Q. I will start drawing Social Security in a few months. I have read for some time what a great deal my generation gets with Social Security. That may have been so in the past, but not with me and possibly not with most folks now becoming eligible. I was fortunate to have above average income and SS payments are scaled… The published propaganda is that we get back a great deal more than we paid in. I even got a report from SS showing I had paid in just over $40,000. Obviously, if I live my expectancy, I will get back a great deal more. This ignores the time value of money paid in… plus that of my employer.
As an exercise, I calculated a 7 percent return on my contributions from 1952 on and then doubled it to include the value of employer contributions. The total came to $223,510. A clerk at Social Security said my expectancy is 16 years. If that's so, I'll get about half my money back although my wife may continue to draw. The Social Security payments are not a big concern but I resent being conned.
---K.S., Nemo, TX
A. Those now retiring are a cusp generation--- the bridge between a generation whose contributions were small in relation to benefits and future generations whose contributions will be large in relation to expected benefits. That's what your calculation shows.
In actual fact, Social Security was designed as a "pay as you go" system, transferring income from people working to retirees. There was no opportunity for contributions to earn interest.
That was changed in 1983 when the employment tax was increased to create a surplus that was supposed to be accumulated in a trust fund. The idea was to reduce the financial impact of the first wave of boomer retirees early in the next century. Now there is a surplus and it is invested in U.S. Treasury obligations so there IS an earning component in Social Security.
Unfortunately, what it looks like and how it works are two different things. The surplus is credited to the Social Security Trust fund as Treasury obligations but the actual cash has been spent. In essence, the extra tax burden on young workers is being used to finance current government spending and mask the actual size of the federal deficit. When today's contributors actually retire and ask for their promised benefits, the government will have to redeem its accumulated horde of Treasury obligations.
It will do this by floating NEW obligations, sucking money out of the private economy… or by increasing income taxes, which also suck money out of the private economy. Real investment has never been involved. The biggest political debate of the next ten years will be HOW we can turn your calculations from an abstract exercise to real accounts using real money for future generations.
Q. You recently had an article regarding the direct purchase of T-Bills. I think this would be an appropriate way for my mother to invest her money. She currently needs a place to reinvest $100,000 from 8% bonds that are being recalled. She could work through her bank but they would charge her $25 - $75 for the service. But if she could almost as easily deal directly with the Treasury it would make it more appealing (and with my mother more exciting).
Does she need any forms?
--- K. R., Dallas, TX
A. Yes, she needs forms. Many readers have complained that Treasury Direct is anything but and don't understand the forms, etc. So be prepared for some work. You can get the forms by calling a regional Federal Reserve Bank. Dallas, in this case. They also provide regular listings of auction dates and deadlines for the receipt of non-competitive bids.
One limitation of Treasury Direct is that you cannot treat it like bonds held in a normal brokerage account. If you decide to sell before maturity you must arrange for a transfer to an outside broker who will then sell the security. It's a slow process. In addition, when you place a bid you must deliver a bank cashiers' check before the auction. This means you lose interest between the time you buy the cashiers' check and the time you own the new Treasury: this invisible loss can be nearly as large as the banks' charge to buy the Treasury for you.
File Name: 961107THDallas Morning News file date: 11/07/96---THUUniversal Press Syndicate file date: same © Dallas Morning News, Universal Press Syndicate, 1996
Scott Burns has covered the changing world of personal finance and investments for nearly 40 years. Today, he ranks as one of the five most widely read personal finance writers in the country.
Scott began his career as a newspaper columnist at the Boston Herald in 1977 where he was also the financial editor. Nationally syndicated in 1981 and now distributed by Universal Press, the column appears in newspapers from Boston to Seattle. In 1985 he joined the staff of the Dallas Morning News where his column quickly became one of the most widely read features in the paper. He left the Dallas Morning News in 2006 to become one of the founders of AssetBuilder and its Chief Investment Strategist.
Burns is a graduate of Massachusetts Institute of Technology (1962). He has written four books, including "The Coming Generational Storm" (MIT Press, 2004) coauthored with economist Laurence J. Kotlikoff. His fourth book, also coauthored with Kotlikoff, will be published this spring by Simon & Schuster. "Spend Til' the End" uses consumption smoothing to demonstrate the errors of conventional financial planning.
His business experience includes working as a staffer for a major consulting company and service as a director and audit chairman of a NASDAQ listed manufacturing company. He and his wife divide their time between Dallas and Santa Fe, New Mexico.
