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PaperclipPerfector  1yr ago (text post)   29600 thread views

Culture War Roundup for the week of October 2, 2023

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Fair point. The regressivity is broader than just the cap, generally as you get poorer people pay a larger sharer of the income for payroll, but payouts should ofc be factored in too.

The progressivity is in the payout structure.

Let's take 3 people. Follow along if you iike there's a quick calculator here. For simplicity lets assume all 3 were born on Jan 1, 1980 will retire in January of 2050 and remain single their entire lives. We'll assume they earn the same amount after adjusting for inflation for the 35 years that are relevant for calculating social security benefits.

  1. Alice earned $13,500. She contributes 6.2% of her income or $837 and her employer contributed the same this year. When she retires in 2050 at 70 she will get a benefit of $14,500 (in today's dollars) per year of retirement.
  2. Bob earned $80,000. He contributes $4960 (nearly 6x as much as Alice) and his employer matches. When he retires at 70, he'll earn a benefit of $40,200/yr (in today's dollars). So, after paying 6x as much as Ailice he gets a bit less than 3x the benefit.
  3. Charlie earns $160,000. He contributes $9,920 and his employer matches this. When he retires he gets a benefit of $55,300 yer year (in today's dollars. Despite contributing nearly 12x Alice and 2x Bob, Charlie will get a bit less than 5x Alice's benefit and 1.25x Bobs.

Alice and Bob's incomes were chosen at the bend points of the PIA calculation, incomes in between any of those three people's will be some mix of those.

Yes, social security taxes are flat, but the benefit is enormously progressive.

Alice earned $13,500. She contributes 12.4% of her income or $837

I'm afraid this math is not mathing.

You're right, I started writing with the full (employer and employee contribution) then split them and forgot to edit the percentage. She contributes 6.2% or $837 and her employer contributes another 6.2% on her behalf. The full contribution per year is 12.4% or $1,674.

Yeah, US social security is a redistribution program stealthing as a forced savings program ("and that's a good thing," many progressives/leftists might add). As if a forced savings program isn't bad enough.

Given the strongly progressive nature of SS disbursements, financially literate high-earners are far worse off than an alternate universe where they just took their social security contributions and their employer matches to go home and invest on their own, even in something vanilla like short, intermediate, or long-term treasuries depending on duration appetite and the shape of the yield curve. The difference becomes even more drastic if one throws the option of investing in equities into the mix.

Unfortunately, while "financially-literate high earners" might be able to outperform on returns, I can't see a scenario where Alice, who likely isn't terribly financially literate or prone to long-term decisionmaking (admittedly, this is generalizing heavily about the lower class, but is probably right in aggregate) doesn't get convinced to invest either in high-risk, flashy strategies (NFTs, bro! Can't go tits up!) or outright frauds (Enron, etc).

If retirees ends up destitute from mismanagement of the funds they supposedly saved on their on behalf, it's easily a sympathetic case (and large voting block) that we'll end up bailing them out anyway. I think privatizing would really need a mechanism to prevent this sort of outcome. For better or worse I could point to how the SEC defines "accredited investor" to only allow rich folks to invest in certain poorly-regulated securities. Is Alice prevented from making those sweet returns? Yes. But if high-income Charlie loses his shirt the median voter is just going to laugh, not support a bailout. It's not a good definition, but it seems to work in that context.

If the only options are index funds covering the S&P 500, msci world ex us, Russell 2000, Lehman bond, and average cost of Treasury bonds it's really hard to lose your shirt.

The government is already admistering a plan with those options. Just make the default option a target date retirement plan based on birthday and 99.9% of people will have an extremely hard time screwing it up.

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