Paul Ryan and Social Security - Do the Math
First, let's just get this out of way. Paul Ryan should be commended for putting forth any plan to address Social Security. This already makes him more qualified than almost any other candidate in decades, including the one he is paired with in 2012 and the one he is running against.
That being said, the plan put forth in the Path to Prosperity, also known as the Paul Ryan plan, is based on two facts that most people are aware of, but aren't comfortable talking about. First, there is no way to solve the financial problems in Social Security without someone taking a bath. Either the baby boomer generation will see a reduction in benefits, or future generations will have to pay a great deal more into the system than they could ever get back. The second reality is that no one gets elected if they even think about cutting benefits to baby boomers. Put those two facts together and you come to the unfortunate reality of the Paul Ryan plan - young people are about to pay big for the mistakes of the baby boomer generation.
To understand the Paul Ryan plan for Social Security, keep in mind that right now, every person pays 12.4% of their income into the Social Security system. You pay half of this out of your paycheck and your employer pays the other half. You may never see this employer side, but it is money that you would be receiving if the requirement was not in place.
The Paul Ryan plan grants each person under the age of 55 the permission to leave the Social Security system and have a personal account. Now, if you were truly "out" of the system then you wouldn't have to pay any more into it. Right? Wrong.
The plan put forward by Congressman Ryan allows someone who has left the system to place money that would have gone into the social security system into private accounts. The amount of money they can place into these accounts is slowly raised over four decades so that by 2052, 5.1% of a person's income that would have gone into Social Security goes into these accounts. The remainder of that 12.4% still goes into the Social Security system and is used to pay for the benefits of the baby boomer generation. Specifically, the plan allows for the following amounts to be placed into a private account :
- 2012 through 2022 - The first ten years
- 2% of the first $10,000 of your salary
- 1% above that amount and below the Social Security taxable limit
- 2023 through 2032 - The second ten years
- 4% of the first $10,000 of your salary
- 2% above that amount and below the Social Security taxable limit
- 2032 through 2042 - The third ten years
- 6% of the first $10,000 of your salary
- 3% above that amount and below the Social Security taxable limit
- 2042 through 2052 - The final phase
- 8% of the first $10,000 of your salary
- 4% above that amount and below the Social Security taxable limit
This is how the system works. The younger generation is asked to pay a large portion of their salaries into the system to pay for the promised benefits to those over 55 - who will see no reduction. When we turn 67 and are allowed to retire, we get less benefits than our boomer predecessors.
So, how much money are you losing by leaving the social security system? To answer that question we looked at a theoretical situation. This hypothetical person is 25 years old when the law goes into affect in 2012. He starts off making $50,000 a year and only receives increases in pay due to inflation. Inflation is set to 2% a year, and the average return on his investments in the stock market is set at 5.5%.
What we find is that if this person remained within the current system, by the time he retired at the age of 67, he would have contributed $416 thousand into Social Security that would have grown with modest interest to roughly $950,000. However, even after choosing to leave that system under the Paul Ryan plan, he still had to pay in $126 thousand by the time he retires. He gets nothing for that money. It is essentially a penalty for the privelage of leaving the system and went to paying for the boomers.
When he does finally get to retire, the money in his personal account under the Paul Ryan plan is $274 thousand. This is well less than a third the amount he would be credited with under the old system. Had he been allowed to take the full 12.4% of his money and invest it into an private account, he would have $1.3 million to retire on at 67.
The result of the proposed system is that even if you assume a 5.5% rate of return for the private accounts and a zero rate of return for Social Security contributions, our hypothetical person retires with less money in his personal account than he would have contributed to Social Security. The only real incentive is that if he passes away before he uses that money, then he gets to pass it on to his children.
The curves below show the amount our hypothetical person would have contributed to Social Security under the old plan (dashed black line), and the expected amount in his Social Security account (blue line). For the Paul Ryan plan, it shows the amount he would have in an account with a 5.5% rate of return (green line) and how much he would contribute to Social Security that he will never see (grey line). The red line represents the amoutn the same person would have in a private account if he was truly free and allowed to invest that 12.4% into the same account at the same 5.5% rate of return.
The question here is not why this plan is structured this way. The amount of money that we are allowed to keep increases over time because the amount that the baby boomers need to take from us to pay for their entitlements shrinks over time. This is why the system is "phased in" over 30 years. That's how long it will take the boomers to pass away and remove the demographic hump they represent.
The real question here is why. Why is it that the boomer generation is allowed to dictate to its children and grandchildren that we must labor on their behalf? Why is it that the sheer numbers of these people allows them to demand that their misguided experiments in moderate socialism be made whole by those who had no part in it? Why is it that there isn't even a mention of forcing the generation that allowed their leaders to steal their money and replace it with IOUs while promising them the moon and the stars to actually share in the sacrifice?
The answer is obvious. Their numbers allow for them to control the debate. Neither party will utter even the slightest hint of punishing them because to do so would end any political movement in its tracks.
Among the other people protected by this system are the very wealthy. Anyone seeking to retire can leave the system by purchasing an annuity equal to 15 times poverty for the remainder of their life. So the baby boomers get their benefits, the rich get out of it, and the rest of us get stuck with the bill.