Opinion

Ernie the electrician understands Social Security

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William Shipman
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      William Shipman

      William G. Shipman is chairman of CarriageOaks Partners, LLC and co-chairman of the Cato Institute Project on Social Security Choice.

Ernie was pretty certain he had made the right decision after hearing the senators propose that the Social Security retirement age should be increased to age 70. At first glance it seemed to make sense. People are living longer so their benefits should start a little later. And this would help the system’s finances. But looking back at his own career as a self-employed electrician, he began to question if it actually did make sense. He also wondered whether the senators knew what he knew. If they didn’t, they should. If they did, why did they make such a proposal? Here’s what he thought they should know.

Ernie started working in 1966 at age 21. He made $6,900 his first year, and just average wages thereafter. But he was frugal, for his parents taught him to save no matter what. So he saved every year the same amount he paid in Social Security taxes that he assumed were set aside for his retirement. In the first year it wasn’t much, just $360.

He wasn’t a sophisticated investor, so he took what he thought was good advice, and invested in broad indexes of stocks and bonds with a 70/30 percent mix. He didn’t day trade, pick stocks, or try to time the market. He didn’t know anything about that. The only change he ever made was at age 56 when he restructured the portfolio to a more conservative 50/50 stock/bond allocation. He retired at the end of last year, at age 66, the age at which he could receive full Social Security benefits.

When he applied for his benefits in 2010, he was advised by the Social Security Administration that his first monthly check would be $1,664, and he would receive it in mid-January 2011. He was also told that if he chose Medicare Part B, the premium would be deducted from his benefit check. He earned $48,000 in 2010 so his first year’s benefit of $19,968 totaled about 41 percent of his last year’s pay check.

Ernie wanted to know how much he could withdraw from his portfolio to supplement his benefits. Finance not being his strong point, he sought help. He was advised to re-structure the portfolio to earn a more conservative 4.5 percent return. He was also told that a man of his age had a life expectancy of about another 18 years, but that he shouldn’t take that as the number of years he would live. It was just an average. He should be conservative, and assume he’d live another 25 years to age 91. After he agreed to these points, his advisor told him how much he could withdraw.

Ernie was shocked. Even after including the stock market crash of 2008, he could take out $37,000 in 2011, and increase it every year for 25 years by 3.0 percent, the historical inflation rate. Or he could buy an annuity providing a comparable benefit. Of course he could take out less, so as to leave some assets for his children. Or he may want to hedge whether he’ll live longer than 91.

Ernie was confused. He couldn’t figure out why saving and investing the same amount he paid the government resulted in almost double the benefit.

When he shared all of this with his children, they were angry that they were forced to pay the government their savings when they likely could earn more on their own. Not only that, if the senators’ proposal became law, they wouldn’t even get their full Social Security benefits until they were 70, four years later then their father. The senators were proposing to cut their already-low projected benefits.

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  • ChillytheAlaskan

    Ernie and family are getting screwed even worse then they think. I retired in 2003 with a $5000 per month retirement. Since the government began printing money without backing, the estimated inflation rate is about 20%. I began collecting my social security last October, so first the government using inflation had stolen 20% of my retirement ($1000 per month)and then 20% of the social security ($320/mo), so they really have stolen and I am paying MY OWN social security because of their printing money without backing!

    To make this even worse, social security is nothing but DOUBLE taxation to start with. We give the government the funding to “put in trust” for our retirement, THEY SPEND IT and then put an IOU or in our case a “you owe yourself later” note in a box, so they can then tax us later for this same money we have put in “trust”. THIS IS AN OUTRAGEOUS THEFT! All of our government representatives including retiree’s should LOSE THEIR RETIREMENT AND HEALTH PLAN because they know about and approve of this theft from the taxpayers of this country!

  • Bart Pinyoncede

    You write

    don’t let folks keep more of the fruits of their labor,

    Don’t forget that people should be able to keep their other fruit too: like the apples people get from the trust a person’s parent’s might have established (although restricted way too much), and the pears that you get from winning the lottery, and the melons you get when you make a killing in the stock market. The fruits of labor get all the attention, but the other fruits are just a tasty and we shouldn’t be letting the government take them away.

  • Joe Steel

    Obviously this posting was contrived to present a certain point of view. It’s a good illustration of the dishonesty rampant among right wing extremists.

    • Buckoux

      Ergo, among the extremist Left, honesty is “rampant”?

  • sawdustking

    The more I think about SS the more I think it should be shrunk into a true safety net, including means testing. Slash the contribution rate and then tell Earnie that he couldn’t draw it until most of his savings were gone. I know that makes it even more socialistic, and some people would use it as an excuse to not save, but their reward would be to retire in poverty. Pretending it is a retirement plan is folly.