Unexpected consequences of social security

[Dominus]

Lower middle to lower class people tend to go straight from HS to the work force, thus starting to pay into SS right away.

Middle to upper people tend to go to college first and start work at 25-30.

In other words, lower middle to lower class people pay more into the system via the compounded interest effect.

Furthermore, statistics tell us that middle to upper class people tend to live longer for obvious reasons. So, they get to draw more from SS.

Someone pointed this out to me years ago. I just remembered it. Is there anything wrong with this logic?

 

[cityboy-stl]

I'm not sure what your point is.

 

[Dominus]

I'm not sure what your point is.

That social security by design makes poor people pay more (since lower income start working at an earlier age) on average while gives middle to upper income more benefits (since middle to upper income people tend to live longer).

 

[cityboy-stl]

Everyone pays in 6.2% of their salary to Social Security. Lower income people may pay in longer but also pay in proportionally less per paycheck at the same time. I don't know that it is true that lower income people pay in more overall because they pay in longer. Do you have any actual data to support that?

The amount you can claim when you receive benefits is based on the total amount contributed by you and your employer, up to some maximum. Middle and upper income people may in fact pay in more over a career, and so therefore also receive greater benefits.

The problem is the contribution cap. Any income over $142,800 is not taxed for Social Security. The contribution cap is what benefits upper income people the most. The cap should should be $400,000 at minimum to keep Social Security solvent and then benefits at the lower end should be raised.

 

[Dominus]

^ Forgive me for being sloppy with my words. I was thinking in terms of rate. I don't know if with raw numbers that the low income folks will pay more or less. But everybody pays into SS at the same rate. And since the low income folks start working a lot earlier than the middle to high income earners, the low income folks end up paying more percentage wise.

5%+5%+5%+5% VS 5%+5%

Also, the folks in the middle and high income earners tend to live a lot longer than the folks in the low income bracket. Common sense tells me this meant middle and high income earners will collect a lot more than low income folks.

 

[cityboy-stl]

Does the rate make a difference? Lower income folks are simply making more contributions. They're not paying more percentage wise, they're just making more payments in smaller amounts than upper and middle earners. It is the dollars contributed that counts for Social Security. Ultimately, the middle and upper people put in more dollars but in fewer total payments. But everyone pays the same 6.2%.

Middle and high income earners probably do collect higher benefits at the start and over their lifetime, first because they contribute more dollar-wise over their career, and second, yes they do live longer. Thus, the contribution cap should be raised to at least $400,000 to keep Social Security solvent and to give those in the lower income levels who really need it, a boost. Social Security is not a personal investment portfolio. It's a national insurance program where everyone contributes to the national benefit of all. Those who make more, should contribute more.

 

[Rickrock]

Dominus, although your statement has a lot of generalizations, it is probably somewhat true. I don't think that it matters much. It is also likely that high income earners pay higher amounts over the years, so do end up contributing more even though they start paying later. They probably also collect at a higher rate when they start collecting and so probably do collect a higher total. I don't think that any of this is enough to be critical to revamping the program.

 

[TX-Beau]

SS was set up as a get out what you put in proposition. So if you put more in you supposedly get more out. it works pretty much like that by and large, and if there are problems with solvency - I wonder who the culprits for that might be?

My Grandpa and Dad religiously pay the SS and Fed taxes on their migrant labor, and the SS Administration even then, does indeed pay the migrants out when they retire. I suspect that there are more rich people who don't get out what they put in simply because they put in a lot more, and have other means, and really are not living centuries beyond poor people, and there are plenty who put in a bunch and died before - what is it, 65? - there's an issue, people rich and poor these days are living longer, and can easily work beyond the current retirement age.

Then there's the millennial gripe that there are far more grandparents and great grandparents than they number, and how is SS going to pay for the ones who's SS runs out before they die.

Frankly I think we should just stop pretending, and call it a tax, then set up universal health and elder care.

 

[unloadonme]

Lower middle to lower class people tend to go straight from HS to the work force, thus starting to pay into SS right away.

Middle to upper people tend to go to college first and start work at 25-30.

In other words, lower middle to lower class people pay more into the system via the compounded interest effect.

Furthermore, statistics tell us that middle to upper class people tend to live longer for obvious reasons. So, they get to draw more from SS.

Someone pointed this out to me years ago. I just remembered it. Is there anything wrong with this logic?

What's wrong with this "logic" is that it's a collection of generalisations and not logic so all.

In the UK at least, it's possible to leave school at 16 as long as you start some sort of apprenticeship. If you go to university, you're likely to be looking for your first job at 21, not 25 to 30. Most graduates will pay substantially more in taxes over their career and be less of a burden on the state in terms of social security than non-graduates, despite the latter having a 5 year head start. Many from the lower orders never manage to hold down a job and seem to claim state benefits for most of their lives.

Another set of generalisations certainty, but I think most economists would accept that that the middle classes subsidise the lower classes through taxation regardless of their later start and possibly longer life expectancy.

 

[cityboy-stl]

Then there's the millennial gripe that there are far more grandparents and great grandparents than they number, and how is SS going to pay for the ones who's SS runs out before they die.

Frankly I think we should just stop pretending, and call it a tax, then set up universal health and elder care.

Solvency? Raise the contribution cap. Pay FICA (Federal Insurance Contributions Act) up to $400,000; don't cut it off at $142,800.
Those over 65 already have universal health care. At least some anyway, but it needs improvement. It's called Medicare.

FICA (Federal Insurance Contributions Act) is basically an insurance premium but call it a tax if you want to.

 

[KaraBulut]

Everyone pays in 6.2% of their salary to Social Security. Lower income people may pay in longer but also pay in proportionally less per paycheck at the same time. I don't know that it is true that lower income people pay in more overall because they pay in longer. Do you have any actual data to support that?

Not everyone. As you probably know, there are some small classes of workers that are excluded or that pay self-employment tax (SECA vs FICA). Because the employer matches the 6.2% payment, the self-employed pay 12.4%.

The problem is the contribution cap. Any income over $142,800 is not taxed for Social Security. The contribution cap is what benefits upper income people the most. The cap should should be $400,000 at minimum to keep Social Security solvent and then benefits at the lower end should be raised.

And it needs to be on all earnings, not just payroll.

 

[opinterph]

Is there anything wrong with this logic?

I think the main problem is a lack of facts. Logic doesn’t work as well when it is based upon hearsay and stray factoids.

The question of who pays more in and who gets more out is somewhat moot. All members of society benefit from the program whether they are recipients or contributors.

The Social Security Act and related laws establish a number of programs that have the following basic purposes:

• To provide for the material needs of individuals and families;
• To protect aged and disabled persons against the expenses of illnesses that may otherwise use up their savings;
• To keep families together; and
• To give children the chance to grow up healthy and secure.

Introduction to Social Security (Social Security Administration)

Common sense tells me this meant middle and high income earners will collect a lot more than low income folks.

… most lower-wage workers receive more in benefits than they pay in taxes.

Social Security: Many pay more in taxes than they'll get back (CNN Business; April 2013)

The only thing [the difference in longevity] seems to be correlated with is how educated and affluent the area is, so low-income people live longer in New York or San Francisco, and they live shorter in the industrial Midwest.”

For life expectancy, money matters The Harvard Gazette; April 2016)

 

[KaraBulut]

...
The question of who pays more in and who gets more out is somewhat moot. All members of society benefit from the program whether they are recipients or contributors.

^QFT

It's kind of a statement on the wealth gap that there's a tendency for the well-to-do to view Social Security as a return-on-investment (ROI) program instead of an entitlement program. As cityboy-stl mentioned, it is supposed to be a insurance program that wage-earners pay into in the event that they live to retirement age or suffer a disability. It's also why most people forget that the official program name is "Old-Age, Survivors, and Disability Insurance (OASDI)".

It was also designed nearly 100 years ago when most people didn't live long enough to collect on what they had contributed to the system.

Years ago, a financial planner explained OASDI as the minimum guaranteed benefit that I would have at retirement and not what I should expect to provide my income in my golden years or in the event that I was disabled before age 65. Pension and 401K/403B plans are designed to be ROI programs where you contribute, your employer matches and where you would obtain most of your income after retirement.

Unfortunately, only about 1/3 of Americans have a 401K and only about 10% of workers in the private sector have a pension plan. That does mean that a substantial portion of Americans will be using OASDI as their primary source of income upon retirement.