Reflecting on the recent tax cut deal that reduces Social Security taxes for a year (and makes the Social Security Trust Fund even more underfunded) Brett Arends points out that average life expectancy for those who reach 66 is so high that buying annuities purchased at age 66 to fund retirement would cost too much for the overwhelming majority to afford.
If your Social Security payments are scaled back, or worse, what would it cost you to buy something similar in the private sector?
We can do some math.
According to ImmediateAnnuities.com, a 66-year-old man would have to pay $128,000 for an annuity providing him with income of $10,000 for life. A 66-year-old woman would have to pay even more, about $138,000.
That's for an income of $10,000 a year. If you think you'll need $40,000 a year to live on, naturally you'd need to set aside four times as much, or about $550,000.
And this would only be for a straight annuity, with absolutely no inflation protection at all.
But an inflation-adjusted $10k annuity at age 66 would cost $180k. To sustain a $40k income until death would cost $720k. Think about that. This also helps explain why Social Security is in financial trouble. For a $14k/year average Social Security benefit (which isn't much, btw) what fraction of the population has paid, say, $252k total in Social Security taxes by age 66? The overwhelming majority hasn't. Hence, Social Security is a pyramid scheme and its future benefits have to be cut somehow.
Then there's Al Gore's famous Social Security Trust Fund lock box. The Trust Fund is really imaginary.
From the mid-1980s through last year, Social Security was a cash cow for the federal government thanks to tax increases and benefit cuts adopted after the Greenspan Commission's 1983 report. Social Security collected more in taxes than it paid out in benefits, turning the surplus over to Treasury, which used the cash to meet various obligations, and gave the trust fund securities in return.
The fact that Social Security was funding the rest of the government to the tune of trillions of dollars gave beneficiaries a moral claim on the trust fund, economically useless though it is.
The US government will have to run a huge surplus in other forms of revenue to be able to afford to pay back the money it borrowed from the Trust Fund. To do that will require a sustained healthy rate of economic growth as well as large cuts in other areas of spending.
It does not appear that Americans either collectively or individually look at the future with time lines sufficiently long enough to drive savings accumulation or spending restraint. The costs of an aging population will have to be paid for by making them work more years.
Support for raising retirement ages seems to be building with the US deficit reduction commission, Sen. Tom Coburn (R., Okla.), and House Republican Leader John Boehner (more here) support an age hike. The American Academy of Actuaries came out for a 2 year increase in retirement age in 2008.
|Share |||By Randall Parker at 2010 December 21 12:06 AM Economics Retirement|