What’s the biggest consumer ripoff in the world? Is it the recent
increase in ATM fees by $2.00 at some banks? Newsman Tom Brokaw thinks
so. Is it the $3.50-$5.00 cereal companies charge per box of their
product? Congressman Charles Schumer, D.-NY, thinks so. Or is it any
price above $1.00 charged by oil companies for a gallon of gasoline?
Fox commentator Bill O’Reilly thinks so.
Ralph Nader and Michael Moore, the self-proclaimed champions of
consumers, have never denounced this ripoff. In fact not only do Nader,
Moore, and most other “consumer advocates” zealously defend this scheme,
they are heavily in favor of enacting more of them.
What’s surprising is that the biggest ripoff on the planet is a
popular thing. Millions of older Americans today cherish it and firmly
believe that they couldn’t survive without it — yet before 1935 it
didn’t exist, and before 1965 it wasn’t widely relied upon. This scheme
is unstable and will be on the verge of financial collapse in the next
three decades, yet both Democrats and Republicans are scrambling to
OK, so what’s the name of this ripoff? Social Security. To see the
tremendous costs it will inflict on today’s workers age 40 and under,
let’s start with four assumptions:
- Worker incomes stay constant at one level. (Highly
- The FICA (federal Social Security) tax stays constant at the
current 6.2 percent level. (Highly unrealistic. It will definitely
increase, possibly to as much as 9 percent.)
- Workers enter the work force at age 25. (Fairly reasonable.)
- Retirement begins at age 65, hence the working career is 40 years
long. (Less likely given increases in life expectancy.)
With these assumptions in mind, consider the table below:
Click table to view at full size
Column 1 lists various constant levels of income for a hypothetical
young person throughout his/her working career. Column 2 lists the
amounts withdrawn from his/her income every year over a 40-year working
career by the FICA (federal Social Security) tax.
Columns 3 to 5 represent three types of investment strategies for
these FICA amounts:
Column 3: Person who holds most of their net worth in a Standard &
Poors 500 index fund. The S&P 500 over the past 79 years earned an
average, inflation-adjusted return of 8.14 percent.
Column 4: Stuffing cash in a mattress may make some savers feel
secure, but it exposes them to the full bite of inflation. Even so,
mattress cash still beats Social Security big time.
Column 5: Social Security viewed as an investment. This is misguided
in the sense that SS doesn’t fund private capital but is nothing more
than a transfer of income from youngsters to oldsters.
Interpreting the table: An example
Matt, a 25-year-old, graduates this year with an MBA and enters the
work force. He earns a constant $60,000 per year over his entire
working career and retires in the year 2040. Investing in an S&P 500
index fund, he would end up with a sum of $999,917.98 — the easiest
million dollars he or anyone could ever earn. However, since his money
went to Social Security instead, he will receive only a comparable (and
measly) $74,830.95 broken down into small monthly checks. If he had
stuffed his money in a mattress he would have done better, earning
$87,331.68 that could be collected in lump sum and re-invested as a
higher rate of return in stocks or bonds.
Using the previous four assumptions and table, losses for each income
level are greater than or equal to a whopping 1,187.82 percent for the
S&P 500 and 16.71 percent for cash. But even these losses are
underestimates since the withdrawal of lump sums from Social Security is
forbidden. Under current law, the maximum allowable withdrawal for a
couple 65 and older is $24,000. Even worse is the fact that if a worker
or couple dies soon after retirement, his/her heirs lose all claims to
their Social Security “savings.”
If you think the losses are huge for individuals, for the entire
economy they’re nothing short of staggering — in fact the numbers are
so large as to be unimaginable. If you take the losses for the $20,000
income taxpayers ($333,305.99 – $24,943.65 = $308,362.34) and multiply
them by the 100 million people who will pay the FICA tax, total
economy-wide losses amount to $30.8 trillion, enough to absorb 3.5 times
our entire 1998 national wealth. This represents $31 trillion in lost
private investment (buildings, airplanes, trucks, computers, lost
research and development) and more than 50 million new jobs that would
be created with this investment.
Recent college grads rejoice!
Dale Steinreich, Ph.D., taught economics at Auburn University and is an economic and financial consultant in Huntsville, Ala. He regularly writes for the investment advisory service,