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08/21/2007 - 8:39am

The Social Security Scam


Over the past few years, people have become aware of how Social Security actually works. In the past, many people believed that the government withheld Social Security taxes from your paycheck, stuffed it into a shoebox (or maybe even invested it) so that when you retired you could get it back.

Actually, that's not at all how it works. When your paycheck is taxed for Social Security, those funds (after having administrative fees removed) go to the current recipients of Social Security. Mathematically, this seems like a good solution, so long as we always have a constantly and steady population growth, and we never ever have any sort of booms (like the baby boomers of 40s and 50s).

When Social Security was first introduced, the ratio of people paying to people receiving was 32:1, which meant that people paying into the system saw very little taken from them. Today, that ratio is about 3:1.

I've talked about how Social Security is tyranny, and others look at me with a "How can that possibly be?" expression on their faces. First, as the baby-boomer generation approaching retirement age, that ratio is going to start to creep towards 2:1. This is clearly an unsustainable system.

But let's look at this from another perspective. The average American household income is roughly $40k/year. Social Security and Medicare taxes come to a combined total of 15.3%; 7.65% paid as withholding from your paycheck, and 7.65% paid by your employer. Make no mistake, the employer isn't "paying this on your behalf." This expense that they incur is taken into account when negotiating your salary or wage. If they didn't have to pay this, it would be added to your paycheck without costing the employer anything extra. So in reality, you are paying 15.3%.

This means that your annual taxes being paid into Social Security and Medicare totals $6,120 per year, if you're making an average salary.

Now let's say that you're 18 and have the average responsibility of an 18-year old. You're not going to save a penny. Let's also be realistic and say that you won't start saving anything for retirement until you're age 35. If you sock away $6,120/year from age 35 through age 65 into a mutual fund earning 12%, you're going to retire with $1,476,956.03. If you keep that money in that retirement investment and just live off the interest that you scrape off each year, you're going to have an annual income of $177,234.72.

For those whose eyes glazed over with all the numbers, I'll lay it out here:

While working, you make $40,000/year.
At age 35, you begin investing for retirement.
When you retire at age 65, you make $177,000/year.
When you die, you get to pass on $1.4 million to your heirs.

The important thing to notice here is that your annual income has gone up 4.5 times from the act of retiring. How many people on Social Security can say that their income goes up when they retire? In most cases it'll go down, perhaps even be cut in half. Not to mention that when you die, you have nothing to pass on to your children with Social Security.

"But that's not what Social Security is about. It's meant to take care of people who don't make enough to invest and take care of themselves," the naysayers might say. Alright, so let's do the same thing for someone making minimum wage at $5.15/hour, which is an annual salary of $10,712 for someone working a 40-hour week.

15.3% of $10,712 is $1,638.94. "This person can't afford $1,638.94" you say? Wait, we're talking about getting rid of the Social Security tax, so this $1,638.94 is money that this person never saw anyway. We're transferring it from taxes to investment. So $1,638.94 invested each year from age 35 to 65 will yield $395,529.79. The interest off of this investment will provide an annual income of $47,463.57. Again, roughly 4.5 times what this person made while they were working:

While working, you make $10,000/year.
At age 35, you begin investing for retirement.
When you retire at age 65, you make $47,000/year.
When you die, you get to pass on $395k to your heirs.

Social Security is not good for the rich, the middle class, or the poor. We need to get rid of it as soon as possible. The challenge is that there are currently many people dependent on Social Security who this country has made a commitment to, and we can't back out of that commitment. We need a solution that allows us to keep that commitment while not continuing the cycle, a sort of phasing-out of the system. That's the hard part.

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