disables half the working people there won’t be any money coming in to pay those people and the other half that is continuing working from collecting any benefits when they retire, when it can pay only 3/4 with current working people.

For the record, I like SS to help the elderly, poor and disabled. I can retire without needing the benefits. But being forced into contributing into something that is touted as saving when it is really insurance is not something I like. Maybe a better savings scheme would be collect 9 % as SS from employee and 9% from employer instead of 6.2%. State that 2.5 % would go into a pool for helping the poor and 6.5% would go into a savings account where one will be guaranteed to get the benefits when the reach the stated age. Make the intentions more open and honest instead of the numbo jumbo they put out now.

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the only guarantees in life are death and taxes. i guess that makes everything else a Ponzi scheme.

[spiritrider]

SS earnings are indexed to the national average wage index. Over the two dozen years from 1992 - 2016, this averaged just a little over 3%. Over the dozen years from 2004 - 2016, this averaged just a little over 2.5%.

So using 5% or even 4% as your real return seems a little optimistic.