For all it’s bad raps, I think pretty highly of Social Security.  While a lot of people like to focus on its future insolvency and occasionally refer to it as a Ponzi scheme, I think the original idea behind it and the structure, were pretty solid.  Furthermore, I think a few small fixes is all it would take for it to remain solvent.

But even if one is a member of the small-government, libertarian, or conservative camps, my experience observing finance and human nature, is that many people do not set aside money for retirement.(period!)   Thus if you do not force people to save and put it into a locked box, they will come back and ask for a do-over 30 years hence.  And if enough do so (i.e. vote), they will get it.  At which point those that have been profligate will squeeze the most out of the system, by taking it from those who were not.

Here are a few facts buttressing my viewpoints regarding the need for maintaining Social Security from an excellent 2005 article by Roger Lowenstein in The New York Times:

The average stipend for a 65-year-old retiring today is $1,184 a month, or about $14,000 a year …for two-thirds of the elderly, Social Security supplies the majority of day-to-day income. For the poorest 20 percent, about seven million, Social Security is all they have. Even those figures understate the program’s importance. According to an agency publication, ”Income of the Population 55 or Older: 2000,” 8 percent of elderly beneficiaries were poor, but a startling 48 percent would have been below the poverty line had they not been receiving Social Security.

Yet whether I like it or not, Social Security is yet another shiv to the upper-middle class.  It may be the one we have to take for the team, but if so it should be recognized as one of the many givebacks I have highlighted, that we alone are forced to endure.

Here is why.  The payroll tax is 6.2% of income in a given year, up to $117,000 in income, or $7,254.  Eventually, like in retirement, you’re going to get a lot of that $7,254 back, but there is some progressiveness in the system, so let’s call it $5,5001.  Meanwhile, the guy who makes $60,000 a year pays a total payroll tax of $3,720 and let’s say receives $4,500.  ‘Ehh, not such a big deal’ you think ‘…oh wait, isn’t that the same guy moving into an identical apartment upstairs who gets an affordable housing rate on his rent that’s two-thirds of mine and whose total cost to put his three kids through college will be half what it will cost me to put a single child through?’

Maybe, or maybe he just gets a big pension at age 50 or 55 in lieu of Social Security.  None of which is taken into account when he’s applying for affordable housing, student aid, or in his marginal income tax rate.

Of course if you earn double the $117,000 maximum income, or $234,000 a year, your effective tax is cut in half to 3.1%.  That makes it a little easier to swallow, until you realize that if you made $1,000,000 a year it goes below 1%.

Now do you feel like you’re in a vise?  Well don’t move because there are more indignities to endure if you’re a member of the upper-middle class…

Want to be kept apprised of the weekly postings, newsflashes, and musings of The Shadow Banker?  Follow us on twitter @TheShadowBanker and/or put your email address in the box below to receive the weekly posting directly.

A Question of NumbersRoger Lowenstein gives you the real facts on Social Security; and an excellent explanation of how and why it came to be.

  1. for this example, let’s disregard accumulated interest []

Leave a Reply