I was thinking about Social Security today, and how it is a colossal rip-off for many people.
People do not generally recognize what a bad investment SS is because of the varying relationship of the dollar to wealth. The government loves inflation as it is a tax which does not have to be voted on and inflation alters that money to wealth relationship. To really evaluate an investment, it needs to be done in terms other than the dollar. The Consumer Price Index should fill that bill, but the numbers have been fudged to make the inflation rate look smaller and government policy look better. President Clinton had the formulas and procedures changed. If the original formulas and procedures are used, the CPI is almost twice as high as is now reported! Because of this, the CPI cannot be used to determine the true relationship between money and wealth.
Money is not wealth. Its wealth we want and need to sustain ourselves, not money. We need to look at the situation in terms of wealth, and that means something tangible, and that retains the same importance to society over the time period to be examined.
Lets look at a real life example of another professional engineer, who I will call Bob.
Starting working as an engineer in 1968, Bob’s SS payments were about $10001. That same year, Bob bought a new Chevy Camaro RallySport at a cost of $3000. Using the Camaro as a standard unit of wealth over time, the $1000 represented 1/3rd of a Camaro. Over Bob’s working career his salary increased, and so did the cost of a Camaro, and his SS payment was always very close to 1/3rd of a new Camaro. So during Bob’s working career he will have essentially paid 14 Chevy Camaros into SS.
I could have used some other standard unit of wealth for this analysis, like the price of a gallon of milk, or the price of a pair of jeans, but the automobile represents a fairly constant unit of wealth.
Now that I have an idea what Bob will have invested into SS in terms of tangible wealth, lets see what he will get back.
According to his latest SS statement, Bob will get $1900 a month, and according to the actuarial data Bob will live to be 75.4 (He hopes longer!) This means he can expect to draw SS for about 9 years. Doing the math, 9 years of SS equals $205,000. So the question becomes, will Bob get back his 14 Camaros worth of wealth? Chevrolet reintroduced the Camaro, and at today’s prices the more or less equivalent model to the one I am using as a wealth standard would cost about $30,000. Based on that, 14 Camaros would cost $420,000. Therefore, Bob will be losing the equivalent of $215,000. But Wait, There’s More! Bob will probably have to pay income tax on that, so lets assume a modest tax rate of 15%. Losing the tax money would cost Bob another $45,000 bringing his amount down to $160,000. Essentially, Bob lost 8.6 of his Camaros; a loss of 59% of the wealth he contributed to SS.
Suppose Bob had taken the money he was required to invest in SS, and instead had deposited it in ordinary certificates of deposit at 5% interest and assume an income tax rate of 20% . According to my spreadsheet program he would have $400,000 in the bank at the end of 2008. How many Camaros is that? 13! So instead of ending up with 13 Camaros by investing his money privately, Bob ends up with 6.
Even though Bob is likely to get more money out of SS than he put in, he will only get a fraction of the amount of wealth invested in SS. Where does the rest go? It goes to illegal aliens, others who invested nothing in the system and a long list of other government projects having nothing to do with Social Security.
In actual fact the situation is probably even worse. Bob, you and the rest of us will end up with a lot less as we head into a time in which rampant hyperinflation is likely to happen. I’m sure that in 2011, a Camaro if such exists will not cost $30,000. It will cost a lot more.
Never say the government is not efficient. They are very efficient at taking your wealth while at the same time giving you more money. Is it any wonder then that the gov hates the idea of privatizing SS? With privatization, you risk losing some of your wealth. With the current system, you are guaranteed to lose a large portion of your wealth.
If nothing more, I hope I have given Bob and you a different way to think about money and wealth.
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1) This includes the portion paid for by the employer, which is part of a workers salary.