Thursday, July 30, 2015

The Never Ending Train Wreck That Is Social Security

As of June 2015 there are 65 million recipients of SS and SSI (supplemental security income) receiving an average of $1221/mo per recipient ($1354 per retired worker).  Over 20% of all Americans (1 in 5) are active beneficiaries and nearly everyone else is supposed to be a future let's check in on this ongoing train wreck.

Cost of Living Adjustments (COLA's) have collapsed by over 50% from the 76-'00 period (5% average) vs. the '00-'15 period (2.4% average).  As the chart below shows, COLA's have mysteriously moved lower with Treasury yields and the implementation of Zero Interest Rate Policy (ZIRP).

And below you can see the impact of the lowered COLA's on the average beneficiary over a 15yr period (the average period SS retirees collect their benefits) is not a rounding error.

Yup, the chart below shows the diminishing COLA impact gets much more severe as retirees get toward their end of year 8 the difference of a 5% vs. a 2.4% COLA is about 18% or $4k/yr...but by year 15 it's up to an annual $10k reduction per beneficiary or about a 33% annual reduction.
But wait...there's more. 

It's also worthwhile to note the government is taxing Social Security benefits in retirement (law was implemented in '83 and broadened in '93).  So, if you are a married couple and so rich to have an adjusted gross income in retirement above $44k...then 85% of your SS benefit payments will be taxed as regular income or typically at a 15-25% rate.  Of course this $44k threshold was set in 1993 and is un-indexed for inflation...meaning nearly all future SS recipients benefits will be taxed as regular income.

Nearly all present and future beneficiaries are facing huge reductions in their benefits from this double whammy...and the reduction in spending and economic activity among this group (and future beneficiaries who know they need alternative sources to the gamed SS system) is somehow conveniently forgotten by economists in their future GDP forecasts

FYI - Treasury assumes the average worker contributes about 15% of their benefits directly (and employer another 15%...of course if your self employed, you paid all 30%)...the remaining 70% is anticipated to come from interest earned on trust funds (lol...those are the special intra-governmental bonds that thanks to ZIRP now earn about average of 2%).  Thus the rationale to tax 85% of your benefits as regular income since you didn't contribute it anyway (again, unless you were foolish enough to be self employed).

Assuming an average career of 40yrs (working from 25-64yrs/old), the average worker spends 5 years solely funding social security.  Average lifetime earnings and SS payments are...
  • Ave. high school grads earnings = $1.2 m...& SS payments = $150k (85% of 25+ yr/old Americans have at least a HS degree)
  • Ave. bachelors degree $2.1 m...& $260k (28% have a bachelors)
  • Ave. masters+ = $2.5 m...& $280k (10% have a masters or doctorate or greater)
If you reach 65yrs old...on average you will live to be 80yrs old and on average collect 15yrs of SS benefits starting at todays average of $1354/mo or $16,248...or $280k for the average beneficiaries retirement or roughly 45% higher than lifetime SS withholdings.

If you die prior to 65...spouse of kids likely to get some typically reduced portion of your bene's.

So, the Federal government took 6.2% annually from you in your working years (and forced your employer not to pay you another 6.2% and instead give it to the government on your behalf) and then will take an additional 15--25% of that benefit back in retirement.  Based on COLA's since '00, the government is giving you nothing for your 40yrs of accumulation and then a 2% (1.7% post-tax) annual return on your money during retirement! 

All I can say is where do I sign up?  Oh, that's right, somebody already made that wise choice for me!

Wednesday, July 29, 2015

Headwaters of US Population Growth (Mexico) Going Dry!?!

There is a general consensus that the US population will continue to grow (unlike Germany or Japan or most advanced nations)...and the story goes that immigration (primarily of the Hispanic variety) will offset the US negative birth rates.  Let's think this one through using Mexico as the proxy.

The graph below shows Mexican total population over 5 decades (the rising blue line) but note the flattened grey line...Mexican 0-14yr/old population.  The astute observer will note the 0-14 yr/old Mexican population peaked in '05 and has fallen by over a million since or a decline in excess of 3%.  All this lines up with the 70% decline in Mexican birth rates over the same time.

And the chart below shows the annual change in Mexican population vs. the 0-14 yr/old annual change turning, the headwaters of Mexican and vis-à-vis US population growth are going dry.

A good question now would be "so what"?  US economic growth and it's ability to service debt (among other things) is largely dependent on a growing population.  However, it appears Catholics aren't the baby making machines demographers assumed (appears Catholics are people too?!?) and Mexico's young population is now shrinking.  Plus, America isn't creating an excess of low skill jobs to draw them.  So, fewer Mexicans chasing fewer US jobs all adds up to significantly slower US immigration and population growth than assumed...and significantly slower growth in consumption and general economic activity.  

I take no pleasure in wrecking this fairy tale but truth is what it is!