In the last few months the PBS NewsHour has done some shows about wealth inequality in the United States. This week they aired a segment with an unusual take on the subject: economist Robert Lerman (professor at American University) contends that Social Security and Medicare represent significant wealth for the average American totaling hundreds of thousands of dollars and should be included in any mapping of wealth distribution.
Professor Emmanuel Saez of UC Berkeley has the most widely-used statistics about wealth inequality. Click here to see me discussing these numbers on YouTube, or here to see Professor Saez’s website.
The NewsHour chart showed the bottom 40% of the population owning 5.7% of the total wealth. Professor Lerman revises the figures so that the bottom 60% own 28.5%.
I think Professor Lerman has a point, but the way he delivers this theory is ripe for misinterpretation in our current political climate. Social Security and Medicare are commonly called “entitlement” programs, as if they are pure give-aways to the elderly. In fact, these are forced retirement savings programs; everyone has so-called "payroll" taxes automatically deducted from their paycheck, these taxes go directly into the Social Security and Medicare trust fund accounts. After watching the NewsHour segment online this morning I wondered: what kind of return on investment does the average worker get for her payroll taxes?
With just a little investigation I found that the average person actually receives LESS in Social Security benefits than he or she paid in.
The figures below are from a widely reported study by the Urban Institute, and the total taxes paid into the system are calculated using an investment return of 2%. The average return over decades in the stock market is 8-10%. When helping a person plan for retirement many investment advisers project a conservative estimate of 5-6% to ensure that the actual return is higher. But as this blog shows, many standard retirement planning calculators use 10% return as a calculator. Even in this era of deflated savings rates, 30-year U.S. Treasury bonds yield 2.83%. In other words, if the taxes paid in were calculated at a higher return on investment, these statistics would look even worse for the average person.
Here’s some statistics for a person turning 65 this year; from the Urban Institute, revised June 2011; (interest earned on taxes calculated at 2%). These figures include both Social Security and Medicare:
These figures are for Social Security tax and benefits only:
Professor Emmanuel Saez of UC Berkeley has the most widely-used statistics about wealth inequality. Click here to see me discussing these numbers on YouTube, or here to see Professor Saez’s website.
The NewsHour chart showed the bottom 40% of the population owning 5.7% of the total wealth. Professor Lerman revises the figures so that the bottom 60% own 28.5%.
I think Professor Lerman has a point, but the way he delivers this theory is ripe for misinterpretation in our current political climate. Social Security and Medicare are commonly called “entitlement” programs, as if they are pure give-aways to the elderly. In fact, these are forced retirement savings programs; everyone has so-called "payroll" taxes automatically deducted from their paycheck, these taxes go directly into the Social Security and Medicare trust fund accounts. After watching the NewsHour segment online this morning I wondered: what kind of return on investment does the average worker get for her payroll taxes?
With just a little investigation I found that the average person actually receives LESS in Social Security benefits than he or she paid in.
The figures below are from a widely reported study by the Urban Institute, and the total taxes paid into the system are calculated using an investment return of 2%. The average return over decades in the stock market is 8-10%. When helping a person plan for retirement many investment advisers project a conservative estimate of 5-6% to ensure that the actual return is higher. But as this blog shows, many standard retirement planning calculators use 10% return as a calculator. Even in this era of deflated savings rates, 30-year U.S. Treasury bonds yield 2.83%. In other words, if the taxes paid in were calculated at a higher return on investment, these statistics would look even worse for the average person.
Here’s some statistics for a person turning 65 this year; from the Urban Institute, revised June 2011; (interest earned on taxes calculated at 2%). These figures include both Social Security and Medicare:
Single man earning average wage ($43,500)If you subtract out Medicare, the average person loses on Social Security.
Total taxes paid $359,000
Benefits over lifetime $436,000
Single woman earning average wage ($43,500)
Total taxes paid $359,000
Benefits over lifetime $478,000
Two-earner couple both earning average wage
Total taxes paid $717,000
Benefits over lifetime $913,000
These figures are for Social Security tax and benefits only:
Single man earning average wage $43,500
Total taxes paid $305,000
Benefits over lifetime $267,000
Single woman earning average wage $43,500
Total taxes paid $305,000
Benefits over lifetime $294,000
Two-earner couple both earning average wage
Total taxes paid $611,000
Benefits over lifetime $560,000
Clearly Medicare is the only problem in terms of unfunded benefits, just another aspect of our ongoing national health-care crisis. If we had a sane politics, we would have solved this problem years ago but instead it continues to fester, sapping our nation’s strength.
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