Social Security: Universal and Retirement
by John Moser
Earlier I discussed the impact of a Universal Social Security, in the form of a Citizen’s Dividend, on retirement income. I used some rough estimates of income and savings and came up with the below chart:
After the last post, I’d like to revisit this topic to provide more detail. Retirement benefits are one of our most important and critical services, and replacing them with a Universal Social Security benefit requires careful consideration.
First, I want to discuss low-income Social Security benefits. The above chart uses the 2013 averages; it doesn’t reflect minimum wage workers. Under the current system, the less you’ve been paid in your 40-year working life, the less you get paid in retirement; long-hours for low-pay means poverty in retirement.
A person retiring at age 62 in 2016, if having received 2,000 hours per year of minimum-wage pay every year since the age of 18, would receive only $746/month of Social Security Retirement Benefits; this is just $165 more than the Universal Social Security benefit. Those workers who spend time on and off welfare, underemployed, and otherwise not banking the full minimum wage receive even less.
In theory, anyone receiving any form of income can bank that income and live on the USS benefit, providing a vehicle for retirement savings; in practice, that sucks. Even so, a person who gets current minimum wage plus Universal Social Security and banks 100% of their USS benefit would live above the minimum standard and retire with the equivalent of (roughly) $135,000 in the bank. That means they’d still retire with $1,150 monthly income (20-year amortization of savings) instead of $746, which isn’t bad even if you ignore that poor people don’t live long.
I gave a 3.5% growth model over 20 years as a basic model, with returns projected up to 6%. This wasn’t exactly arbitrary:
Even that Vanguard Total Bond Market Index has been as low as -4.8% (losing money), and the other two have been low-return or moderate-loss holdings. As Representative Elijah Cummings (D-MA) put it:
We promised that we would never again allow those who protected us as children to die penniless, and hungry, because their private retirement plan fell apart in the stock market.
That’s a real concern: strategic income and bond investment vehicles can lose money.
Money Market Accounts, Certificates of Deposit, and other guaranteed-income investment vehicles do not share this concern. These options are often lower-growth—Pentagon Federal currently offers a 1.20% Mutual Fund CD, and my SF Guaranteed is now 3%—and carry no risk of loss. The primary risk of these types of investments is low growth: Vanguard’s Money Market accounts have made 4.41% and 5.18% per year since inception on average, and yet their 10-year averages are currently 1.07% and 1.13%.
There are strategies to maximize these investments, and the least-risky option of taking a no-loss investment and adding 3% of your paycheck ($30 per $1,000) provides great outcomes. There is no reason for Americans to risk their retirement in the markets if they don’t have the skill and the income to cover for the risks involved.
Compared to OASDI
OASDI takes 6.2% directly off your paycheck at all income levels, plus an extra 6.2% from payroll.
At a minimum-wage income, Social Security retirement benefits pay just $165 more today than the Universal Social Security benefit. Under Universal Social Security, diverting 6.2% of the past 42 years of a minimum wage to an individual IRA would yield $104/month additional for 20 years; at 1.2%, it would yield $129/month; and a 2.5% growth rate would exceed Social Security benefits.
That 6.2% represents money currently removed from the employee’s paycheck. As well, the minimum-wage employee under Universal Social Security has an additional $581/month today, which they can further put toward retirement or use for immediate elevation out of poverty. Financially-distressed low-income families today do not have the option to leverage Social Security in this manner, and are forced to pay 6.2% of their income to fund current retirees.
In total, a Universal Social Security better protects retirees from an unstable retirement and enables low-income families to survive to retirement int he first place. It gives the lowest and the middle classes far more potential to save for retirement while simultaneously supplying an irrevocable lifetime Social Security benefit. This makes Universal Social Security a powerful extension of modern OASDI benefits.