Close Close

Retirement Planning > Social Security

The ghost of Internet Social Security

Your article was successfully shared with the contacts you provided.

Internet Social Security seems different from U.S. Social Security.

A few years ago, there was a viral bit about Social Security and Congress floating around the Internet. The question was this: Why aren’t members of Congress and senators not in Social Security? Of course, the question was nonsensical—our politicos have been in Social Security since the 1986 Greenspan Commission reforms.

Now there’s a new argument about Social Security from someone out there in cyberspace. This time the question has to do with what happens to all the money the government collected from you and from your employer if you die before retirement age. The short answer is that—unless a decedent left survivors—that it goes to support everyone who lives. The Internet piece I read seemed also to ignore Social Security disability—there are millions of U.S. citizens who receive Social Security pre-retirement disability benefits.

How much will you and your spouse receive yearly from Social Security when you retire? I know a couple in their early 70s who began benefits at normal retirement age—the couple now receives a bit over $36 thousand yearly. If you divide $36 thousand by .05 (the 5% assumed as an interest rate in the Internet example) the result is $720 thousand, which is the amount of money that needs to be invested at 5% to produce $36 thousand yearly ($3 thousand monthly) Benefits are lifetime. If the husband dies first (statistically normal), the wife gets his benefit, if it is higher. In the case of the couple I know, the husband’s benefit is $2,500 monthly, or $30 thousand yearly. If the husband dies first, the math looks like this: $30 thousand/.05 = $600,000, which is the amount invested at 5% that produces $30 thousand yearly. If the wife dies first, the husband keeps his higher benefit. No matter who dies first, the survivor gets to keep the highest of the two benefit amounts.

Take me. I work and receive Social Security benefits. Despite the fact that I was born in the 1800s, since I have income from work, I pay tax on part of the Social Security benefits received, which I find annoying. Still, if I invested $720 thousand at 5%, and received $3 thousand monthly, I’d pay tax on that amount in full and, as said, I don’t have to pay tax on all of the Social Security income.

Government does not save. It tries only to balance income and outgo. Government cannot have “savings accounts.” The federal treasury is not paying 5% on debt, as the Internet diatribe suggests—it’s paying very little these days. Still, people all over the world invest in U.S. government bonds because the United States has a transparent financial system and a fair legal system—people may hate us or like us U.S. citizens, but they trust us more than anyone else. U.S. dollars, around the globe, get more credibility than any other currency; the trustworthiness shown our currency is by a wide, wide margin over the nearest competition. People everywhere feel strongly that U.S. dollars are worth something; that they have value.

The person who wrote the Internet piece did not think much about disability and survivor benefits, big parts of Social Security. 

Social Security is a government program that has worked well for close to three-quarters of a century. Ida May Fuller received the first monthly benefit in 1940 (benefits received before 1940 were paid in a lump sum). If it is low on funds, Social Security is very easy to fix—reduce the benefit, increase the contributions, or extend retirement ages. If you want to worry about something—worry about Obamacare, global warming or an asteroid hitting the earth; you probably do not need to worry about Social Security.

We got some warm weather in OK for our three-day weekend, and I hope you did too. Keep the faith and keep your powder dry. Have a great week of helping folks through the financial and investment maze.