Social Security is failed program. It is the most unsuccessful program in the History of the United States. What happened? First we need to clear up a few basic myths.
Myth number one is that life expectancy has increased from 65 years in 1937 to 78 in 1999. The reason life expectancy has inproved is the infant mortality rate has dropped from 8.5% to under .7%. This little known fact has added over 5.9 years to life expectancy. The second largest contributor has been vaccinations amoung those under age 18. This age group has also increased life expectancy another four years. However, this is not what we need to be looking at. We need to be comparing life expectancy of those at 65 in 1937 with those aged 65 in 1999. Doing this we find very little has changed in over 60 years.
Myth number two is that economic growth will save Social Security. In fact increased economic growth is bad for Social Security. OASI uses wage growth as the measure of replacement instead of inflation in determining the OASI benefit. It is only after retirement the replacement rate is changed to inflation. What this means is one must save more to replace at a higher rate.
Myth number three is people paid into the Social Security and could have done better privately. It is true some might have done better investing privately during their working years. However, on average, most everyone who has retired to date will get a good return on what they paid in. In fact those retired before 1983 got tremendous returns.
What does it take to finance an OASI benefit? Well it is pretty simple if one thinks about it. What we need is a formula which handles a gradient. A gradient is when you have to different rates of changes (inflation and rate of return). It is not simply subtracting inflation from rate of return to get a true return. For the formula check out
Using this formula one can make any number of tables. You can find one already done which shows the percent to save based on ones age and rate of return you think you can get and retiring at age 65. It also assumes you live to 95. Why do I use age 95? Well if the average person lives 17 to 18 years past 65, that means there are many who live past 25 and many who do not live past 70. What confidence level do you want to have to ensure you have enough funds available without being a burden on society?
The average OASI Treasury note is earning just over 7% a year.
Therefore a person who invested in treasuries and gets 6% a year at age 22 would have to save 12.1% of their income every year to replace 100% at age 65.
However, OASI targets a 40% wage replacement and taxes 10.4% of your wages. Why is the OASI rate 10.4% instead of 4.84%? Where does the other 46.5% of your money go? Well the simple fact is Congress does not understand life expectancy and created a program based on misleading data. They began a system that taxed only 2% for the first 13 years while never increasing it for inflation! This created a huge unfunded liability. Then to fix the problem, they enrolled ever more workers. Many of these workers paid minimal years into the system and drew out huge benefits.
For example, a person who works 35 years making the average wage has the same benefit as some one who works 45 years making the average wage and as someone who starts 10 years later making the average wage. In fact a person making twice the average wage could work 17.5 years and theoretically get the same benefit. Becuase the OASI benefit replaces lower average indexed wages at a significantly higher percentage, the unfunded liability is very large when you begin to bring older workers into the system.
The current unfunded liability is just at $10 Trillion. There is no real surplus. If you treated the OASI fund as a corporation, you would easliy see OASI has been going deeper into debt each year since its inception. You can see what this looks like graphically at
Notice how the unfunded liability increases each year even though there is a surplus. Who wants to bequeth heir children a $60 trillion unfunded liability in 2040?
Would you bet $250,000 for the opportunity to win $2,500 a month for life starting at age 65 on the flip of a coin?
