I've got a few facts and observations thrown in. First of all, Social Security is set up like a mix between a safety net for senior citizens and an old fashioned pension that is calculated as a function of one's last 5 years of salary. There is a variable rate of yearly benefits per dollar of yearly salary. The rate of marginal return is
<1.2k 0% 1.2k-7k 73% 7k-10k 60% 10k-55k 26% >55k 12% As a result, a 55 year old making 10k/year when they (and corresponding yearly adjusted amounts in previous and subsequent years) would receive 6972/year when they retired at 66. But, the difference between someone who makes 60k/year and 70k/year is only 1224/year. The private investment part of social security would, of course, be directly porportional to the amount invested. Thus, this would promote a greater disparity between the people who's income places them in the top 20% of wage earners and those who are in the bottom 20%. In addition, social security provides for the care of people who were not gainfully employed, but took care of the home...with a 50% spouse's benefit. The elimination of 2/3rds of employee's pay from the benefits would result in a reduction of the social security benefits. Let me make some general, reasonable assumptions and run the numbers. Let us assume that someone is gainfully employed for 40 years. That person's salary sees a real increase of 2% per year (clearly the real numbers are not the same for everyone, but this is a decent general trend.) Let's say the person contributes 8.7% of their income to a 401k plan (72.8% of the total SS tax, because according to recent statistics, 72.8% of SS benefits go to retirees and their spouses and children)...and gets the real averaged stock return of about 6.6%/year. The nest egg they will have at the end of 40 years will be 13.6* their yearly salary. Using the standard rule of spending only 5% of the value of one's retirement assets/year (investments should be more conservative when they are for short term income) one gets a yearly return of about 49% of one's final income. A single worker making 80k/year would clearly benefit. A married worker, making 20k/year would clearly lose. The tradeoff point for a married couple is between 50k and 60k according to my calculations. I realize that these numbers will change with different inputs, and I'd be more than happy for people to argue for their own sets of input numbers, turn the crank, and get different results. I may do that myself, if I get time, but I'm visiting my mom later this week. Finally, the idea of switching to the inflation rate or median earned income, instead of the mean earned income, for the the calculation of future benefits does not seem unreasonable. The present SS benefits does provide a floor that's not unreasonable. One way to do this would be to phase it in over, say, 20 years. That should change the calculations of costs for 40+ years out significantly, while not providing a major impact. When I have time, I could run those numbers too. In short, while it would be a real mistake to put off a solution for another 10-20 years, SS looks as though it could be fixed with modest changes. If you want to talk about a government program in trouble, we have no further to look than Medicare, which is in far worse shape. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
