-
The United States Social Security Retirement Benefit:
Are We Getting Our Money's-Worth?
. HAS BEEN ESTABLISHED fOR
JOHN DOE
SIGNATURE
FOR SOCIAL SECURITY AND TAX PURPOSES-NOT fOR IDENTIFICATION
An Honors Thesis (Honrs 499)
-
By
Jeffrey J. Lane
Ball State University
Muncie, Indiana
April, 1995
Expected Date Of Graduation: May 6, 1995
Sf Coil
-11'1'( I'"
!T
'- • .1
-
.1
Table Of Contents
I'I
I
i c."~.~
Acknowledgements
i
Introduction
1
A Brief Overview Of The U.S. Social Security System
2
Necessary Assumptions
3
The Basic Procedure . . . . . . . . . . . . . . . . . . . . .
8
Tables:
-
. . . . . . . . . . . . . . . . . . . . . . .
. ..
11
Interest Rates . . . . . . . . . . . . . . . . .
. ..
11
Annual Wages & Tax Amounts
12
Monthly Benefit Awards . . . . .
14
Life Expectancies At Retirement
15
Accumulated Tax Values . . . . . . . . . . . . . .
16
Value Of Future Benefits . . . . . . . . . . . . .
17
Benefit/Tax Return Ratios
19
Conclusions . .
-
I
References
. . . . . . . . . . . .
. .
21
. . . . . . . . . . . . . . . . . . . . . .
24
Interpretation Of Results . . .
. . . . . . . . .
. . . .
. . . . . . . . . . .
25
-
i
Acknowledgements
I
I would like to thank Dr. John Beekman for his constant
advice and support throughout the semester.
His knowledge,
enthusiasm, and willingness to help are a great asset to Ball
State University.
I would also like to thank the Honors College for giving me
the opportunity to research a timely and relevant topic in the
actuarial field.
This project has been a good experience and can
only help me in my future endeavors .
.I
-
I
I.
Introduction
Many Americans ask: Will I really get my money's-worth out
of the U.S. Social Security system?
People are curious as to
whether or not they will get a full return on the dollars they
have put into the program in the
fo~
of payroll taxes.
If one
was to try and answer this question based only on stories that
have made headlines as of late, undoubtedly the answer would be a
resounding "no".
In fact, if a person was to rely strictly on
what the media has said about the condition of the Social
Security program, they would feel lucky to get any return at all
on their investment.
The media, however, with its usual tendency
to exaggerate a newsworthy story, paints a darker picture of the
financial strength of the Social Security system than it should.
The fact is, the majority of workers who retired in the past
have received far more in benefits than they have payed in taxes.
Single, average wage-earning men who retired in 1960, received
nearly a 1500 percent return on the taxes they had payed!
Clearly, this was an impossible situation that could not
continue.
Worker's returns on investment have been steadily
decreasing ever since the unrealistic dividends of the 60's, with
the benefit/tax ratios figuring to level out at about 160 percent
for single average wage-earning males retiring in 2010 and later.
-
2
!
II. A Brief Overview Of The U.S. Social Security System
Social insurance is a byproduct of the Industrial Revolution
of the 1700's and early 1800's.
During that time, a great number
of people migrated from rural areas to go to work in the cities.
Most of these workers' wages were far too low to allow them to
save for old-age, and disability or unemployment usually meant
the financial devastation of a family.
Our United States was one
of the last major industrialized nations to implement a social
security program.
Only in 1935, after American workers had felt
first hand the economic effects of the Great Depression, was
Congress impelled to pass the Social Security Act.
In the
program's infancy, it provided cash benefits only to retiring
workers in commerce and industry.
Then in 1939, the act was
amended to include wives and dependent children of retired
workers and the widows and dependent children of deceased workers
[5, p.557].
Today, over 91 percent of all workers in the United States
are covered by Social Security [1, p.1].
The few exceptions are
federal employees hired before 1984, who are generally covered by
Civil Service Retirement, railroad workers covered by the
Railroad Retirement System, and about 20 percent of the state and
local government employees [2, p.5].
Social Security pays
benefits to a worker and his/her family when he/she retires,
-
dies, or becomes disabled provided that all eligibility
I
requirements are met.
These benefits are paid for through
-
3
i
payroll taxes.
The total tax is split evenly between the
employer and the employee.
In 1993 41 million people were
receiving Social Security benefits, while 134 million were paying
into the system [2, p.2].
III. Necessary Assumptions
Posing the question of whether or not individuals get their
money's-worth from the Social Security taxes they pay is much
easier to do than it is to answer that same question.
There are
almost an infinite number of variables and intangibles that make
their way into the equation that might provide us an answer.
Therefore, it is impossible to come up with a precise or
definitive answer to this question.
Any type of analysis must
employ certain assumptions, and then employing these assumptions,
approximate benefit/tax ratios can be calculated and used to make
pertinent comparisons among the different classifications of
workers.
When nonactuaries tackle this type of problem, the resulting
figures are often misleading.
Nonactuaries may have poor
methodology or may simply use inconsistent assumptions such as
the use of interest rates that are too high when compared to
assumed earnings growth.
The key to accurate analysis lies in the use of assumptions
-
that are both consistent and realistic.
i
One of the most
important factors in the final analysis of the problem, is
-
I
4
whether the benefit/tax ratios should be calculated using only
payroll taxes payed by the employee himself or the combined
employer-employee payroll taxes.
Some would say that using the
combined payroll tax would be more accurate because the employee
ultimately pays for the employer's portion through lower wages.
This may not be the case, however, when considered on an
individual basis.
Other people contend that the employer's
portion is passed on to the consumer (who, in general, is either
an employee or his/her family).
However, one cannot determine
whether or not the employees do in reality absorb this tax.
For
my analysis, only the employee payroll tax will be considered.
Changing to the combined employer-employee tax consideration can
be accomplished by simply halving all benefit/tax ratios.
In all
actuality, the real portion of the payroll tax to be considered
would fall somewhere between these two points of view.
Where
exactly it would be, however, is anybody's guess and impossible
to determine with any kind of accuracy.
present another problem.
payroll tax rates.
Self-employed workers
They pay the combined employer-employee
They are also, however, allowed to deduct
approximately 50 percent of these taxes on their tax returns [7,
p.249].
In reality then, they are still only paying a rate
roughly equal to that of the company employed worker.
Another unavoidable problem that presents itself when
attempting to evaluate the complex Social Security program, is
how to take into account the entire benefit structure with regard
to payroll taxes.
The solution to this problem comes from Myers'
and Schobel's "An Updated Money's-Worth Analysis of Social
--
5
I
Security Retirement Benefits", "The failure to consider
disability benefits, survivor benefits payable in the case of
death before retirement age, and Hospital Insurance (HI) benefits
can be mitigated to a considerable extent by taking into account
only the Old-Age and Survivors Insurance (OASI) portion of the
total payroll tax, which supports both the OASDI and the HI
programs [7, p.249]."
Therefore, for our purposes, only the
retirement benefits will be considered.
This allows for the
simplification of the concepts and the calculations to be used.
It also makes the analysis less technical and therefore, more
easily understood by the general population.
Because this analysis is based on the "generic" tax-payer
-
and worker, another assumption must be made concerning the value
of benefits to those workers who die prior to attaining
retirement age.
However, because very few workers actually do
die before reaching retirement age, the benefits paid out to
their survivors have a relatively small impact on this analysis,
so we will assume that no one dies before attaining retirement
age [7, p.250].
Without this assumption there is no methodology
that can simply be applied to this money's-worth analysis
problem.
The analysis would become too technical for
nonactuaries to easily interpret, and the net effect of including
the preretirement death benefits would be very minimal.
Yet another problem which must be considered when attempting
to accumulate the preretirement taxes paid and discount the
-
postretirement benefits is finding an appropriate interest rate.
For the purposes of accumulating the preretirement taxes paid,
-
6
I
the nominal interest rates, compounded annually, will be used.
A
nominal interest rate of 2.3 percent will be assumed for the
years 1937-1950 because the actual rates are difficult to
calculate [6, p.535].
For the period from 1951-1992, however,
the actual nominal rates are available, as are projected future
rates (1993 and after) calculated under the intermediate
assumptions of the 1993 OASDI Trustees Report.
Calculating the
present value of the postretirement benefits, however, will
involve using an approximated "real" interest rate.
The real
interest rate is equivalent to the difference between the nominal
interest rate (what most people think of when they think of "the
interest rate") and annual increases in the Consumer Price Index
(CPI).
For example, if the CPI were four percent and the nominal
rate 7.1 percent, the "real" interest rate would be 3.1 percent.
For simplification purposes, a real interest rate, that when
compounded monthly is equivalent to an annual rate of two percent
will be used.
This will be assumed and applied to the past, the
present, and the future.
The actual real interest rates did and
will fluctuate above and below the two percent level, but two
percent is generally accepted as a good approximation of the real
interest rates [7, p. 251].
By using a reasonable approximation
of the future real rates from the 1993 OASDI Trustees Report,
postretirement benefit increases will automatically be taken into
account, solving two problems at once.
Other necessary assumptions must also be used as we make a
"general" analysis of the benefit/tax ratio.
All hypothetical
workers are assumed to be steadily employed in a Social Security
-
7
!
contributing job from age 21 through 65 excluding, of course,
periods of unemployment.
Unemployment would tend to reduce the
amount of taxes paid, but would not necessarily reduce the
benefits received.
It would, however, be impossible to
generalize its effect on the benefit/tax ratios with any
certainty.
All average earning and maximum earning workers, as
defined by the intermediate assumptions of the 1993 OASDI
Trustees Report, are also assumed to remain in the category of
average earning or maximum earning over all years of their
employment.
These earning patterns are far from typical, but
must be assumed in order to analyze the aforementioned "generic"
worker.
In reality, most workers tend to earn less than average
at the beginning of their employment, are earning above average
by the middle, and then decline again in their later years.
Most
maximum earning workers also earn less than the maximum in early
years, usually reaching the maximum level for OASDI taxation
around age 30 [6, p.537].
The net effect of these more typical
earning patterns, however, is relatively small, and will
therefore be ignored [7, p.256].
Our final assumptions also deal with the hypothetical worker
being considered in this analYSis.
It will be assumed that all
workers retire at the Normal Retirement Age (NRA).
This
assumption is true for the most part and any effects from those
workers retiring early are usually balanced by those retiring
late.
-
It will also be necessary to assume in the case of married
couples, that each individual will receive benefits based on
their own earnings record.
This generally the case now and will
8
be even more valid in the future.
Therefore, no figures will be
included for married couples and benefit/tax ratios will be
calculated for the individual only, for both males and females.
IV. The Basic Procedure
This brings us to an explanation of the basic procedure to
be used in calculating these benefit/tax ratios that we are so
interested in.
In order to compare the benefits received to the
taxes that have been payed in, both amounts must be brought
together to a common point in time.
For the purposes of this
paper, this point in time will be the date of retirement.
-
Therefore, we must accumulate the OASI taxes with interest to the
retirement age and compare this to the present value of the
future benefits to be received as of that same time.
The present
value of these future benefits would, of course, be different for
each individual depending both on mortality and, as a result of
the changes in the normal retirement age which are currently
being implemented, the year of retirement.
must come into our equation.
Another assumption
It will be assumed that all
individuals retiring at the normal retirement age will live
exactly as long as they are expected to.
That is, their life
expectancy will be based on the patterns of an age-specific
mortality table, taking into consideration the decreases in
-
mortality rates that both have occurred and are expected to
I
9
--I
occur.
Thus, we are allowing for the increased life spans of
individuals in the future.
The basic formula used for calculating the present value of
the worker's future monthly benefits at the time of retirement is
(Table VI) :
[4, p. 59].
PV = PMT*aii i
where 'n' is the number of monthly payments the worker could
expect to receive and 'i' is the monthly interest rate equivalent
to an annual rate of two percent.
Using the infor.mation from the average wage-earning male retiring
in 1960:
PV =
A
$107.00*a-155
.16516
= $14,621.67
similar formula can be used to calculate the value of the
accumulated taxes at the time of retirement (Table
V) :
[4, p. 60].
Again, using the infor.mation from the average wage-earning male
-
retiring in 1960:
1
10
FV = $11.50*(1.023)*(1.023)* ... *(1.026) + $10.53*(1.023)*
(1.023)* ... *(1.026) + ... + $73.48*(1.026) + $86.76 = $976.21
This
fo~ula
is somewhat more complex because we can no longer
use the constant interest rate assumption, and because the values
we are accumulating vary from year to year.
11
-
Table
I
Year
-
-
I
I
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Nominal
Rate
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.2
2.3
2.4
2.3
2.3
2.5
2.5
2.6
2.6
2.9
3.8
3.9
3.9
4.1
4.2
4.9
5.0
5.5
6.6
7.3
6.0
5.9
6.6
7.5
7.4
CPI
3
3.6
-1.9
-1.4
1.0
5.0
10.7
6.1
1.7
2.3
8.5
14.4
7.8
-1.0
1.0
7.9
2.2
0.8
0.5
-0.4
1.5
3.6
2.7
0.8
1.6
1.0
1.2
1.2
1.3
1.6
3.0
2.8
4.2
5.4
5.9
4.3
3.3
6.2
11.0
9.1
'"
I:
Real
Rate
-1.3
4.2
3.7
1.3
-2.7
-8.4
-3.8
0.6
0.0
-6.2
-12.1
-5.5
3.3
1.3
-5.7
0.1
1.6
1.8
2.7
1.0
-1.1
-0.1
1.8
1.3
2.8
2.7
2.7
2.8
2.6
1.9
2.2
1.3
1.2
1.4
1.7
2.6
0.4
-3.5
-1.7
(1): Nominal rates 1937-1974 [7, pp. 254-255].
(2): CPI 1937-1974 [1, p. 57].
(3): Nominal rates and CPI 1975-2070 [10. p. 59].
Interest Rates
Year
Nominal
Rate
CPI
Real
Rate
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
7.1
7.1
8.2
9.1
11.0
13.3
12.8
11.0
12.4
10.8
8.0
8.4
8.8
8.7
8.6
8.0
7.1
6.3
5.9
5.9
6.0
6.0
6.1
6.3
6.4
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.3
5.7
6.5
7.7
11.4
13.4
10.3
6.0
3.0
3.5
3.5
1.6
3.6
4.0
4.8
5.2
4.0
2.9
3.0
3.1
3.2
3.3
3.5
3.7
3.9
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
1.4
0.6
0.5
-2.3
-2.4
3.0
6.8
8.0
8.9
7.3
6.4
4.8
4.8
3.9
3.4
4.0
4.2
3.3
2.8
2.7
2.7
2.5
2.4
2.4
2.4
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
Alternative II assumptions.
,
12
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-
I
Table IIA:
Year
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Annual Wages & Tax Amounts
Average Earner's
Maximum Earner's
OASI
Wage
Tax Rate
Taxes
Taxes
Waae
1.000% $1,150.45
$11.50 $3,000.00
$30.00
3,000.00
1.000
1,053.23
10.53
30.00
1.000
1,142.35
11.42
3,000.00
30.00
1,195.01
3,000.00
30.00
1.000
11.95
1,276.03
12.76
3,000.00
30.00
1.000
1.000
1,454.27
14.54
3,000.00
30.00
1.000
1,713.52
17.14
3,000.00
30.00
1.000
1,936.32
19.36
3,000.00
30.00
2,021.39
1.000
20.21
3,000.00
30.00
1.000
1,891.76
18.92
3,000.00
30.00
1.000
2,175.32
21.75
3,000.00
30.00
1.000
2,361.66
23.62
3,000.00
30.00
1.000
2,483.19
3,000.00
24.83
30.00
2,543.95
38.16
3,000.00
45.00
1.500
1.500
2,799.16
41.99
3,600.00
54.00
1.500
2,973.32
44.60
3,600.00
54.00
3,600.00
1.500
3,139.44
47.09
54.00
2.000
3,155.64
63.11
3,600.00
72.00
2.000
3,301.44
66.03
4,200.00
84.00
3,532.36
2.000
70.65
4,200.00
84.00
3,641.72
2.000
4,200.00
72.83
84.00
2.000
3,673.80
73.48
4,200.00
84.00
2.250
3,855.80
86.76
4,800.00
108.00
2.750
4,007.12
110.20
4,800.00
132.00
4,086.76
2.750
112.39
4,800.00
132.00
4,291.40
2.875
123.38
4,800.00
138.00
3.375
4,396.64
148.39
4,800.00
162.00
3.375
4,576.32
154.45
4,800.00
162.00
3.375
4,658.72
157.23
4,800.00
162.00
3.500
4,938.36
172.84
6,600.00
231.00
3.550
5,213.44
185.08
6,600.00
234.30
3.325
5,571.76
185.26
7,800.00
259.35
3.725
5,893.76
219.54
7,800.00
290.55
3.650
6,186.24
225.80
7,800.00
284.70
4.050
6,497.08
263.13
7,800.00
315.90
4.050
7,133.80
288.92
9,000.00
364.50
4.300
7,580.16
325.95 10,800.00
464.40
4.375
8,030.76
351.35 13,200.00
577.50
4.375
8,630.92
377.60 14,100.00
616.88
(1): Tax rates, wages, and tax amounts 1937-1975
[6.
p. 538].
13
-
Table lIB:
!
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
-
-
I
Annual Wages & Tax Amounts
Average Earner's
OASI
Wage
Taxes
Tax Rate
9,226.48
403.66
4.375
9,779.44
427.85
4.375
4.275
10,556.03
451.27
497.06
4.330
11,479.46
12,513.46
565.61
4.520
13,773.10
647.34
4.700
4.575
14,531.34
664.81
727.67
4.775
15,239.24
16,135.07
839.02
5.200
16,822.51
874.77
5.200
5.200
17,321.82
900.73
958.18
5.200
18,426.51
5.530
19,334.04
1069.17
20,099.55
1111.51
5.530
21,027.98
1177.57
5.600
5.600
21,811.60
1221.45
5.600
22,935.42
1284.38
24,143.42
1352.03
5.600
5.600
25,384.98
1421.56
5.600
26,737.74
1497.31
5.600
28,141.28
1575.91
5.600
29,613.54
1658.36
5.600
31,147.78
1744.28
5.600
32,765.11
1834.85
5.490
34,464.16
1892.08
5.490
44,195.83
2426.35
5.490
56,675.43
3111.48
5.490
72,678.92
3990.07
5.490
93,201.31
5116.75
5.490
119,518.63
6561.57
5.490
153,267.18
8414.37
5.490
196,545.34 10790.34
5.490
252,043.98 13837.21
5.490
323,213.81
17744.44
5.490
414,479.91
22754.95
5.490
531,516.89 29180.28
5.490
681,601.67 37419.93
5.490
874,066.00 47986.22
5.490 1,120,876.61 61536.13
Maximum Earner's
Wage
Taxes
669.38
15,300.00
16,500.00
721.88
17,700.00
756.68
22,900.00
991.57
25,900.00
1170.68
29,700.00
1395.90
32,400.00
1482.30
35,700.00
1704.68
37,800.00
1965.60
39,600.00
2059.20
42,000.00
2184.00
2277.60
43,800.00
45,000.00
2488.50
48,000.00
2654.40
51,300.00
2872.80
53,400.00
2990.40
55,500.00
3108.00
57,600.00
3225.60
60,600.00
3393.60
64,200.00
3595.20
67,500.00
3780.00
71,100.00
3981.60
74,700.00
4183.20
78,600.00
4401.60
82,800.00
4545.72
106,200.00
5830.38
136,200.00
7477.38
174,600.00
9585.54
223,800.00 12286.62
286,800.00 15745.32
368,100.00 20208.69
472,000.00 25912.80
605,300.00 33230.97
776,200.00 42613.38
995,400.00 54647.46
1,276,500.00 70079.85
1,636,900.00 89865.81
2,099,200.00 115246.08
2,691,900.00 147785.31
I
(1): Tax rates, wages, and tax
amoWlts
1976-2070
[7,
pp. 255-256].
14
-
I
Table III:
Year Of
Retirement
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
-
(1):
(2):
(3):
(4):
-
Average
Benefit
107.00
108.40
111.40
114.40
117.50
120.00
120.60
122.00
141.30
143.60
168.40
189.00
232.10
237.90
254.00
271.00
292.30
315.90
342.20
400.30
450.90
532.80
535.40
553.00
542.80
548.40
576.40
593.50
Monthly Benefit Awards
Maximum
Benefit
3
119.00
120.00
121.00
122.00
123.00
131.70
132.70
135.90
156.00
160.50
189.80
213.10
216.10
266.10
274.60
316.30
364.00
412.70
459.80
503.40
572.00
677.00
979.30
709.50
703.60
717.20
760.10
789.20
Average
Benefit
Year Of
Retirement
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
626.50
668.50
720.40
751.10
794.90
820.20
829.50
867.30
905.50
945.30
986.90
1,030.30
1,075.60
1,386.50
1,824.10
2,339.80
3,020.80
4,029.40
5,167.20
6,627.00
8,498.30
10,898.30
13,975.40
17,922.60
22,983.40
29,473.90
37,796.60
Average earner's benefits 1960-1978 [6, p. 542].
Maximum earner's benefits 1960-1994 [8, p. 63].
Average earner's benefits 1979-1994 [3].
Average and maximum earner's benefits 1995-2070 [10,
Alternative II assumptions.
p. 189].
Maximum
Benefit
4
838.60
899.60
975.00
1,022.90
1,088.70
1,128.80
1,147.50
1,210.30
1,273.70
1,340.30
1,410.50
1,484.30
1,562.20
2,088.00
2,835.40
3,698.30
4,787.50
6,376.20
8,176.10
10,477.80
13,415.60
17,193.20
22,052.30
28,287.90
36,283.60
46,536.60
59,682.30
15
-
I
Table IV:
Year Of
Retirement
-
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
I
Life Expectancies At Retirement
NRA
Life Expectancy
Female
Male
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
11.8
12.1
12.0
11.9
12.2
12.4
12.1
12.5
12.6
12.9
12.6
12.7
12.8
12.8
12.8
13.0
12.9
13.2
13.1
13.0
12.9
12.9
13.1
12.9
13.1
12.9
12.7
13.0
12.9
12.9
13.0
12.8
13.0
13.1
13.1
13.1
13.2
13.5
13.7
(1): Life expectancies 1937-2070
[9,
13.1
13.4
13.4
13.4
13.8
14.1
13.7
14.1
14.4
14.6
14.5
14.7
14.9
15.1
15.2
15.3
15.3
15.7
15.6
15.7
15.6
15.7
15.9
15.9
16.1
16.0
16.0
16.3
16.3
16.3
16.6
16.6
16.9
17.1
17.1
17.2
17.3
17.7
18.0
p. 16].
Year Of
Retirement
NRA
Life Expectancy
Male
Female
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:0
65:6
66:0
66:0
66:2
67:0
67:0
67:0
67:0
67:0
67:0
67:0
67:0
67:0
67:0
13.7
13.9
13.9
14.2
14.0
14.2
14.5
14.3
14.4
14.4
14.5
14.6
14.6
15.2
15.3
15.4
15.4
15.5
15.5
15.6
15.7
15.7
15.8
15.8
15.9
15.6
15.3
15.5
15.5
14.9
15.1
15.3
15.5
15.7
15.9
16.1
16.3
16.5
16.7
Alternative II assumptions.
i
18.1
18.3
18.3
18.6
18.4
18.6
18.8
18.6
18.7
18.6
18.7
18.7
18.7
18.9
19.0
19.0
19.1
19.2
19.2
19.3
19.4
19.4
19.5
19.5
19.6
19.3
19.0
19.2
19.2
18.7
18.9
19.1
19.3
19.5
19.7
20.0
20.2
20.4
20.6
i
16
-
Table V:
I
Accumulated Tax Values
Year Of
Retirement
Accumulated Taxes
Average
Maximum
Year Of
Retirement
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
$976.21 $1,364.05
1,535.60
1,114.72
1,725.96
1,269.46
1,931.27
1,422.35
1,646.99
2,168.59
1,868.96
2,419.50
2,683.12
2,104.69
3,045.59
2,380.66
2,684.77
3,432.17
3,880.29
3,017.70
3,436.41
4,426.94
5,034.81
3,913.06
4,410.98
5,652.79
4,960.15
6,350.81
5,613.46
7,234.36
6,385.82
8,354.44
7,235.97
9,589.54
8,153.38 10,939.78
9,160.13 12,438.38
10,362.53 14,215.00
11,802.58 16,500.13
13,666.47 19,485.83
16,056.54 23,277.94
18,700.95 27,524.37
21,396.71 32,022.95
24,786.61 37,702.54
28,220.00 43,555.42
31,235.97 48,930.16
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
Accumulated Taxes
Average
Maximum
34,640.21
38,544.09
42,771.97
47,392.49
52,119.54
56,779.57
61,353.80
65,830.64
70,568.24
75,669.74
81,093.89
86,708.50
92,835.82
129,907.65
175,883.88
231,635.73
298,977.80
387,743.95
488,164.91
619,216.34
792,457.78
1,014,657.64
1,300,439.34
1,667,645.37
2,138,539.30
2,742,400.01
3,516,773.28
55,006.68
62,004.78
69,701.91
78,195.72
87,047.63
95,923.36
104,763.35
113,672.19
123,146.15
133,457.09
144,558.12
156,331.40
169,093.23
248,587.31
356,431.36
496,679.62
679,302.84
915,553.32
1,170,584.49
1,488,230.86
1,902,992.56
2,437,208.42
3,123,477.66
4,005,110.11
5,135,760.30
6,585,332.95
8,444,930.06
17
~
I
-
-
Table VIA:
Year Of
Retirement
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Value Of Future Benefits At
Time Of Retirement
Average Earning
Male
Female
$14,621.67
$17,515.04
17,980.71
15,063.96
18,316.44
15,222.94
18,809.70
15,455.58
16,147.34
19,660.36
20,078.67
16,398.13
20,179.06
16,480.13
16,765.75
20,765.00
24,049.95
19,199.39
19,734.11
24,750.10
23,401.94
29,384.69
26,264.65
32,979.26
32,254.10
40,664.86
33,243.10
41,849.83
36,077.05
45,578.60
39,111.89
49,199.31
42,186.00
53,474.56
46,072.06
58,231.86
49,907.75
63,079.90
59,591.79
74,898.97
66,102.70
83,430.37
79,316.77
99,690.67
80,911.12
100,915.21
82,740.25
103,470.23
81,622.11
101,936.18
82,464.20
102,609.54
87,107.16
108,246.16
90,579.89
111,457.48
Maximum Earning
Male
Female
$16,261.48
$19,479.35
16,675.97
19,904.85
16,534.79
19,894.87
16,482.35
20,059.29
20,580.63
16,903.17
22,036.34
17,996.95
18,133.60
22,203.66
18,675.94
23,130.85
21,196.78
26,551.97
22,056.58
27,662.89
26,375.82
33,118.85
29,613.74
37,184.55
30,030.64
37,861.60
37,183.64
46,810.59
39,002.99
49,275.13
45,649.78
57,423.40
52,534.05
66,591.66
60,189.74
76,075.61
67,058.99
84,757.86
74,940.06
94,189.72
83,856.17
105,837.59
100,783.51
126,671.51
147,994.51
184,583.98
106,155.89
132,752.49
105,801.99
132,133.93
107,847.05
134,193.22
114,868.41
142,744.45
120,447.59
148,209.35
18
.--.,
--
-
Table VIB:
Year Of
Retirement
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
Value Of Future Benefits At
Time Of Retirement
Average
Male
$95,616.34
105,503.32
114,225.97
119,647.23
126,624.39
131,257.99
132,746.29
140,068.46
146,900.62
153,357.43
160,827.54
167,900.11
176,067.11
223,918.97
289,227.64
374,442.15
483,423.74
623,977.83
811,672.19
1,050,771.10
1,359,997.30
1,768,047.50
2,287,661.10
2,972,888.40
3,845,633.50
4,974,190.50
6,460,293.70
Earning
Female
$117,654.78
126,462.28
136,774.88
142,603.57
152,008.00
157,406.33
159,191.11
167,036.81
175,010.35
182,702.69
191,413.69
199,831.31
210,075.93
267,031.63
346,322.95
449,035.99
579,728.15
756,708.99
977,495.75
1,267,275.20
1,636,721.90
2,113,774.20
2,738,993.50
3,548,836.30
4,597,168.70
5,934,783.20
7,686,050.60
Maximum Earning
Male
Female
$127,987.01 $157,486.51
141,975.74
170,180.21
154,595.12
185,113.14
162,943.88
194,207.41
173,425.56
208,191.11
180,643.77
216,630.41
183,636.37
220,219.17
195,462.77
233,096.56
206,634.26
246,174.15
217,438.88
259,046.25
229,858.39
273,572.81
241,885.01
287,886.65
255,719.63
305,114.00
337,210.83
402,136.35
449,578.46
538,327.99
591,845.21
709,748.62
766,151.73
918,779.31
987,394.51 1,197,430.80
1,284,315.10 1,546,699.00
1,661,350.50 2,003,660.10
2,146,921.20 2,583,764.60
2,789,278.60 3,334,698.40
3,609,785.00 4,321,959.00
4,692,219.30 5,601,259.10
6,071,052.50 7,257,491.50
7,853,793.20 9,370,481.50
10,201,055.00 12,136,572.00
19
-
.
I
Table VIlA:
Year Of
Retirement
-
-
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Benefit/Tax Return Ratios
BenefitlTax Return Ratios For:
Average Male
1497.80%
1351.37
1199.17
1086.62
980.42
877.39
783.02
704.25
715.12
653.95
681.00
671.20
731.22
670.20
642.69
612.48
583.00
565.07
544.84
575.07
560.07
580.38
503.91
442.44
381.47
332.70
308.67
289.99
Average Female
1794.19%
1613.02
1442.85
1322.44
1193.71
1074.32
958.77
872.24
895.79
820.16
855.10
842.80
921.90
843.72
811.95
770.45
739.01
714.21
688.64
722.79
706.88
729.45
628.50
553.29
476.41
413.97
383.58
356.82
Maximum Male
1192.15%
1085.96
958.01
853.45
779.45
743.83
675.84
613.21
617.59
568.43
595.80
588.18
531.25
585.49
539.14
546.41
547.83
550.19
539.13
527.19
508.22
517.21
635.77
385.68
330.39
286.05
263.73
246.16
Maximum Female
1428.05%
1296.23
1152.68
1038.66
949.03
910.78
827.53
759.49
773.62
712.91
748.12
738.55
669.79
737.08
681.13
687.34
694.42
695.40
681.42
662.61
641.43
650.07
792.96
482.31
412.62
355.93
327.73
302.90
20
-
I
Table VIIB:
Year Of
Retirement
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
-
Benefit/Tax Return Ratios
BenefitlTax Return Ratios For:
Average Male
276.03%
273.72
267.06
252.46
242.95
231.17
216.36
212.77
208.17
202.67
198.32
193.64
189.65
172.37
164.44
161.65
161.69
160.93
166.27
169.69
171.62
174.25
175.91
178.27
179.83
181.38
183.70
Average Female
339.65%
328.10
319.78
300.90
291.65
277.22
259.46
253.74
248.00
241.45
236.04
230.46
226.29
205.55
196.90
193.85
193.90
195.16
200.24
204.66
206.54
208.32
210.62
212.81
214.97
216.41
218.55
Maximum Male
232.68%
228.98
221.79
208.38
199.23
188.32
175.29
171.95
167.80
162.93
159.01
154.73
151.23
135.65
126.13
119.16
112.79
107.85
109.72
111.63
112.82
114.45
115.57
117.16
118.21
119.26
120.80
Maximum Female
286.30%
274.46
265.58
248.36
239.17
225.84
210.21
205.06
199.90
194.10
189.25
184.15
180.44
161.77
151.03
142.90
135.25
130.79
132.13
134.63
135.77
136.82
138.37
139.85
141.31
142.29
143.71
-
21
I
V. Interpretation Of Results
The most striking result of this money's-worth analysis has
to be that all of the return ratios are above 100 percent.
Thus,
under the assumptions of this paper, each hypothetical worker
will receive more in benefits than he/she payed in taxes.
A few important points must be made here.
First of all, no
program can survive when it pays out more than it takes in.
Again, the argument about whether or not to include the employer
portion of the payroll tax could come into play.
If this extra
tax was to be considered, the resulting ratios would be one half
of the ratios calculated in this paper and would cause many of
the projected ratios to fall below the 100 percent level.
Even
with this consideration, the financial position of the program is
in question.
The pecuniary instability of the United states
Social Security system has been widely publicized in recent
years, and the OASDI Board of Trustees readily acknowledges this
fact.
In their words, "the OASDI program does not meet the
requirements for the long-range test (over the next 75 years) of
close actuarial balance.
Individually, the OASI and DI Trust
Funds also fail the long-range test.
Because of this,
appropriate options to strengthen the long-range financing of
these funds should be developed [10, pp. 5,7]."
The "appropriate
options" that the Board of Trustees is speaking of to counteract
-
some of the financial problems include increasing taxes,
decreasing benefits, and other possible changes, much like what
was done in 1983.
This, of course, would have a great impact on
22
~- I
the benefit/tax ratios that have been calculated.
These new
ratios would likely fall well below the 100 percent level if the
necessary changes for financial stability were implemented,
especially for those retiring beyond the year 2000.
It must also be kept in mind that all of the benefit/tax
return ratios calculated beyond 1993 are in some way affected by
future projections.
While the projections do attempt to account
for "marriage and divorce rates, birth rates, death rates,
migration rates, labor force participation and unemployment
rates, disability incidence and termination rates, retirement age
patterns, productivity gains, wage increases, cost-of-living
increases, and many other economic and demographic circumstances
-
affecting the program [10, p. 13]", no one can see into the
future.
These are simply best estimates given the information
available.
The actual experiences will likely differ from the
projections, and with them, the resulting return ratios.
These points do not render the results of this paper
useless, however.
Some very important relationships and
conclusions can be drawn from this money's-worth analysis.
Some
of the more obvious inferences from the study include the fact
that women receive greater returns than men and average wageearning individuals receive greater returns than those making the
maximum taxable amounts.
A woman will, in general, receive a
greater return on the taxes she has payed simply because of the
fact that women generally live longer than their male
-
counterparts.
The greater return realized by lower wage-earning
workers, however, is an essential part of the United States
-
23
I
Social Security system.
The program is designed in such a way as
to weight the monthly benefit awards in favor of those with lower
incomes, the workers for whom Social Security was originally
designed.
Two other interesting outcomes resulting from our money'sworth analysis include a dip in the return ratios after the year
2000 and the similarity between the return ratios for the average
and maximum wage-earning individuals in the late 1970's.
The
slight decline in the return ratios after the year 2000 are a
result of an increase in the normal retirement age.
From 2000 to
2025 the normal retirement age is expected to increase from 65 to
67.
-
As a result, workers will pay more taxes over their working
lifetimes and, at the same time, should expect to collect fewer
monthly benefits.
The connection between the average and maximum
return ratios of the late 70's is a direct consequence of the
small differences between the average and maximum wages from
1951-1971, the period during which a person retiring in the late
1970's would pay the majority of his/her taxes.
Another important reason for doing a study such as this is
that we can see exactly where one of the major problems in the
Social Security system lies.
The huge returns experienced by
those retiring in the 1960's and even beyond were unrealistic.
I'm sure that those workers weren't complaining, but this was not
a good thing in regard to maintaining the long-term health of the
-
.
Social Security Trust Fund .
24
~
I
VI.
Conclusions
Because the Social Security system does not collect the
necessary information to allow for a more precise study, an
analysis such as the one contained in this paper is useful in
pointing out past flaws and the possible effects of corrective
changes.
It would be interesting to see how the return ratios
would change if payroll taxes were actually increased to a point
where the system really would be self-supporting.
I'm sure the
results would be very depressing for individuals such as myself
who still have a few years of work ahead of us.
As I write this,
Congress is taking a closer look at some of the financial
problems infecting the United States Social Security system.
We
can only hope that the solutions they propose will not come at
the expense of those for whom the system was originally designed.
25
--I
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[2]
Detlefs, Dole R. and Robert J. Myers. (1992, November). 1993
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[3]
Grundmann, Herman. (1995, March 8). "Personal letter to the
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[4]
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[8]
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[9]
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