Following up on this post (see especially the excellent comments), let’s take a look at why the Social Security program exists. As I said in the post cited, in part it’s aspirational (in part, of course, political): we want a society in which people who are too old to work can maintain a reasonable lifestyle and that produces an acceptable level of economic growth. Let’s think about the implications of the Social Security program ceasing to exist and people living solely on what they’re able to save over the course of a lifetime.
Using the retirement calculator here, I’ve been able to produce a baseline scenario, the results of which are in the graph above. My assumptions are a base income of $50,000 (median income for a family of four), the ability to realize 4% on savings for the whole term, paying principal down to zero over the term, working fulltime without hiatus from age 20 to age 67, realizing an income of $30,000 per year after retirement, inflation at 3% (its average for the last 300 years here), and wages incrfeasing slightly slower than inflation. I recognize that there are any number of ways in which these assumptions are unrealistically rosy, for example, a good part of the interest you’d realize on savings would be taxed away or eaten up in fees but you’ve got to start somewhere.
I also assume that Medicare continues to exist, at least for people age 67 or older.
As you can see in order to achieve the target retirement income you’d need to save 25% of your gross income. That alone should be enough to convince you that people with average or below average incomes just aren’t able to save enough for their retirements but we’ll continue with the experiment.
Note that the result isn’t robust: it is extremely dependent on the rate of return that can be realized. At a 3% rate of return:
the rate at which you’d need to save rises to 35% and at 2% return (much, much more realistic in my view):
the rate at which you’d need to save rises to a whopping 50%.
Is it practical for people of average (or below average) income to save 25% of their income? Saving 25% leaves 75% or $37,500. Let’s make some more assumptions and construct a budget:
Here in Chicago I think that’s pretty realistic. A decent two bedroom apartment in an okay neighborhood will run at least $1,200 per month. Two CTA passes every month will cost about $2,000 a year (you won’t be able to buy a car, pay its insurance, put gas in it, and maintain it for $2,000 a year). I suppose you could scrimp a bit on food and utilities. Maybe someone more knowledgeable on shopping for healthcare insurance than I could comment on what it costs to insure a family of four. Note that if you assume that the job includes healthcare insurance you’ve got to assume it for everybody which is not a realistic assumption.
But it’s extremely frugal. Clearly, a family earning the median income can’t save enough for retirement and that’s even more obvious at lower levels of return.
There’s another monkey wrench. Look at that everything else figure. That’s most of the economy. We can’t maintain a growing economy when people are saving at that ferocious rate. Another monkey wrench: at that low level of personal consumption state and local governments couldn’t fund themselves with sales taxes. Income taxes and property taxes would need to rise and that will lower the amount of money available for saving even farther. I submit that for people below the top quintile of income earners, 80% of the people, there is no realistic way for them to save for their retirements and doing so would be too injurious to the economy to contemplate doing.
We need the Social Security program. If it didn’t exist, we would need to invent it. If we dismantle it, it will only to replace it with another program that does much the same thing.
Let’s stop telling fables about eliminating Social Security and, instead, produce realistic strategies for salvaging it. We need it.