Republicans don't know money. It might be home schooling or it might be willful ignorance, but whatever the reason, you need to protect yourself, because those who know money will prevail.
So, here I present to you some very simple, mathematical facts about Social Security to help you keep your money away from The Bandits. Simple math, nothing more serious than multiplication. Simple multiplication.
The Bandits Do Know Money
I don't want you to think I mean no individual Republican knows money when I make the sweeping statement "Republicans don't know money." Some certainly do. Many Republican constituents know money and built considerable financial empires on that knowledge.
Here’s what I mean: The core of the Republican Party—the leaders, the pundits, the thinktankers, and the blind followers—don't know money or pretend they don't. We can tell because they talk incessantly about privatizing Social Security. They say we should turn it into some kind of voucher system or convert it to private accounts. No one who knows anything about money would even consider this because it is such an incredibly bad deal for the public. You don't need to take my word. Math says so.
First of all, Social Security is intended to keep retired people out of poverty. (It has other purposes, such as disability income, but I'm going to concentrate just on the old age benefits.) It is not intended to raise money or make someone wealthy. It is targeted at those who work for a paycheck. If you are well above the poverty line during your working years, you have the opportunity (and should take it) to put aside additional funds for retirement so you can live comfortably and protect your health.
So, the most important thing the system needs to do is pay you. It must pay you when you retire and it must keep paying you for as long as you live. You cannot afford to get to, say, 75 and have someone tell you, "Sorry, but your funds dried up. You're on your own." No. At that point, you don't have the option to go back to 35 and invest more wisely. You need a regular check regardless how long you live.
If you were to have your own account you would have to put aside money for 76. And, for 106, for that matter, because some people live that long. But this means stashing money you will never use. No matter how long you plan your retirement, you could live longer, so you must put aside money for every conceivable year. If the average life expectancy for your age group were, say, 75, you would still need to put away money for many, many years more than that. Let's say you put aside money to live to be 100. That means, on average, you've just wasted 25 years of funding.
Even if you stretched it to 85, you would have wasted 15 years of payments.
But the Social Security system doesn't have to put aside money for these extra years. That's because it pays out to about 55 million people each year. Chances are good any one individual will beat the odds. Individuals must take that into account. But the probability all 55 million will is vanishingly small, and the Social Security system doesn’t have to consider that risk.
And since Social Security is a pay-as-you-go system, if the actual life expectancy goes up or down by a few days, the system can handle the difference easily because that change is a very small fraction of the total.
To get around this problem, proponents of private accounts assume you'll cash out your money and put it into a life annuity. This annuity is a kind of insurance policy that pays you until you die and averages the probabilities over the whole insured group. But, since the group is private, it is inevitably smaller than the Social Security pool. So, it will never be able to zero out the probabilities that the whole group will live substantially longer than average. And it can't raise taxes even one cent to cover the risk that the group, as a whole, lives longer than expected.
To make up for this, and because it is run by a private company (which needs to make a profit), people who put their money into an annuity don't get back (on average) what they put in. For example, if you had $100,000 to put into your annuity, you might get $90,000 worth of coverage, the rest going to pay for profits, administration, and the risk that your group would beat the odds and live a bit longer. In general, life annuities are not protected against inflation, either.
Social Security does not make a profit and has very low risk, because its group is everyone over retirement age, not some fraction. Also, its administrative costs are very low. The part that goes to pay for old age benefits is about 0.6%. The total administrative cost of the Social Security program (including disability) is currently only about 0.9%.
And The Bandits Want Your Money
So, if privatizing Social Security is such a bad monetary idea, why do Republicans keep pushing it?
There are two reasons:
(1) Republicans don't know money.
(2) But the ones that do know money want yours.
I'm convinced many of the elected and hopeful politicians in the Republican Party simply don't know money. They get their talking points from someone else and don't know whether they’re valid. Or, they know the truth and are evil. But either way, they are working for someone else. They're working for The Bandits.
The Bandits are the ones who profit from bad public policy. In the case of retirement, that would be (one must presume) financial services companies, which would profit immensely from privatization. About $650 billion a year runs through the Social Security system (to retirees, survivors and dependents). And not a single person is making any profit from it. If you're greedy, you can't but think, "What a waste...".
The ellipsis here is the part where they are thinking, "If I could get just 1% of that, I'd be making over $6 billion a year." This is the collective thought-balloon over Wall Street. "If we could just get 1% of that...".
Most of it would be profits. That's because Wall Street already has a large platoon of mutual funds they could feed those billions. Actual billions, because in some countries where they've privatized Social Security the administrative costs average 3%, not 0.6% (like the Social Security Administration) or even 1%. Do the math. How much is 3% of $650 billion a year?
And that's not counting loads. Loads are the sales commissions you pay to have them take your money. A typical load is 5%. That means they want to scoop up 5% of your retirement before even handling your money. What's 5% of $650 billion a year?
The costs to the company are trivial. The funds are already in operation. Most of this is pure profit for Wall Street and gravy for their employees. Naturally, the money wouldn't appear magically. It would come from the public. So, who is going to retire on this income? Not you.
This is why the industry has invested substantially in politicians. The right politician in the right place, and whoops! Just open your pockets!
How Do We Get Our Money Back?
Republicans constantly talk about Social Security "going bankrupt". In some number of years, varying depending on factors beyond our control, the surplus built up by the baby boomers will be gone and, in theory, the system will only pay out a very large fraction of its obligations, not all of them. This theory is based on the assumption that the public does not have the willpower to raise the funds needed to pay its obligations. But that's not the math part.
The math part is about how our system is systematically shortchanging Social Security funding. To understand this you need to know Social Security is intended to be funded from payroll taxes.
Why should we fund Social Security by a flat tax, one that is levied on wages, and is theoretically regressive (hitting the poorest the most)? The reason is because payroll taxes make the cost of Social Security proportional to the labor used. Social Security is a form of minimum wage. It requires employers, in the aggregate, to pay the total costs of the labor they use, not just the cost of having it while their workers are actually working, but also when they can't work.
Until we developed Social Security employers could externalize a part of the cost of this labor to society—to families, friends, charity or the government. They only needed to pay employees enough to live while they worked. As soon as the worker developed a debilitating disease or got too old to work, the employer could simply stop paying them. Since most work is done for the cheapest price the company can get away with (workers cannot afford to turn down work, so there are always workers willing to take any job, even if it doesn't pay enough to live beyond work) this means the company could get labor below the actual lifetime living wage for that worker.
Funding Social Security with a payroll tax makes all employers pay at least enough for the worker to survive disability (should it occur) and retirement (when, we hope, it does).
But this funding source means Social Security’s health is a reflection of the health of the workforce. That is, it's a reflection of the economic health of the workforce, and that health ain't so good. Since 1990, workers have seen a substantial loss of income. In just one measure, the percentage of business income going to workers declined from 63% to 58%. What happened to that other 5%? It went to profits.
The U.S. economy is around $15 trillion a year. You can think of that as a proxy for "business income". (Some of it is public income, not private income, but wages for public workers are substantially dictated by wages in the private economy. Workers can move back and forth, albeit slowly, so an increase in private wages would pull workers out of the public system, and vice versa.) So, 5% of the GDP is about $750 billion. This is about how much less workers are being paid compared with 1990.
And, Social Security gets about 10% of wages. There are exceptions (because of the cap) and the actual amount is 10.6%, but 10% is a good enough number to see that the loss of $750 billion in income represents a loss of about $75 billion a year from Social Security. This is roughly how much the decline of 5% represents.
What would it take for Social Security to pay out 100% of benefits for the next hundred years? Well, restoring that 5% deficiency in wages would go a long way.
And unemployment is also almost 1% higher now than it was before 1980. One percent of the work force means about 1 million people not working. Even at minimum wage that represents about 2 billion hours of work and about $14 billion of lost wages—$1.4 billion that’s not funding Social Security. “A billion here, a billion there…”.
The way to strengthen Social Security is to raise wages and increase the employment rate. Wages have stagnated. Employment levels are systematically down. The fight to preserve Social Security is just the warning bell going off. It’s really the fight to save the worker.
When someone (let's say, one of the Republicans that doesn't know money) starts blabbering on to you about how we need to "fix" Social Security, say this:
In order to fix Social Security we need to raise wages. How do you think we should do that? Do you think we should raise the minimum wage? Or, do you think we should make it easier to unionize (EFCA)? Are you in favor of higher tariffs? Or, would you like to see an international minimum wage?Be prepared to teach them a little math.
You can find information on the administrative costs of Social Security on this page of the Social Security Administration website. The average administrative cost for OASI (Old-Age and Survivors Insurance) is 0.59% and the total average cost for all Social Security administration is 0.91% for the twenty-first century (2000-2012).
According to the Social Security Administration Press Office Basic Facts page, OASI payments in December 2012 were about $54.7 billion. This is about $650 billion on an annual basis.
How much are administrative costs? I give you Chile. According to the abstract for Privatization of Social Security: Lessons from Chile, the average administrative charge there is 2.94% of average taxable earnings. In the 2012 Republican presidential debates, Newt Gingrich specifically called out Chile’s Social Security system as an example of where he wants the U.S. system to go.
The statistics on wage loss are probably much worse. Wage loss is probably much worse than the statistics I reported. Peter Orszag reported that wages had dropped by 5% from 1990 in his report for Bloomberg in 2011. Karl Smith said on Up w/ Chris Hayes on 29 December 2012 that the labor share of business income dropped 10% between 1980 and today. (This is quoted as a drop from 60% to 30% in the transcript, but that would be inconsistent with other figures.) My inflation adjusted figures for non-supervisory wages from the Bureau of Labor Statistics between 1978 and 2010 show a drop of about 7.4%. Overall wages were a bit higher because they include hedge fund managers and CEOs, but wages for the bulk of workers are down.
I said there would be numbers. I said there would be math. Okay, now, you know money!