Monday, March 4, 2013

Social Security "Insurance" ... Simple Words and Their Plain Meaning

We call it Social Security Insurance, but it's not insurance at all.

Our contributions and those of our employers are not investments either.

For lack of a better term, Social Security benefits represent a legislated entitlement granted to eligible recipients by their fellow citizens and for which the recipients and their employers made certain required payments into the system during their working careers.

As I recall, the Social Security maximum earnings base was $3,600 annually when I began work. Then it rose to $4,800 or some such maximum. Now it's over $100,000. The percentages paid into the system have increased substantially as well over that period. So has inflation. But let's continue.

So if I was paid $10,000 when I began my career, which would have been a high starting salary at the time, and if I paid 4% and my employer paid another 4% of $3,600, that combined total 'contribution' of 8% amounted to $288 annually, or less than $300.

At approximately the same time, for a similar premium of less than $300 annually, I purchased a $100,000 decreasing term life insurance policy. Decreasing term is the least expensive type of life insurance and the payout amount on my policy decreased ratably each year for 25 years, meaning that around age 50 I had no more insurance coverage. But had I died in the meantime, my wife would have received some portion of $100,000 from the insurance company to spend on her and the children.

But I didn't die. As a result, the premiums paid to the insurance company went for naught. Happily, it proved to be a bad investment.

However, WE now collect Social Security benefits each year which amount to approximately $33,000 in total. And we will continue to do so until death do us part, whenever that is. {NOTE: Happily, I also have other retirement income, such as a 401(k), but that's not germane to this story.}

So let's stay with Social Security today. First, it's not only not an investment. It's not even insurance. I say that because no insurance company would have agreed to provide me with $33,000 annually for the "premiums" I paid during my working career. They couldn't have stayed in business had they done so. My own decreasing life insurance policy purchase demonstrates that very well.

{NOTE: In that regard, inflation is not our friend, my friends. And neither are inflated salaries over time. It's the real inflation adjusted income that matters. But that's another story for another time. We'll also skip the survivors and disability pieces of the equation which make Social Security even more expensive to fund properly.}

Social Security is provided by us to us. Not by "them," aka the politicians, and not by "it", aka the government. We the People who are working are responsible through legislation to pay the benefits specified in the Social Security plan tables to people who no longer are working or perhaps never did work, aka spouses.

If the money 'contributed' by workers is not sufficient to pay benefits to the oldsters, then the workers have to 'contribute' more. And if we die while we're still working and before becoming oldsters, we no longer have to contribute but we don't get to receive retirement benefits either. We don't contribute because we're dead and we don't receive benefits because we're dead. That's the program.

But there's no they or it involved in the program. WE the People are the government. The legislators are acting on our behalf. The government isn't some inanimate object or distant group of they. It's a proxy for WE.

But as a government we suck. And as our dysfunctional politicians acting on our behalf, they suck.

Notable & Quotable talks about the Italian, European, Japanese and U.S. governments and how similar, dysfunctional and corrupt they are. Here's what it says:

"Financial markets around the world reeled when the Italians rejected the European status quo and their own political establishment in the last election. This should not have come as such a surprise; few political establishments anywhere in the democratic world are as spectacularly rotten as Italy's, and the European status quo is the biggest man-made policy disaster since the fall of the Iron Curtain.

Italian voters don't have a lot of use for their leaders, and it's hard to say they are wrong. The left wants to preserve the unsustainable, the right doesn't have what it takes, and the center is dominated by short term, self centered careerists whizzing through the well oiled revolving doors that connect business with government. But how different are politics elsewhere? Voters ultimately weary of repeat policy failure by the well connected and well educated, and whether you look at Europe, the United States or Japan, the failures of national leadership keep piling up.

Americans often like to believe that our problems are as exceptional as our strengths, but our stale and ineffective political establishment looks a lot like its peers around the world. The American elite is not alone in its inconsequential futility and its lack of strategic vision; world leaders everywhere are falling down on the job.

The assumption that the people guiding the destinies of the world's major powers know what they are doing is a comforting one, but there's not a lot of evidence to support it. The "pass it to find out what's in it" health care 'reform' in the United States, the vast stinking policy corpse that is European monetary union, the failure of establishments everywhere to figure out the simple arithmetical problems that our welfare states are encountering because of the demographic transition, the metastasizing tumor of corruption also known as the Chinese Communist Party: none of these suggest that the world is being governed with unusual wisdom."

Summing Up

We began with a discussion of why Social Security is neither earned nor an insurance contract. If you don't like the word entitlement, which many people don't, then feel free call it something else.

It's a free country, so we can use the words we choose to use.

But understand that the "earned rights" granted by Social Security are being funded in large measure by people who didn't get to vote on the issue.

And also understand that many oldsters receiving the benefits don't need that money as much as the youngsters do who are paying for the retirement benefits of the oldsters.

And also understand that the 2% payroll tax increase effective in January will go for Social Security funding.

And that the additional 2% tax on workers will have a weakening effect on consumer spending, and will result in fewer workers employed by businesses and probably fewer taxes paid in total. Higher Social Security taxes will translate into lower income taxes (both businesses and individuals) from a slower economy.

There is no free lunch. There are no "earned" or "insured" Social Security benefits.

There is no "they" or "it" when it comes to government.

It's We the People who ultimately are in charge, and we need to start acting accordingly.

Like 'educated' and knowledgable grownups, for instance.

That's my take.

Thanks. Bob.

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