In 1996, there was a study showing that members of Generation X were more likely to believe in UFOs than Social Security still existing by the time they'd be eligible to receive it. This stuck out in my mind because, as I read it in my High School library, I distinctly remember thinking, "Yeah, that sounds about right."
Not that I'm a big believer in extraterrestrial intelligence, but even back then, I could see the odds.
I'm not making a controversial statement when I say that Social Security is unsustainable. Even from the beginning, it was poorly designed at best and dishonestly promoted at worst. When Rosevelt implemented Social Security, there were 10 workers for every recipient, the eligibility age was 65, and life expectancy was 62. That's right, Social Security was designed with the assumption that most people would die before they drew a penny out.
Now, there's 3 workers for every retiree, quickly approaching 2. Eligibility age is between 65 and 67, depending on when you were born. Life expectancy is 78. And while today's retirees have spent their entire working life paying in to the system, the average beneficiary will receive more in two years of benefits than they paid in taxes their entire career.
Honestly, I could go on for pages describing all the ways in which Social Security is screwed up, from trust funds full of IOUs to payments sent out to illegal immigrants. Suffice it to say that, for as long as I've been working, I've wanted a way to opt-out of Social Security. But while most Ponzi Schemes tempt you to buy in by appealing to your greed, Social Security gets you to buy in by simply garnishing your income.
(As an aside, there is actually one way to opt-out of the Social Security system: Get yourself elected to Congress. That's right, just like Obamacare, insider trading rules, and the Civil Rights Act of 1968, Congress exempted themselves from Social Security.)
As part of his original "stimulus" package, President Obama cut Social Security tax withholding from 6.2 to 4.2 percent, and if you were paying attention to politics just before Christmas, there was a big fight about extending those tax cuts. For those that missed it, here's a brief summary:
President Obama: We need to extend the Social Security tax cut for another year.
House Republicans: OK, 12 more months of tax cuts.
Senate Democrats: No, just 2 months. Have a good Christmas Vacation!
House Republicans: 2 months? Are you serious? Get back here and do the whole year.
President Obama: Look, the Republicans don't want to cut your taxes!
House Republicans: ???... OK, fine.
Now the tax cut itself is not that much; at first the President kept referring to it as about $1000 a year, but then apparently somebody slipped him a note pointing out that his party didn't want to do the full year, so he switched to referring to it as $40 per paycheck. The White House even made a website where people could go to submit their stories of what a difference $40 would make.
As I said before, I've long known that Social Security was doomed, and have pretty much assumed that the Social Security taxes I'm paying is money thrown down a rathole. That said, I'd love to be throwing away a little less. I've long said that I'd love a chance to opt-out of Social Security and put those taxes into my 401K. It recently hit me that this extension of the Social Security tax cut is a chance to do just that, at least partially. Rather than just keep that extra 2%, (and pay income tax on it - something else that's been left out of the equation,) I can invest in a real retirement plan - one that will actually be around by the time I'm ready to retire.
Not that I'm a big believer in extraterrestrial intelligence, but even back then, I could see the odds.
I'm not making a controversial statement when I say that Social Security is unsustainable. Even from the beginning, it was poorly designed at best and dishonestly promoted at worst. When Rosevelt implemented Social Security, there were 10 workers for every recipient, the eligibility age was 65, and life expectancy was 62. That's right, Social Security was designed with the assumption that most people would die before they drew a penny out.
Now, there's 3 workers for every retiree, quickly approaching 2. Eligibility age is between 65 and 67, depending on when you were born. Life expectancy is 78. And while today's retirees have spent their entire working life paying in to the system, the average beneficiary will receive more in two years of benefits than they paid in taxes their entire career.
Honestly, I could go on for pages describing all the ways in which Social Security is screwed up, from trust funds full of IOUs to payments sent out to illegal immigrants. Suffice it to say that, for as long as I've been working, I've wanted a way to opt-out of Social Security. But while most Ponzi Schemes tempt you to buy in by appealing to your greed, Social Security gets you to buy in by simply garnishing your income.
(As an aside, there is actually one way to opt-out of the Social Security system: Get yourself elected to Congress. That's right, just like Obamacare, insider trading rules, and the Civil Rights Act of 1968, Congress exempted themselves from Social Security.)
As part of his original "stimulus" package, President Obama cut Social Security tax withholding from 6.2 to 4.2 percent, and if you were paying attention to politics just before Christmas, there was a big fight about extending those tax cuts. For those that missed it, here's a brief summary:
President Obama: We need to extend the Social Security tax cut for another year.
House Republicans: OK, 12 more months of tax cuts.
Senate Democrats: No, just 2 months. Have a good Christmas Vacation!
House Republicans: 2 months? Are you serious? Get back here and do the whole year.
President Obama: Look, the Republicans don't want to cut your taxes!
House Republicans: ???... OK, fine.
Now the tax cut itself is not that much; at first the President kept referring to it as about $1000 a year, but then apparently somebody slipped him a note pointing out that his party didn't want to do the full year, so he switched to referring to it as $40 per paycheck. The White House even made a website where people could go to submit their stories of what a difference $40 would make.
As I said before, I've long known that Social Security was doomed, and have pretty much assumed that the Social Security taxes I'm paying is money thrown down a rathole. That said, I'd love to be throwing away a little less. I've long said that I'd love a chance to opt-out of Social Security and put those taxes into my 401K. It recently hit me that this extension of the Social Security tax cut is a chance to do just that, at least partially. Rather than just keep that extra 2%, (and pay income tax on it - something else that's been left out of the equation,) I can invest in a real retirement plan - one that will actually be around by the time I'm ready to retire.
To get an idea of the actual numbers involved, I'll take the $1000 per year that the President was talking about. Bloomberg has a 401K calculator here that I used to handle the numbers. I assumed a starting balance of zero, and left the investment rate of return at the default of 8 and the employer match at the default 50%. I also assume someone around my age will have about 35 years left till retirement, based on the current retirement age of 67 - but keep in mind most of the current suggestions for "fixing" Social Security involve raising the retirement age.
The above parameters generate a retirement fund of $288,646.88. That's starting from nothing and investing only the current tax cut. Now, $288K isn't a huge retirement fund today, and once adjusted for inflation, you're going to be looking at a pretty modest lifestyle, but your 401K will be there. Can you say the same for Social Security?
The obvious objection is that a 401K is subject to the fluctuations of the market. And fluctuate it does. Stocks in particular are notoriously volatile over the short term, and individual stocks are subject to whatever that company is going through. But the market as a whole, over a long period, has an upward movement. The best thing to do with any long-term investment, including and especially your retirement, is to invest the money, then leave it alone until you're ready to withdraw.
Taking the 35-year period I used, the Dow Jones Industrial Average has never lost money. The worst 35-year periods of the 20th century - starting in 1905 and 1906 - still averaged yearly Rates of Return of 6.4% and 6.1% respectively. Keep in mind, those periods had most of their late gains wiped out by the Great Depression, but still managed over 6% a year on average. On average, any 35-year period will return about 9.7%, so the 8% Bloomberg used as its default is likely a bit conservative.
If you want to know how all this would affect your own life, grab your last pay stub and find the line marked "Social Security". That's how much you're paying now, at the current rate of 4.2%. To find out how much you're saving with the much-debated tax cut, multiply the amount of your Social Security withholding by .476. That will show you the 2% that everyone was fighting over just before Christmas. (Was yours $40 per paycheck? Mine was a little over half of that.)
Now, go to the 401K calculator I linked above, (or find your own - there's plenty of others). If you know your annual salary, just fill that in and use 2% as the contribution rate, and put in a best guess as to the number of years you've got till retirement. If you don't have a set salary, then just assume you've grabbed a typical pay stub and multiply the Social Security Withholding times .476 and then by the number of pay periods in a year. (26 if you get paid every other week.) Put that number in the "Annual Contribution Amount" box. If you're starting from zero, make sure you change the "Current 401K Balance" to 0, otherwise put in a best guess as to what your 401K is currently worth. Hit the "Calculate" button and see what you get putting your Social Security Tax Cut into your 401K. I suggest your next step should be to talk to someone in HR about making the appropriate changes to your 401K. Then, go to the White House comment page and tell them what you're doing with your tax cut.
Here's a little bonus exercise that will only result in frustration. On the same 401K calculator, enter your annual salary, but use 6.2% as the contribution. This shows your retirement account if you were allowed to completely opt-out of the employee-paid portion of Social Security and instead invested the amount of those taxes into your 401K. I ended up with nearly $1.3 Million. Anybody out there still think Social Security was a good idea?
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