Progressive Logic & Compound Interest II

There have been many calls from progressives for the government to slash military retiree benefits and an independent commission's call for an integrated active and reserve retirement system would put an end to immediate retired pay for active duty members after 20 years.

Under the proposal, retired pay would begin at age 62 for those with 10 years of service, age 60 for those with 20 years, and age 57 for those with 30 years. "There are people who see military retirement, with its immediate annuity as very generous at a time when pensions are disappearing in the private sector" said a house aide, who asked not to be identified.  (Army Times)

Let us take for an example an E-8 with 25 years of service from 1985-2010
In his last three years of service he earns $4499 (as an E-7), $4786, and $4948 in base pay. His high 3 average (which they use to calculate retirement) is $4744 and of that sum he takes home in retired pay 62.5% or $2965 a month, $35,889 a year. Sure seems like a lot, if he lives to the age of 75 the government will have paid him $1,076,400 over 30 years.

Suppose instead this upstanding young soldier had put $100 a month with 200% matching contributions (that's what my company does) for his first 10 years, $150/mo for his next 10 years, and $200/mo for his last five years. The average annual return from the S&P 500 from 1985-2010 was 12.43%. At the end of ten years, with $3600 a year invested, he has $65,000, increasing the contribution to $5400 at the end of twenty years he has $309065, and saving $7200 for the last five he ends with $601,348.

If he moves his portfolio into a more conservative investment earning 6% and is allowed to withdraw the equivalent of his retirement pay at age 45 ($35880/yr) he will still continue earning money on the principal. Withdrawing $35880 a year, he has over the course of time: 5-yr $590,342, 10-yr $575,612, 20-yr $529,525, and at the end of his life at 75 he leaves $446,974 to his heirs. Now if the government had done the same thing with the money it needed to pay for his retirement benefit, almost half a million dollars would go back in the fund. Some will die at 65 some will die at 90, it is these variations that allow the fund to cover everyone.

Effectively the military retirement system is the equivalent of a 401K without the employee contribution and without the age penalty restrictions. With military, federal, state, and other institutional pensions the same general equivalency can be made, the difference between a public and private pension is the government is the fund manager as opposed to a private company. What's sad is that for many years employees with the option to participate in government or private pension options chose the government because they trusted them more, today we see how far that trust was misplaced.


Bernie Madoff is Jealous
The federal, state, and local governments engaged in pension fund management practices that had they been civilian would have landed them in the cell next to Bernie Madoff, and today the progressives blame the retirees for being greedy. Little blame falls on the idolized political candymen who handed out unfunded or underfunded social programs like kibble. Politicians gambled and lost, now it is time to pay the piper and they are more than happy to throw their constituencies to the wolves.

Ask yourself...who's to blame? The retired Army Major, statehouse Secretary, Fireman, Schoolteacher? Or the politicians who played tricks with funding and money that would land them in jail if they worked for IBM? Our politicians pay off one credit card with another, and the Repo-man is catching up.

Progressive Logic & Compound Interest

Social Security by the Numbers

There has been a lot of talk on the left and right about slashing pensions, medical benefits, and other retirement plans of folks who are already retired, or who have contributed into those plans for many, many years.

"I would like to see any Tea Party member cut their Medicare Card. Or not to cash their SS check. Or quit their government job (whether state or federal) or refuse any benefits associated with a past or present government job."

"Federal, state, and corporate pensions should be substantially reduced if not eliminated entirely."

"A quick fix to all government budgets is to stop paying pensions and benefits."

"All pension should be abolished ! ! ! ! ! ! ! Including federal government." [sic]

You can opt out of the benefits, but not the taxes
These comments are not unique and are reflective of the problem with the progressive mindset. If you are against their programs, you ought to opt out... don't collect that social security check of which you are paying 6.2% (12.4% if you are self-employed) on the first $106,280 of income. Of course in the progressive mind, while you ought to opt out of the benefit, there is no opting out of the taxes. They seem to think that Social Security is some form of government largesse as opposed to a rather shitty return on a government mandated investment.

$252,246.35 in...
Let us perform a simple mathematical exercise on a hypothetical entrepreneur who started working at the age of 21 and who retires at age 66 on December 31,2010. This person, born in 1945 started working in 1966 and earned the maximum FICA taxable income through this period. This person, over his 45 year work history, would have paid $252,246.35 in Old Age Survivors Disability Insurance (OASDI) on his income.

The total is based on social security tables and breaks down all the payments, year by year. OASDI subtotal column used, because since 1994 there is no upper limit on what you are taxable on for Hospital Insurance (HI). In 1993, where the OASDI figure is $7142.40, our subject would have paid the maximum $3915 in HI, in 1994 there would be no maximum and our subject would have paid an HI amount based upon his total income. http://www.ssa.gov/history/pdf/t2a4.pdf

$269,724 out!
Now, this person who is 66 years old, if a white male, can expect to live to 75.6 years of age, that's another 114 months. The maximum benefit payout is $2366 a month for a total annual income of $28392, so in the remainder of his life (ignoring cost of living increases) the social security payout will be $269,724 presuming he gets the full amount without any income offsets. AH HA you progressives exclaim... evil white conservative guy is stealing $17,478.


What if you put the money in a bank account instead?
But compound interest makes it a more interesting story. If our subject wasn't very investment savvy and had simply stuck all that FICA money in a savings account at 1% interest, he would have ended up with $285,833.49, more than enough to cover his predicted withdrawals of $2366/mo and his heirs would have received $30,062 (remember, the principal keeps earning interest). Had he invested conservatively and received an average return of 4% when he retired his portfolio would have been worth $440,270 and his heirs would have received $299,960.34... as it stands now, the SSA pockets all that money (or they would if the government didn't play funny money games).

What if you invest it?
Suppose instead that our subject had invested all that money in stocks, from 1966 until the day he retired. The Standard & Poor's annual average rate of return from 1966-2010 was 10.95%, had our subject invested wisely his portfolio upon his retirement would have been worth $1,621,653.73 and if he continued to earn 10.95% interest and withdrew only the maximum allowable under social security ($2366), when he died the portfolio would have been worth $4,074,116.83. So you can see, your government largesse has screwed our poor fellow and his heirs out of $3,804,392.83

So instead of not cashing my social security check, how 'bout I fold it into sharp corners and shove it up your...

That's the problem with progressives, they take your money and expect you to be obsequiously grateful as they dole out the pittance they think you deserve.

Compound Interest calculated using:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm