Social insecurity

| Tuesday, Jan. 5, 2016, 9:00 p.m.

An easy case for government intervention requires just one mistaken assumption: Ordinary people cannot take care of themselves as well as government officials will take care of them.

An example of this assumption appears in a recent letter to the editor in The Wall Street Journal. UC-Berkeley business school instructor David Robinson admits that Social Security really isn't what Uncle Sam advertises it to be. For example, Robinson correctly notes that the Social Security Trust Fund “is a myth.” Nevertheless, he applauds Social Security because, he alleges, it ensures that ordinary people will have adequate retirement incomes. To emphasize his point, Robinson asserts that “there's simply no way that a janitor could save enough in his working years to provide a decent retirement.”

Let's explore this assertion.

The typical janitor in America today is paid $26,586 annually. Because even janitors must pay to Social Security 6.2 percent of their incomes, this janitor pays every year to Social Security $1,648.33. On top of this sum, this janitor's employer kicks in to Social Security another 6.2 percent of the janitor's salary.

If a janitor works from age 18 until the full Social Security retirement age of 66, he will, upon retirement, begin receiving from Social Security a monthly check for $1,108. He'll receive such a check until he dies. (Note: when he dies — even if he dies just one minute after retiring — his heirs get nothing from Social Security.) But suppose that this janitor is relieved of having to pay 6.2 percent of his wages to Social Security and, instead, he invests each year this sum into financial instruments that pay, on average, a real annual return of 5 percent, compounded monthly.

Saving and investing no more than this sum each year during his work life, this janitor, when he retires at age 66, will own a pension worth $337,591. Even assuming (unrealistically) that these funds earn no further returns for the rest of the retired janitor's life, if he lives for another 15 years, every month he can take from his retirement fund $1,875.51 — or 69 percent more than the monthly amount that he would instead have received from Social Security.

In order for this janitor's monthly payment out of his private retirement account to fall short of the monthly payment he will get from Social Security, he would have to live past the age of 91.

Now let's further assume that employers are also relieved of the obligation of paying to Social Security 6.2 percent of their employees' salaries. Because relieving employers of this obligation makes the hiring of janitors and other workers more attractive, employers will compete for workers by bidding up workers' wages. Even if our janitor's pay increases by an unrealistically small 1 percent, this raise will allow the janitor — if he adds this 1 percent pay raise to his savings — to increase his annual savings by enough to yield a pension, when he retires, worth $392,045.

If our janitor lives for another 15 years and draws each month evenly from this account, the amount he'll get each month will be $2,178 — almost double what he'll get from Social Security.

It's untrue that if Social Security were abolished, janitors and other low-paid workers would be unable to adequately save for their retirements. Quite the contrary.

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.

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