orb@whuxl.UUCP (SEVENER) (11/13/85)
Opponents of the Social Security system like David Olson apparently have trouble understanding the power of compound interest. Although the Social Security Trust Fund is not actually run by putting current payments into an interest-bearing fund, this is a reasonable way to properly consider the relation between payments and benefits: what would people's payments into Social Security be worth when they retire if they had been able to collect interest for all that time? When considered in this light, Dave Olson's comment: > From Dave Olson > As it stands now, on the average for every dollar one collects of the > money he paid into SS, he also collects about 3 from somebody else. In > reality, SS is another pyramid scheme, no matter who collects it, or > how badly it is needed. > The relation of 3 to 1 between payments during one's working life and benefits upon retirement is hardly unreasonable when one calculates the effects of compound interest. To demonstrate this, let us suppose that we take $100, and provide an annual interest rate of 5% on that money. Here is what that payment would be worth after various time intervals: 20 years $265.18 30 years $431.88 40 years $703.42 In other words, after 40 years this initial $100 has increased 7 times in value. After about 25 years it has tripled in value. If the average working lifespan is 25 years or over a ratio of payments to benefits of 3 to 1 is therefore perfectly reasonable. I am not sure of either the average working lifespan before retirement nor the minimum number of quarters which must be worked before one can collect Social Security. I think I remember my mother (who works for Social Security) saying that you have to work at least 11 years to collect any Social Security. This is less than the 25 years at which a 3 to 1 benefits/payments ratio would take place. On the other hand, it seems quite likely to me that the typical working lifespan is much more than 25 years therefore the amount actually paid in is greater. tim sevener whuxn!orb
tw8023@pyuxii.UUCP (T Wheeler) (11/14/85)
Just one more small point, Sevener. You're calculations concerning how much someone would get after 25 or 40 years of investing are all very nice, but, they do not mean a thing as far as SS is concerned. The SS funds are NOT invested. Olsen is right, it is a gigantic ponzi scheme. T. C. Wheeler
orb@whuxl.UUCP (SEVENER) (11/15/85)
Ah, T.C. is such a careful reader: > Just one more small point, Sevener. You're calculations > concerning how much someone would get after 25 or 40 > years of investing are all very nice, but, they do not > mean a thing as far as SS is concerned. The SS funds > are NOT invested. Olsen is right, it is a gigantic > ponzi scheme. > T. C. Wheeler 1)I was *very careful* to point out that in fact the Social Security Trust Fund is *not* actually invested. Please reread the article. While some people may have trouble understanding this point such investment is not actually needed given the law of large numbers and demographic trends. Banks do not back up *all* of their loans with actual deposits or assets: the law of large numbers enables them to predict fairly well the flow of demand for funds and deposits for funds under normal circumstances. It is logical that private insurance companies work under the same dependencies on statistical averages which can be quite confidently predicted for large numbers. The typical atuo insurance policy may cost several hundred dollars per year, yet it insures protection against medical damages and physical damages in the thousands of dollars. *IF* every owner of an auto insurance policy were to wreck their car there is *no way* that the several hundred dollar insurance policy would pay the thousands of dollars in damages: the insurance company would go broke and then all those people would never collect their insurance claims. However this is *extremely* unlikely to happen. Insurance companies base their prices upon projections of the average number of car accidents and damage claims. Those projections are quite accurate- when they get out of line with new claims they are adjusted accordingly. So with Social Security: demographic trends for various segments of the population are quite stable and slow to change. So,as Jeff Myers excellent article pointed out, the Social Security system as a whole is in good shape according to demographic projections.(always barring Nuclear War which would ruin everything!) 2)my point that people do pay in enough money to earn the benefits they eventually receive refutes the argument that it is so terrible that "people get 3 times what they pay into Social Security" and that therefore Social Security is simply a gigantic giveaway program. The expenses and receipts of Social Security are carefully calculated to insure that Social Security stays solvent and that it is *not* simply a huge giveaway program. tim sevener whuxn!orb
goodrum@unc.UUCP (Cloyd Goodrum) (11/17/85)
In article <279@pyuxii.UUCP> tw8023@pyuxii.UUCP (T Wheeler) writes: >Just one more small point, Sevener. You're calculations >concerning how much someone would get after 25 or 40 >years of investing are all very nice, but, they do not >mean a thing as far as SS is concerned. The SS funds >are NOT invested. Which leads us to an overwhelming question... WHY aren't they invested??? The Grace Commission pointed out that huge sums of money (not just SS money) are left sitting around in vaults when they could be earning huge sums of interest. Here's another thought. My father suggested once that we could take a good chunk out of the deficit if social security payments were taxable as income. This wouldn't hurt people who depended on social security as their sole source of income, but the government could get a lot of money back from SS recipients who have income from a lot of other sources (investments, etc.) >Olsen is right, it is a gigantic >ponzi scheme. >T. C. Wheeler Cloyd Goodrum III