Nothing can save 40-something Baby Boomers from getting a raw deal at retirement because they're mired at the bottom of a massive pyramid or Ponzi scheme, according to a University of Delaware economist whose analysis of the Social Security system appears in the new issue of Humanomics, an international social science journal.
Since 1940, U.S. retirees have received an estimated $6.6 trillion dollars more in benefits than they've paid in taxes: an amount only slightly higher than the current national debt, UD faculty member William T. Harris reports. This amount will rise and peak at more than $9 trillion around 2015, he says.
Privatizing the nation's "pay-as-you-go" Social Security system-or funneling a certain percentage of taxes into individual retirement accounts-might help offset the staggering imbalance between benefits paid versus contributions made to the plan, says Harris, winner of four UD teaching excellence awards. Given the system's huge payoffs to date, however, "privatization simply wouldn't be a panacea," he adds.
"We're talking about the ultimate pyramid scheme," says Harris, whose latest study tracks Social Security benefits over a 65-year period, beginning in 1955 and projected to 2020. "Those who got in early received the biggest benefits for the smallest contributions. The rest of us will experience a very poor rate of return on our investment for the next 22 years, and those retiring after about 2015 will get back less than they paid into the system."
Until recently, Americans have reaped remarkably large rewards from the Social Security system because tax rates remained low during their working years, and benefits were based on the higher rates in effect at the time of their retirement, Harris explains. When former U.S. President Franklin D. Roosevelt launched the Social Security system 61 years ago, Harris notes, Social Security taxes claimed only 1 percent of the average worker's paycheck. By 1950, the rate rose to 3 percent-compared to a current rate of more than 15 percent. Such low tax rates during the first half of this century explain why the earliest retirees "received the highest rates of return," Harris says.
The late Ida M. Fuller of Vermont, for example, the nation's first Social Security recipient, paid only $44 in taxes for three years before she retired in 1940. Yet, she collected $20,884.52 in benefits over the next 35 years, according to Harris. Subsequent Social Security recipients enjoyed comparable windfalls. In 1955, those who retired at median-income levels drew nearly $15,000 more in benefits than they paid in taxes, according to research by Harris. And, workers who retired between 1970 and 1980 received the largest payoff, compared to their investment, he says.
The trend toward soaring benefits peaked in 1980, when the average worker drew $145,400 in benefits, "over and above their contributions," Harris reports. By comparison, today's 40-something employees, who entered the workforce in 1980 when the Social Security tax rate was comparable to current levels, "will pay large amounts into the system for 40 years and then get 15 years' worth of benefits," according to Harris.
"The large benefits that our parents and grandparents and great-grandparents have enjoyed for so many years are going to come home to roost," he says.
Currently, U.S. workers may receive partial Social Security benefits at age 62, with full benefits payable at age 65. By the year 2022, however, the minimum age for full retirement will rise to 67, thereby further reducing the lifetime benefits paid to most workers, Harris notes.
Policymakers are evaluating various options for Social Security reform. The bipartisan National Commission on Retirement Policy (NCRP), for instance, has recommended investing 2 percentage points of each individual's Social Security tax into mutual funds. Under the NCRP recommendations, taxpayers could decide how to invest their money, but full retirement benefits would be withheld until age 70, beginning in 2029. Competing reform proposals call for differing degrees of privatization, all of which would divert some percentage of Social Security taxes into high-yield investments, coupled in some cases with higher tax rates and/or reduced benefits.
To analyze Social Security benefits paid to date, Harris compiled data from the monthly Social Security Bulletin and the annual Current Population Survey. He also took into account average annual mortality and birth rates to tally the number of employees who retired each year, as well as the Social Security benefits paid to them, starting in 1955. His analysis assumes that each retiree reached the average life expectancy and worked continuously from age 20 to age 65, earning a median income, as defined by the Bureau of Labor Statistics. By projecting earnings, tax rates, benefits and longevity statistics, Harris also predicted future Social Security benefits, through the year 2020.