I was accused of dishonesty by another poster for not having used a Baby Boomer for my Social Security calculation. So, I'm recrunching with a Baby Boomer.

I'm using a Boomer born in January 1946 (the first year of the Baby Boom), to minimize the need for guessing about the future. Our hero is 63 years old this year. He earns $50,406 (the median income for a person age 45-64). He'll retire at the start of 2012 (when he can get full benefits). I went to a life expectancy calculator, and based on him being 63, white, male, middle-class, and married, a non-smoker, with unexceptional health stats and habits, he can expect to live to around 87 (it would be shorter if he were black, longer if he were a woman, so it seemed like a fair middle-of-the-road person to use).

Based on the aforesaid assumptions, the SSA estimates he'll receive $1457 per month, starting that first month, thereafter escalated by CPI-W (inflation). Assuming CPI-W rises during his retirement at an average of 3.77% (the same average rate as during his career), and assuming there are no other unscheduled handouts to seniors, he will have taken out $583,241 from SS, in monthly benefits checks, by the time of his death. That compares to a lifetime SS contribution (his taxes plus his employers') of $137,870 (based on the SSA's own calculator's earnings estimators). So, he'll be taking out more than four times as much as he contributed.

Of course, it's not that simple, since one can rightly point out that he should get some reasonable rate of return on those contributions, as if he'd invested them. If nothing else, he should get something pegged to the federal government's "cost of money" (since the money he hands to the government in SS taxes is money the government doesn't wind up borrowing and paying interest on). But the government's cost of money is very low, since it's such a high-rated borrower. If you were planning to retire in 30 years and bought yourself a 30-year Treasury today, to pay for it, you'd only get 4.5% -- and shorter periods get you crummier rates. The 5-year is only getting you 2.375% right now. An average government IOU, right now, is probably getting around 3% (lumping together the various terms), and that just isn't going to cut it in turning $137,870 of contributions into $583,241 in benefits.

In fact, if we impose a 3% return on the calculation, the guy winds up drawing in excess of $380,000 more out of the system than he ever paid in. In order for him just to break even (drawing out exactly the real value he paid in, after accounting for interest), you'd need to assume over a 5.5% average rate of return on his contributed funds, and that's just not realistic on a safe investment subject to no tax. In the real world, you can't go out and find a near-certain 5.5% return, much less one where you wouldn't pay taxes on the interest (knocking down your effective return). So, in the real world, he's going to be drawing more value out than what he paid in was worth.

Keep in mind, that's without us even taking account of SS death benefits, administrative costs, SS disability, and intra-generation wealth shifting (subsidization of the retirements of the poor). Count those things, and you'd need a middle-of-the-road retiree to pay more into the system than he takes out just for the system to break even. Which means the system itself winds up even deeper in the hole when average retirees, in fact, take more out than they put in.

So, how is it that this Baby Boomer can pull $583,241 out of a system into which he only contributed $137,870, if only part of it is explained by the implicit rate of return his contributions received? The answer is inter-generational wealth shifting. It's not as extreme as in the early years (where the very first Social Security beneficiary pulled out almost 1000 times the value she'd paid in), but it's still there. Every generation of retirees (except that first one) has its retirements subsidized by the paychecks of the workers who came after them. That's certainly true of the "Silent Generation," and appears like it will also be the case for Baby Boomer retirees. And when an unscheduled $250 hand-out is stacked on top of the scheduled payments, this subsidization is simply increased further.

Oops, I meant "especially that first one" not "except that first one."

Comments and sundry nit-picks:

Somebody born in Jan, 1946 probably has more in common with the Silent Generation than with the Boomers as far as the economy is concerned. Assuming our hero went to college and graduated, he entered the workforce during the late 1960s before the onset of inflation and when real estate was still affordable. Our boomer may have achieved middle class status fairly effortlessly before he turned 30--in great contradistinction to most boomers five or ten years his junior. Likewise, unemployment wasn't really a problem until 1975 when our hero was nearly 30 and probably established in a secure job. The one exception to this is, of course, the Vietnam War and the draft, but the lottery system which was instituted in 1969 spared the majority of people. If your number was greater than about 150 you weren't called even if you were classified 1-A by the selective service. Most boomers born in 1946 escaped going to Vietnam, and even those who didn't would have returned to the States well before the 1973-5 recession and inflation. Even blue collars who didn't attend college made out pretty well at that time, though they subsequently were downsized and had to change careers. But higher education was a bargain during the 1970s, and you either had to be dumb or lazy not to get trained. But for someone born in 1956 things were quite diferent.

The life expectancy calculators you see online are overly optimistic, I think. 87 may be pushing it when the national average even for white males is well below 80.

An average government IOU, right now, is probably getting around 3% (lumping together the various terms), and that just isn't going to cut it in turning $137,870 of contributions into $583,241 in benefits. In fact, if we impose a 3% return on the calculation, the guy winds up drawing in excess of $380,000 more out of the system than he ever paid in. In order for him just to break even (drawing out exactly the real value he paid in, after accounting for interest), you'd need to assume over a 5.5% average rate of return on his contributed funds, and that's just not realistic on a safe investment subject to no tax.

You totally lost me here. Our hero is retiring in 2012, and will have paid SS contributions of $137,870 over his working career, the vast majority of which is in the past tense. He HAS already paid them. We should not look to future, or even present rates of return, but to past rates of return. What would our hero have recveived in interest for all the historical contributions he made---I'm guessing from about 1968 to 2012? Remember that the inflation rate was high during most of the 1970s and 1980s. In 1981-2 he could have gotten 14% on treasury notes, and the Fed Funds rate was 10% in 1987 before the crash. Today it is 0.5%.

were for an "UPPER" middle class, remember?

Enjoy: <link>

Best Regards

Lobato1

Agreed about the rate of return. Last time I ran the numbers, I plugged in actual historical Treasury rates, but this time I got lazy. If he pulled 5.6% or more, average for the full period, he could have put in enough (note, future rates matter, too, since he'll be drawing down for years, so it's like having a private retirement account, where it actually matters what you're earning on the fund while retired). It's fair to assume even a safe and tax sheltered investment could have beaten inflation by a point of two average. Beating it by a point wouldn't have hit the mark, while two points would. So, it would be close for our hypothetical Boomer, but the numbers suggest to me he probably would wind up being subsidzed by later workers. Regarding life expectancy, it's possible it's overly optimisitc, but remember total longevity stats are drawn down by infant mortality, etc. A person who has made it to 64 is statistically likely to reach a much greater age than he was likely to reach when he was first born. Certainly we can all agree that the first generation of SS retirees got a ridiculously sweet deal. And it sure looks bad for Gen X and later. So, somewhere in that span between those two groups, the system most likely passed an equilibrium point, where the age cohort's contributions (plus reasonable rate of return) equaled the total benefits for the same age cohort. The only question is where. I'd guess it was sometime late in the Boomer generation. I assume you'd point to the beginning of that generation. Is that right? Of course, nobody will know for sure for a while, since we don't know where SS benefits are going in the immediate future or hat will happen to life expectancies.

For a socalled numbers cruncher, you're doing pretty pisspoor. First off, You don't say how long your hero worked at this $50,400 median wage, much less how long your hero worked at all. I'm glad you don't do cost accounting or financial auditing.

Given the intra-generational wealth transfer in SS, an upper-middle-class person would be more likely to have "over contributed" while a lower middle class person would be more likely to have under contributed. But, for purposes of assessing inter-generational wealth transfer, using a midlle-middle class example makes more sense, since it'll typify the generation.

Arkady:

Given the intra-generational wealth transfer in SS, an upper-middle-class person would be more likely to have "over contributed" while a lower middle class person would be more likely to have under contributed. But, for purposes of assessing inter-generational wealth transfer, using a midlle-middle class example makes more sense, since it'll typify the generation.

The system is unfair for all the middle class & period.

That "UPPER" middle class guy you prototyped had worked all his life, contributing maximums for his generation but you had skewed the numbers making him a sponger.

Best Regards

Lobato1

No, I simply assumed greater reading abilities in my audience than I should have. Sorry, sometimes I forget who I'm dealing with. I clearly mentioned that I was using the SSA's own calculator's estimates, but I could have called more prominent attention to that, for those who need things spelled out. To put it more plainly: the SSA has an online benefits calculator, which can use your pay in a given year to estimate your SS benefis. To do this, it projects your assumed annual pay forward and back, fom the start of your career to the end, based on average trend lines matched to the earnings for the date given. So, based on that median pay at age 64, they use statistical averages to guess what the person made/will make, from age 17 to age 66. If you plug the assumptions I provided into the calculator, you can have it show you the entire assumed yearly earnings sequence, from the start of his career to the end. Given it was a lengthy post already, you can probably see why I only referred to my methodology in shorthand, assuming, foolishly, people would pick up on it. I'm glad you don't have a job that relies on reading abilities or critical thinking. Last time we discussed this, I naively believed that ignoring the childish plunge into personal insults would help the discussion move beyond them more quickly. This time, I'll experiment with returning insults in kind. If you wrongly insult my number crunching abilities, I'll rightly insult your reading abilities. Deal?

If you disagree with the numbers, run them yourself and show how you reach a different result. I'm more than happy to admit I'm wron if it turns out I am. Of course, being wrong and being dishonest are very different things.

When I wrote that I bought your story, perhaps I should have written that:

I "accepted" your thesis of:

"The Middle Class puts in far more than they get out."

Although I do have a very different view of what defines "Middle Class,"

BTW; Rich "Starts" at about 25 million in relation to the income it generates now days.

Best Regards

Lobato1

Terms like "rich" are relative to their surrounding society, so I look for statistical guidance. Let's say you divide the country into even quintiles by income: lower class, lower-middle, middle-middle, upper-middle, and upper. That would make the upper class the top 20%. If we further divided that into three even groups (lower-upper, middle-upper, and upper-upper), then the upper-upper class would be the top 7%, approximately. I'd use the label "rich" for members of the upper-upper class. Using that definition, you're rich if your household's annual income is in the ballpark of $170,000 or higher.

Which you can now easily multiply by a factor of two.

Enjoy: <link>

Best Regards

Lobato1

Dividing the population into quintiles doesn't make much sense intuitively, for income (and wealth) is exponential, not linear in nature. That is, among those you designated as "upper upper", the top 7%, there is a vast chasm between people who are merely at the 94th percentile in income (approximately where you, yourself, Arkady now sit) and those in the top 0.01% or even the top 0.1%.

I would do it as follows:

1. Ultra-elite: the top 0.001% and above, the richest 3,000 Americans, the people who run the show--what you termed the upper-upper

2. The wealthy or middle-uppers: Those in the top 0.01% (about $10 million or more in annual income)

3. The rich or lower-upper: The top 0.1%: those making more than $1 million a year

4. The privileged: Those between the 99th and 99.9th percentile who make over $500K a year family income. You could call them upper middle class.

5. The affluent: between the 95th and 99th percentiles or between the 90th and 99th percentiles: basically those making more than $150K family income. These people are also sometimes referred to as upper middles.

6. The comfortables: between the 80th and 90th or perhaps even between the 60th and 95th percentiles: the great middle class.

7. The working class: between the 30th and 60-80th percentiles. Used to be called lower-middle

8. The struggling: between the 10th and 30th: lower class

9. The destitute: below the 10th percentile.

In Class, A Guide Through the American Status System (1983) Paul Fussell also lists nine possible social, as opposed to strictly economic classes. They are:

1. Top out of sight

2. Upper class

3. Upper middle

4. Middle

5. Upper prole

6. Mid prole

7. Low prole

8. Destitute

9. Bottom out of sight

But many of these are regionally or culturally determined; wearing legible clothing, for example, he classified as typically Prole behavior; while being blue collar automatically makes one prole, one's degree of autonomy would determine whether one was high, mid, or low prole. While Fussell's observations still resonate, his study wasn't very scientific, and he didn't even speculate as to the percentages of the population which are in each class. We Americans like to think we are mostly middle class, and in my example I had both the middle and working (the former lower middle) classes as the largest in size, each comprising nearly a third of the poulation. But as we become a less egalitarian society, the middle class will shrink and there will be more variation within the working class--what Fussell terms the proletariat. So I think his high, mid, and low prole classes make sense.