Wednesday, April 13, 2005


Just a pension plan?

In the debate as to what kind of a rate of return young people get from Social Security, it is often easy to forget that your Social Security taxes provide for more than just a check when you retire. So,

Pop quiz, hot shot*:

What percentage of Social Security benefits are retirement benefits?

Answer: About 66% (~327M out of 423M). The rest is more or less evenly divided between Survivor benefits and Disability benefits. That being said, retirement benefits are probably an increasing percentage of the pot, since disability rates and mortality are both decreasing. Still, 1/3 of your SS taxes go to these benefits which are truly insurance. This has two implications:

First, to the policyholder, the return on insurance is negative (policyholder pays for a transfer of risk, but diminished risk is not counted as part of the return). Second, consideration of Private Retirmenet Accounts needs to contemplate these other benefits.

One final observation - Disability benefits actually have their own trust fund (the DI fund which is separate from the OASI fund, which is for both life insurance and pension). This might have made me happy, as it would imply that SS does look out for them separately. Only thing is, the DI fund is already paying out more than it takes in and is projected to go bust before the OASI trust fund.

Memo to George Bush -- if you wanted to, you could fix the DI trust fund without having to haggle about PRAs.

As always, thanks for reading.

* - From the movie Speed, lest anyone accuse me of plagiarism

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