U. S. Federal Programs
October 14, 2013
.I hope that by the end of this week, the
government shutdown and the federal debt ceiling will no longer be the chief
topic of conversation. But getting past that, what about federally administered
social welfare programs such as Social Security, Medicare, and Medicaid?
What follows are a few personal observations and experiences.
When I was a child in the 1930's, none of these programs existed. Older relatives lived with their children and grandchildren, or rented out rooms to make ends meet. Some of the elderly had corporate pensions. But in any case, someone had to support them. One way or another, we're going to care for our elderly if they can't care for themselves.
The arrangement in which the parents lived with their grown children must have been most uncomfortable. I saw this happen with my best friend's parents. My best friend's maternal grandfather (a crotchety old cuss) lived with them. None of the adults would have had any privacy in my friend's modest house. Then there were the Crawfords, who lived across the street from Grandpa and Grandma. They rented out part of their big, old, Victorian house, and cooked and served meals for their boarders. Bert Crawford had a night job running down and up the railroad crossing gate at the New York Central Erie Street crossing.
Social Security Begins, Amid Great "This Is Socialism" Resistance
Social Security must have been a godsend for the elderly. My grandparents retired on it, along with money from the sale of Grandpa's small-town dairy business. Dad and Mother depended on it to supplement their pension incomes. It's been a steady, worry-free source of supplemental income for my wife and I for the past 20 years.
We prepaid for our present Social Security income streams, to the tune of about 7½ % in after-tax money, plus an equal amount paid by our employer as a part of our total compensation packages. The federal government collected income tax on our Social Security contributions, so the actual take by the federal government was probably closer to 10% than to 7½ %.
I don't know whether the employer's 7½ % contribution to our Social Security accounts was also taxed by the Fed, but the total contribution to Social Security over a 35-year period would have been very conservatively (ignoring the fact that this was after-tax income) 5¼ years of our inflation-adjusted, 35-year average salaries. If I assumed that this 5¼ years of salary were to deliver a 4% inflation-adjusted annual rate of return, then the 5¼ years of saved salary would deliver about 21% of our 35-year average salary in perpetuity.
In practice, Social Security works like an annuity, keeping our money after we die. Also, if a spouse earns Social Security benefits but elects to use her/his other-spousal benefits, then the money the spouse has paid in is kept by Social Security.
The result is that Social Security, with slight tweaks from time to time, has remained actuarially sound and self-supporting since its inception in the 30's. (We're now being double-taxed on half of our Social Security benefits.)
The point of all this is that we prepaid for our Social Security. It's not a gift. It's a government-administered annuity program.
Beginning in the 1950's, there was a never-ending chorus of warnings that Social Security wasn't going to be there for us when we were ready to retire: that Congress would snatch it away, or the country would go broke because of its monstrous 1950's deficit. This used to infuriate financial columnist Sylvia Porter, who considered this to be politically motivated tommy-rot.
Social Security provides full cost-of-living adjustments, as any retirement system should.
So what will happen going forward? If my hopes and prognostications about human youth span expansions become a reality, Social Security will have to change. However, it seems to me that it should be possible to lay up enough treasure that we can be independently supported off investment income until death do us depart. If I imagined investing 15% of my salary in a Roth IRA in a basket of domestic and emerging market stocks earning 4% a year after inflation, then over a 36-year period, I would have 0.15/0.04 X (22 - 1) = 3.75 X 3 years of salary = 11.25 years of average salary accumulated in my Roth IRA account. Let's call it 8-9 years of final salary. If I earned 4% on it after inflation, then I'd end up with 32%-36% per year of my final salary forever.
This wouldn't be enough for much of a retirement. In a world in which life expectancies were radically greater than they are now, the work span might need to stretch out to, say, 54 years (e. g., from 22 to 76). In that case, the total savings would reach 3.75 X 7 years of average salary = 26.25 years of average salary, yielding a 4% investment income of 105% of lifetime average salary... not bad!
Of course, the other horn of this dilemma would be the idea that we can't have everyone retired, can we?... unless robots can power the world.
During the years when I was paying into Social Security, I complained that I could do better laying aside a retirement nest egg for myself than Social Security was doing. Now, I'm so glad that I didn't have the power to try to build my own private Social Security surrogate. Since the beginning of 2000, stock markets have been Mr. Toad's Wild Ride. In the meantime, like the Eveready Energizer Bunny, Social Security checks have come every month, unswayed by asset bubbles, and my wife and I haven't had to worry about the security of our Social Security income.
There are other huge advantages to Social Security over corporate-run annuity plans: you don't have to become a retirement expert to insure that there won't be fine print in the contract that cheats you out of your cost-of-living or other benefits. You don't need to worry about company management looting the annuity company. You don't need to worry about the company filing for bankruptcy, or about the company being bought out by another company in a deal that allows the new owners to sidestep some of the original promises made to you.
Social Security services are sparse. There's a local Social Security office, but it's not lavishly staffed. You have to wait for a while to see someone. The point is: there's not a lot of administrative overhead visible to us Social Security recipients. It looks like an efficiently run organization.
Civil Service Retirement
Although there are sizable differences (a different formula for calculating benefits, full retirement at age 55 with 30 years of service), the old Civil Service Retirement System (CSRS) was also a government-run annuity. Under the old Civil Service Retirement System, we paid 7% a year in after-tax money into the retirement system, with a matching 7% a year contribution from the federal government, for a total contribution of 14% a year. Using the 4% formula above, a 30-year contribution comes to 0.14/0.04 X (230/18 - 1) = 3.5 X (21.67 -1) = 3.5 X 2.182 = 7.6 years of average inflation-adjusted salary. At 4% a year, that would yield 30.4% a year of the average salary in perpetuity. The actual return is 2% per year of service times the high-five-year average salary. the high-five-year average salary was uncorrected for inflation so it was less than the final salary by about 2½ years of inflation. When I retired in 1981, inflation was averaging between 1976 and 1980, maybe, 6% a year, so I would have gotten, maybe, 51% (round it to 50%) of my final salary in retirement if I had retired at 55 with 30 years of service. On top of that, my salary was capped at about 15% less than it was supposed to be because of a rule that was in effect at the time. If I had retired in 1981 at 55 with 30 years of experience, I would have gotten around 42% of my final salary... not much of a total retirement check.
The old Civil Service Retirement System was not a part of Social Security, so you didn't get a supplemental Social Security check.
The current Federal Employees Retirement System (FERS) provides 1% per year for every year of service if the employee is 62+ and has less than 20 years of service, or 1.1% a year if the employee is 62+ and has 20+ years of service, with a high-three salary formula replacing the old high-five average. For age 62 with 35 years of service (corresponding to 35 years required for maximum Social Security benefits), a Civil Service employee would draw 38.5% of his high-three salary, or typically today, about 36¾ % of his maximum salary. To this would be added another 28% from Social Security for a total retirement income of 75% of maximum annual salary.
Like Social Security, this comes in quietly and steadily every month. I only hear from CSRS once a year in January when the new cost-of-living adjustment is posted. Otherwise, it's invisible.
Medicare is also hassle-free. We pay about $200 a month for it. We also have a supplemental Blue Cross family plan (because of our little darling), which costs more than $300 a month.
The key point about Medicare is that, for the elderly, it's often the insurer-of-last-resort. Why should a health insurance company take on the truly old, knowing what they're ultimately going to cost? The key to the insurance business is insuring people who don't need to be insured. The more of them you can insure, the better your bottom line will be. And let's face it: it takes lots of profits to pay top executives millions to tens-of-millions of dollars a year.
The Affordable Care Act is patterned after Mitt Romney's pioneering plan in Massachusetts. It's my understanding that it will affect 5%-to-10% of the population. The rest of us are already enrolled in health plans.
China wants to de-Americanize the world.