Stocks to Annuity Plus Free Money for Seniors

Even under bad conditions a pay as you go system does returns less money to its contributors overall than the same money put into a conservative stock portfolio. But when we looked at some actual annuities on the market which give the same assurances as Social Security, Social Security does better for those with low income histories, even on good years. We have an apparent paradox!

We can resolve the paradox by realizing that Social Security performs some major wealth transfers within the total working class pool. First, we have a much higher of retirement income to adjusted wage history for those with lower incomes income. For the first $761 of monthly adjusted income Social Security returns 90%. For the next bracket, up to $4,586, Social Security provides 32%, and from there upwards the return is a mere 15%. All else being equal, Social Security transfer wealth from the professional class to the lower working class. But all is not equal. Social Security is an inflation adjusted annuity, which is a bad investment option if you are going to die soon after retirement, or even before retirement. Social Security transfers wealth from the short lived to the long lived. Give thanks to chain smoking high wage earners.

Still, in return for the low overall rate of return, Social Security does provide security. And a forced savings plan might still be inadequate for someone with a low income history followed by a long retirement.

Here, we advocate a program that provides the security of Social Security while giving more incentive to save and invest for the upper working classes: free money for seniors. That is, if you are old and a citizen, you get money, the same amount regardless of your work history. If you want more, save and invest. But the government won’t make you, and you can choose how to invest: mutual funds, individual stocks, your own business, real estate, banks accounts, etc.

Elsewhere, we have looked at giving everyone $1000/month as a replacement for tax deductions and most of the welfare system. This might be a challenge given the current state of government finance. We might want to start with just the aged. Let’s see how $1000/month per senior plus a private annuity works out for people who save 5% and put it into a portfolio that matches the S&P500. We’ll look at 30 years of buying and 5 years of cashing out and then buying an inflation adjusted annuity as before. We look at a bad case scenario: retiring after 2009.

Comparing Today's Social Security @66 with saving 5% of your income over 35 years (1975 to 2009). For the first 30 years, putting the money in portfolio that tracks the S and P 500 index, and for the remaining 5 years, in cash while cashing the fund savings over the same period. Finally the funds are used to buy an inflation adjusted annuity priced for a 66 year old, providing a supplement to the $1000/month the government gives to all senior citizens. Either the annuity or the withdrawal to fund the annuity is taxed at 0%.
Career Adjusted Annual IncomeTotal SavingsFor Single MalesFor Single FemalesFor Couplesvs. Today's Social Security
10000.0032123.361148.451133.092114.65708.05
20000.0064246.721296.901266.182229.30974.71
30000.0096370.081445.361399.272343.951241.38
40000.00128493.441593.811532.362458.611508.05
50000.00160616.811742.261665.452573.261774.71
60000.00192740.171890.711798.542687.911971.00
70000.00224863.532039.161931.632802.562096.00
80000.00256986.892187.612064.722917.212221.00
90000.00289110.252336.072197.813031.862346.00
100000.00321233.612484.522330.903146.512471.00
10000.000000 to 20000.00000043758.631202.221181.302156.18841.38
20000.000000 to 40000.00000087517.251404.441362.592312.361241.38
30000.000000 to 60000.000000131275.881606.671543.892468.541641.38
40000.000000 to 80000.000000175034.511808.891725.192624.721971.00
50000.000000 to 100000.000000218793.142011.111906.482780.892158.50

Nearly everyone does better on this plan. The exceptions are those with a high income history. For longer careers or a better retirement year, the numbers are even better. The numbers are especially good for single wage earner couples. Since both spouses collect while alive their combined free money comes out to $24000/year plus their returns on what they saved. Some couples might be better off waiting to buy an annuity after one member dies, given that two can live cheaper together than two separately. The later you start an annuity, the better the rate of return.

A few notes on the table above. I had originally coded to take into account taxes on retirement funds when used. I turned off the feature after realizing that Social Security benefits are taxed as well, so it makes sense to compare pre-tax incomes for both. Also, I did not bother with looking at longer careers, as the 5% contribution is voluntary, and meant to be illustrative. Limiting to 35 years takes into some account that many young people opt to spend money paying off college loans, starting a family, etc. Indeed, 35 years might be too long a savings time for many.

The next chart looks at what fraction of one’s income one must save to match today’s Social Security given different savings periods. Keep in mind that many would do better under our proposal without saving anything.

Required savings rate to at least match Social Security @66 for 45 year career if the government gives $1000/month to all seniors. For the first years, savings are placed a portfolio which matches S and P 500 index but for the last 5 years (ending in 2009), savings go to cash while cashing the fund savings over the same period. Finally the funds are used to buy an inflation adjusted annuity priced for a 66 year old, and we assume a tax rate of 0% on either the annuity or the withdrawal from IRA to buy the annuity. Results are given as percentages for a single male, a single female, and a one-income couple.
Career Adjusted Annual IncomeToday's Social Security20 Years of Saving to Match25 Years of Saving to Match30 Years of Saving to Match35 Years of Saving to Match40 Years of Saving to Match45 Years of Saving to Match
10000.00708.050.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.00974.710.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
30000.001241.387.74%, 8.63%, 0.00%5.24%, 5.85%, 0.00%3.55%, 3.96%, 0.00%2.71%, 3.02%, 0.00%2.31%, 2.57%, 0.00%2.07%, 2.31%, 0.00%
40000.001508.0512.22%, 13.63%, 0.00%8.27%, 9.23%, 0.00%5.61%, 6.26%, 0.00%4.28%, 4.77%, 0.00%3.64%, 4.06%, 0.00%3.27%, 3.65%, 0.00%
50000.001774.7114.91%, 16.63%, 0.00%10.09%, 11.26%, 0.00%6.84%, 7.63%, 0.00%5.22%, 5.82%, 0.00%4.44%, 4.96%, 0.00%3.99%, 4.46%, 0.00%
60000.001971.0015.57%, 17.37%, 0.00%10.54%, 11.76%, 0.00%7.15%, 7.97%, 0.00%5.45%, 6.08%, 0.00%4.64%, 5.18%, 0.00%4.17%, 4.65%, 0.00%
70000.002096.0015.06%, 16.80%, 1.71%10.20%, 11.38%, 1.16%6.91%, 7.71%, 0.78%5.27%, 5.88%, 0.60%4.49%, 5.01%, 0.51%4.04%, 4.50%, 0.46%
80000.002221.0014.68%, 16.38%, 3.44%9.94%, 11.09%, 2.33%6.74%, 7.52%, 1.58%5.14%, 5.73%, 1.20%4.38%, 4.88%, 1.03%3.93%, 4.39%, 0.92%
90000.002346.0014.39%, 16.05%, 4.79%9.74%, 10.87%, 3.24%6.60%, 7.37%, 2.20%5.04%, 5.62%, 1.68%4.29%, 4.78%, 1.43%3.86%, 4.30%, 1.28%
100000.002471.0014.15%, 15.79%, 5.87%9.58%, 10.69%, 3.97%6.50%, 7.24%, 2.69%4.95%, 5.53%, 2.05%4.22%, 4.71%, 1.75%3.79%, 4.23%, 1.57%
10000.000000 to 20000.000000871.680.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.000000 to 40000.0000001301.998.28%, 9.23%, 0.00%5.88%, 6.56%, 0.00%4.22%, 4.71%, 0.00%3.37%, 3.76%, 0.00%2.97%, 3.32%, 0.00%2.75%, 3.07%, 0.00%
30000.000000 to 60000.0000001732.2913.38%, 14.92%, 0.00%9.51%, 10.61%, 0.00%6.82%, 7.61%, 0.00%5.45%, 6.08%, 0.00%4.81%, 5.36%, 0.00%4.45%, 4.96%, 0.00%
40000.000000 to 80000.0000002027.8214.09%, 15.71%, 0.49%10.01%, 11.17%, 0.35%7.18%, 8.01%, 0.25%5.74%, 6.41%, 0.20%5.06%, 5.65%, 0.18%4.68%, 5.22%, 0.16%
50000.000000 to 100000.0000002229.5213.48%, 15.04%, 3.26%9.58%, 10.69%, 2.32%6.87%, 7.67%, 1.66%5.50%, 6.13%, 1.33%4.84%, 5.40%, 1.17%4.48%, 5.00%, 1.08%

For a bad year, those with above median incomes need to save aggressively to match today’s Social Security if they wait until 20 years before retirement. And this is in addition to whatever savings they would have done under the current system to have in addition to Social Security. If we want to make the switch starting now for people 40 and below, we need to raise IRA contribution limits substantially.

And maybe we want to be even more generous. $1000/month is a figure we explore elsewhere to replace welfare. If we want to give the working class a license to be capitalists, we could use a cushier safety net. Let’s try $1300/month:

Required savings rate to at least match Social Security @66 for 45 year career if the government gives $1300/month to all seniors. For the first years, savings are placed a portfolio which matches S and P 500 index but for the last 5 years (ending in 2009), savings go to cash while cashing the fund savings over the same period. Finally the funds are used to buy an inflation adjusted annuity priced for a 66 year old, and we assume a tax rate of 0% on either the annuity or the withdrawal from IRA to buy the annuity. Results are given as percentages for a single male, a single female, and a one-income couple.
Career Adjusted Annual IncomeToday's Social Security20 Years of Saving to Match25 Years of Saving to Match30 Years of Saving to Match35 Years of Saving to Match40 Years of Saving to Match45 Years of Saving to Match
10000.00708.050.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.00974.710.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
30000.001241.380.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
40000.001508.055.00%, 5.58%, 0.00%3.39%, 3.78%, 0.00%2.30%, 2.56%, 0.00%1.75%, 1.95%, 0.00%1.49%, 1.66%, 0.00%1.34%, 1.50%, 0.00%
50000.001774.719.13%, 10.19%, 0.00%6.19%, 6.90%, 0.00%4.19%, 4.68%, 0.00%3.20%, 3.57%, 0.00%2.72%, 3.04%, 0.00%2.45%, 2.73%, 0.00%
60000.001971.0010.76%, 12.00%, 0.00%7.29%, 8.13%, 0.00%4.94%, 5.51%, 0.00%3.77%, 4.20%, 0.00%3.21%, 3.58%, 0.00%2.88%, 3.22%, 0.00%
70000.002096.0010.94%, 12.20%, 0.00%7.41%, 8.26%, 0.00%5.02%, 5.60%, 0.00%3.83%, 4.27%, 0.00%3.26%, 3.64%, 0.00%2.93%, 3.27%, 0.00%
80000.002221.0011.08%, 12.35%, 0.00%7.50%, 8.37%, 0.00%5.08%, 5.67%, 0.00%3.88%, 4.33%, 0.00%3.30%, 3.68%, 0.00%2.97%, 3.31%, 0.00%
90000.002346.0011.18%, 12.47%, 0.00%7.57%, 8.45%, 0.00%5.13%, 5.72%, 0.00%3.91%, 4.37%, 0.00%3.33%, 3.72%, 0.00%3.00%, 3.34%, 0.00%
100000.002471.0011.27%, 12.57%, 0.00%7.63%, 8.51%, 0.00%5.17%, 5.77%, 0.00%3.94%, 4.40%, 0.00%3.36%, 3.75%, 0.00%3.02%, 3.37%, 0.00%
10000.000000 to 20000.000000871.680.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.000000 to 40000.0000001301.990.05%, 0.06%, 0.00%0.04%, 0.04%, 0.00%0.03%, 0.03%, 0.00%0.02%, 0.02%, 0.00%0.02%, 0.02%, 0.00%0.02%, 0.02%, 0.00%
30000.000000 to 60000.0000001732.297.90%, 8.81%, 0.00%5.62%, 6.26%, 0.00%4.03%, 4.49%, 0.00%3.22%, 3.59%, 0.00%2.84%, 3.17%, 0.00%2.63%, 2.93%, 0.00%
40000.000000 to 80000.0000002027.829.97%, 11.13%, 0.00%7.09%, 7.91%, 0.00%5.09%, 5.67%, 0.00%4.07%, 4.54%, 0.00%3.58%, 4.00%, 0.00%3.32%, 3.70%, 0.00%
50000.000000 to 100000.0000002229.5210.19%, 11.37%, 0.00%7.24%, 8.08%, 0.00%5.20%, 5.80%, 0.00%4.15%, 4.63%, 0.00%3.66%, 4.09%, 0.00%3.39%, 3.78%, 0.00%

Those below the median (and couples significantly above) get a windfall vs. today’s Social Security. The professional class still needs to save, but the numbers are reasonable. How the wealth transfer works out depends on how we fund the free money for old people. The key point is if the professional class has to take charge of its retirement in order to have more than the safety net, then we broaden the base of capitalists. For those that fail, they need but relearn how they lived back when they were college students.

Finally, let’s end with looking at a good year’s return plus this more generous benefit. Take note of the Total Savings column. There is no reason that all the savings have to go to annuity. Some might want to blow some of the money on a final fling while young enough to have serious fun. Other might want to bequeath money to their descendents. There might just be enough money to do a bit of both.

Required savings rate to at least match Social Security @66 for 45 year career if the government gives $1300/month to all seniors. For the first years, savings are placed a portfolio which matches S and P 500 index but for the last 5 years (ending in 2000), savings go to cash while cashing the fund savings over the same period. Finally the funds are used to buy an inflation adjusted annuity priced for a 66 year old, and we assume a tax rate of 0% on either the annuity or the withdrawal from IRA to buy the annuity. Results are given as percentages for a single male, a single female, and a one-income couple.
Career Adjusted Annual IncomeToday's Social Security20 Years of Saving to Match25 Years of Saving to Match30 Years of Saving to Match35 Years of Saving to Match40 Years of Saving to Match45 Years of Saving to Match
10000.00708.050.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.00974.710.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
30000.001241.380.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
40000.001508.052.70%, 3.01%, 0.00%1.90%, 2.12%, 0.00%1.55%, 1.73%, 0.00%1.36%, 1.52%, 0.00%1.21%, 1.35%, 0.00%1.07%, 1.19%, 0.00%
50000.001774.714.92%, 5.49%, 0.00%3.48%, 3.88%, 0.00%2.83%, 3.16%, 0.00%2.48%, 2.77%, 0.00%2.21%, 2.46%, 0.00%1.94%, 2.17%, 0.00%
60000.001971.005.80%, 6.47%, 0.00%4.09%, 4.57%, 0.00%3.34%, 3.72%, 0.00%2.92%, 3.26%, 0.00%2.60%, 2.90%, 0.00%2.29%, 2.56%, 0.00%
70000.002096.005.90%, 6.58%, 0.00%4.16%, 4.64%, 0.00%3.39%, 3.78%, 0.00%2.97%, 3.31%, 0.00%2.65%, 2.95%, 0.00%2.33%, 2.60%, 0.00%
80000.002221.005.97%, 6.66%, 0.00%4.22%, 4.70%, 0.00%3.43%, 3.83%, 0.00%3.01%, 3.35%, 0.00%2.68%, 2.99%, 0.00%2.36%, 2.63%, 0.00%
90000.002346.006.03%, 6.72%, 0.00%4.26%, 4.75%, 0.00%3.47%, 3.87%, 0.00%3.04%, 3.39%, 0.00%2.70%, 3.02%, 0.00%2.38%, 2.66%, 0.00%
100000.002471.006.07%, 6.77%, 0.00%4.29%, 4.78%, 0.00%3.49%, 3.90%, 0.00%3.06%, 3.41%, 0.00%2.72%, 3.04%, 0.00%2.40%, 2.68%, 0.00%
10000.000000 to 20000.000000871.680.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%0.00%, 0.00%, 0.00%
20000.000000 to 40000.0000001301.990.03%, 0.03%, 0.00%0.02%, 0.02%, 0.00%0.02%, 0.02%, 0.00%0.02%, 0.02%, 0.00%0.02%, 0.02%, 0.00%0.01%, 0.02%, 0.00%
30000.000000 to 60000.0000001732.294.33%, 4.83%, 0.00%3.18%, 3.54%, 0.00%2.67%, 2.98%, 0.00%2.40%, 2.68%, 0.00%2.20%, 2.45%, 0.00%2.01%, 2.24%, 0.00%
40000.000000 to 80000.0000002027.825.46%, 6.09%, 0.00%4.01%, 4.47%, 0.00%3.37%, 3.76%, 0.00%3.03%, 3.38%, 0.00%2.78%, 3.10%, 0.00%2.54%, 2.83%, 0.00%
50000.000000 to 100000.0000002229.525.58%, 6.23%, 0.00%4.10%, 4.57%, 0.00%3.44%, 3.84%, 0.00%3.09%, 3.45%, 0.00%2.84%, 3.17%, 0.00%2.60%, 2.90%, 0.00%