Most of us have heard and understood the Social Security issues with the current working generation having to pay for the retirement of the Baby Boomer generation. Now, I would likely not support any initiatives the administration may undertake (such as nationalization, higher taxes) to solve the Social Security crisis due to the lack of a private market presence. Despite this, by not acting on Social Security, there is a cost as well.
Social Security costs were $617 billion in 2008. The cost is expected to rise to $702 billion this year and rise to about $846 billion by 2014. Let’s break the increase from 2008 to 2014 to a percentage basis. $230 billion over 6 years equals about $40 billion per year or 7.5% per year.
As the size of the labor force declines and the number of people working is millions lower than it was in 2008, who or what is going to pay for this increase? The Social Security trust, which is currently under $2 trillion and supposed to grow to $3.5 trillion in the next 10 years (before evaporating), will actually lose money this year. The insolvency should easily raise the costs beyond these estimates.
THE RETIREMENT ALTERNATIVE
The average taxpayer is going to pay $1,751 in 2010 for the Social Security costs and about $10,000 over the next five years. Let’s assume that instead of paying $2,000 per year for someone else’s retirement, the average taxpayer spends $2,000 per year for 30 years in a Roth IRA.
Under the federal government’s Social Security program, the $60,000 spent over 30 years would be use to fund other individual’s retirement therefore it would not earn a return unless future taxpayers were charged more money to fund the retirement of the original “investor.” Therefore, under Social Security, $60,000 invested for 30 years equals $60,000 for a return of 0%.
Using this calculator, the same amount of money spread across the same time at a return of 8% (the average return of the stock market since 1928), $2,000 per year for 30 years equals $244,692. With a Roth IRA, this money is not taxable by the government and you are not dependent on another person (or persons) paying their taxes.
Maybe we should not eliminate social security, but we should give Americans the ability to choose to participate in either a private (self) or public retirement program (or both). If you choose not to participate, you do not pay in or get a payout.
If that was the case, what would you choose to do?
Since I consider all of Social Security a waste, I am going to add all of the above to the average taxpayer’s liability as a part of the Budget BS series. To date, Common Sense Capitalism has exposed $2,574 in liabilities to the average taxpayer in 2010 and $14,663 over the next five years as a result of the federal government’s entitlement initiatives.