What if Social Security...?

 

There's lots of nonsense out on FaceBook and other social media sites about Social Security.  "I paid into this my whole life!" someone will pout;  "Where's all my money?" and it's followed by claims that SS is old-age insurance or that there's a separate account in each person's name.

None of that is true.

From the very start of the program, SS was a two-pronged piece of legislation.  The first piece was a tax plan whereby every wage earner would be taxed some small amount and their employer would be taxed the same amount.  This tax money (FICA) went into the General Fund from day-1.  There was never a 'separate account', but the Social Security Administration did keep a record of how much was taken and the earnings the tax was based on.  You can still get from SSA a list of how much you earned (that was taxed) from the day you started work.  Mine goes back to 1962.

The other part of that legislation was a welfare plan under which certain persons would be paid money based on certain qualifications: how much you had earned, your age, your health conditions, and a few others.  Under this plan, people who had never worked a day in their life (for wages) still got SS 'benefits'.  If there had been those mythical 'separate accounts', their balance would have been zero.  As a matter of fact, everyone's balance is zero.  You have no contractual right to SS benefits even today.

But listening to various people carp about how unfair the system is got me to thinking about how things might have been had those politicians in the 30s really been looking out for the welfare of the people.  Try this on for size:

Suppose the SS law had been cast something like this:

1. Every wage earner must escrow with a trustee of their choosing not less than __% of their gross taxable wages.
2. Funds so escrowed may not be withdrawn before age ___, except as provided by law.
3. This account is the property of the wage earner and heirs.

As of right now, when you die, your SS benefits die with you (except for your spouse).  Your children and grandchildren do not inherit your benefits, but the scheme above makes your SS account truly yours as many people think (wrongly) is the case now.

There's something else.  There would be other changes that are harder to predict.

For one thing, all that money taken as taxes was used to fund the Social Security Administration, and none of that money would have been needed because there wouldn't have been a SSA.  Our federal spending would have been noticeably lower, our national debt would have been lower, the inflation rate would have been lower, and the general health of the economy would have been higher, not simply because of lower federal spending, but because all that money in individual investment accounts would have been used to fuel the private sector rather than being wasted on the bureaucracy.

The Dow-Jones which now stands at 25,000-something might have been much higher, and the dividends from a more robust economy would have been reflected in higher interest rates paid on your retirement account.  What effect would that have had?  Hard to tell, but I ran a little spreadsheet on my numbers — which were not exceptional — and at 8% of FICA earnings (not including the amount my employers were taxed) accumulated at 6% interest, I would have had almost $400K at retirement age.  In the hands of a savvy investor, that might have been substantially higher.  If that 8% were bumped up to 15% to account for the employer's portion, my balance at age-65 approaches $750K.  That's a substantial nest egg, no?

Beyond that, I'm guessing that those numbers would have been substantially higher given my actual experience with 401k savings accounts.  What little time I did have to pour money into a 401k still provided a nice pile that SS would otherwise not have provided, and that 401k is mine to do with as I please and to pass along to my children when I don't need it anymore.

Yes, indeed, FDR's Congress surely did not do us any favors writing the SS law the way they did, but that probably wasn't their intent in any case.

Regardless, the law is what the law is.  No, you do not have your own personal SS account with a pile of money squirreled away for your retirement.  Stop complaining.

 

The Rule of 72

 

I read an interesting article today on the growth being shown by various economies and it contained this quote:

Concern about Chinese debt is not unwarranted, but with GDP rising by 6% per annum, its economy will be 80% larger in a decade, whilst India’s, growing at 7%, will have doubled.

and this made me recall "The Rule Of 72".  The rule is a handy yardstick used by financiers to quickly estimate the time it will take to double or halve an amount based on an interest rate.  It's very simple, really.  It works like this:

Say you have $1000 and you invest it or bank it at a cyclic interest rate of 6%.  At the end of the first cycle, you will have $1,060. After the second, $1,123.60, with the increase accelerating each cycle due to compounding.  At the end of the 12th cycle, your balance will be $2,012.20, approximately double your original investment, and 6 x 12 = 72.  As to the quote above, the balance at the end of cycle-10 is $1,790.85, about an 80% increase.

Another example: the interest rate is 3%.  After cycle-1, your balance is $1,030, then $1,060.90 (almost 6%).  By the end of cycle-23, you're at $1,973.59, and after cycle-24, it's $2,032.79, so 23-1/2 cycles give or take — call it 24, and 3 x 24 = 72.

As you can see, it's not exactly exact, but it's pretty close for use as a first approximation.  So, someone offering you a 4% rate is offering to double your money in (72 / 4 =) 18 cycles.  India's growth rate (according to the quote) will double its present size in (72 / 7 =) 10.3 cycles.

'72' is a handy number.

 

Brexit and Ireland

 

With Brexit barely a month away, some Americans may still be scratching their heads.  What's all the fuss?

I have to admit to some confusion myself.  My particular confusion arises over the phrase 'hard border'.  At present, both the UK and the Republic of Ireland (hereafter just 'Ireland') are members of the EU, which means that goods may transit freely between Northern Ireland and Ireland.  Post-Brexit, Northern Ireland will not be part of the EU (even though NI voted to remain — the rest of UK voted otherwise) and if there is not a hard border, goods from outside EU will easily flow into Ireland.  The EU is apparently upset over this and is demanding that Ireland and UK fix this.

Now, the border between Ireland and NI is about 160 miles long and there are hundreds of places where people cross willy-nilly all the time.  'Fixing' this means halting the free passage of people back and forth between NI and Ireland.  This is not going to go down easily.  When the two Irelands were plagued by "the troubles", it took a very large contingent of the UK military to police the border, and they were far from effective.

The alternative is to make the Irish Sea the 'hard border' and let NI continue as if they were part of the EU.  I'm thinking that if that's the solution that's settled on, it won't be too very long before Irishmen on both sides of their soft border start thinking it may be time to do what East Germany and West Germany did.

How do you say "wiedervereinigung" in Gaelic?  Athaontú, perhaps?  One can only hope...