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Post 02 Feb 2011, 5:43 pm

What I am saying is that there are people who are getting more than they paid in. If you need examples of that, I am sure it would take but a second. The system is replete of them! Social Security is a system that should not require any tax money input into it (or taken out for that matter).

Yes, you get a little bit more of your money back if you make more. Do you get all of it? What if you die? Does your estate get the money that you paid into your retirement via Social Security?
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Post 03 Feb 2011, 2:36 pm

What I am saying is that there are people who are getting more than they paid in.
And? This is true of most pension schemes and insurance schemes. Social Security is a kind of compulsory insurance pension, combining aspects of both types of investment. Like any investment, it is to some extent a bet, albeit one that you are forced to make in this case. Insurance is also rife with fraud, and insurance companies often have fairly large departments dedicated to rooting it out, so it should come as no surprise that it exists in Social Security, or that it would cost a lot to deal with it. There are plenty of people who have had more benefit from home insurance than the value of the premiums they put in, and loads who pay premiums but never get a payout. Similar with car insurance (which is largely compulsory), life insurance, health insurance, pet insurance...

Yes, you get a little bit more of your money back if you make more. Do you get all of it? What if you die? Does your estate get the money that you paid into your retirement via social security?
I think you need to understand a little more about how pensions work before asking these questions. Other than spouse benefits (usually a reduced pension), and a lump sum taken at retirement, it is very unusual for there to be assets from a pension that carry over after the death of the policyholder unless they die before it matures - and this will be costed in as life assurance in the premiums, which is not the case for Social Security. Defined Benefits (Earnings Related) pensions work pretty much the same way whether they are public or private – you put in money while you work, and that builds up to a monthly/weekly pension. As the Archduke illustrates, he will get more the more he pays in and the longer he does so (just as you would in a company DB scheme). Whether it works out to more than he put in while working depends on a lot of factors, the main one being how long he survives after retiring.

If you instead build up a pot of money separately, then you get your actual pension from an annuity. Annuities are explicitly set up so that you use a capital sum (your pension pot) to purchase a regular income. If you die before that regular income exhausts the amount you put in, your estate does not get the remainder (and equally, if you live longer it does not suddenly run out).

For both DB and Annuity pensions, there are hoards of actuaries whose very careers are based on trying to guess better than you can when you will expire (individually they may not be accurate, but averaged out over a large pool they do well).

You could try and just rely on the capital from investments, but that is a gamble as well. If you live longer than you expect (and I am sure most people hope to live for as long as they can, provided they are also healthy), then what do you do when the money runs out? Inflation can take a terrible toll on capital, but pension schemes usually include an accrual rate for inflation that preserves most of the value.

The usual advice is to vary your investments for retirement – to hedge your bets in other words. The above is precisely why. Not everyone can do so, however, because that usually means having more resources. As much as you will assume that this is largely their own fault, I think you very much underestimate external factors in the lives of people. It is very easy to criticise others for poor decisions, especially with the benefit of hindsight. I am sure that all of the decisions you are making are wise. I hope that none turn out to be catastrophic, however clever they seem now. If you are not gifted with the power of prescience, even the safest of gambles is still a gamble.

The way I see my National Insurance payments (which are for similar things to your Social Security payments) is as an insurance policy, should things go bad. A long bout of serious ill health which means you cannot work would not be your fault, but it would seriously affect your ability to save for your retirement. You could be invested in real estate and then see a large crash in property values in the years before you retire. You could put money into a pension scheme or investment in good faith and end up seeing it fold, costing you the lot.

What state social security systems do, if they work well, is to provide a safety net. This has the downside of making it easy for people to simply free-ride on the bottom. However, it also has the upside of giving those who are prepared to take great risks with something to fall back on in case things do not turn out too well. The people who perhaps do worst out of it are the plodders, people who play it safe and take few risks. However, in the world of today, there are no risk-free paths through life. What seems like secure employment or a stable industry now may disappear in the next few decades – or it may take off and become incredibly lucrative.

So why should tax be spent on it (and let us be clear, Social Security is effectively a tax, even if officially it is a form of insurance)? Well, what would happen if you had large numbers of retirees who run out of money? What would happen if you had lower payments to people who lose their jobs when there is a recession? Do you think that these would have no effect on the wider economy or on society? Again, I have to ask you what you think it was that prompted most Western nations to start introducing such schemes around a century ago, what conditions existed then for people who would now be beneficiaries, and what effect that had on those around them, on the economy, and on the nation.

I do not say that there is no need to reform your system – I do not know enough about it to say what reforms would be best – but I have to say that it is pretty blinkered to suggest that the entire system itself should be abolished, which is effectively what you are arguing.

I suppose it depends on your outlook. Do you look at the poor and think to yourself that they probably deserve their state, and likewise see your comfortable life and believe that you deserve all of it for your efforts in life, and that no external factors made things easier for you? Or do you ever look at people in dire straits and think “there but for the grace of God, go I?”