When it was enacted, the nation’s elderly were in dire straits. The Depression devastated their incomes and savings; over fifty percent were poor, more than the rest of the population. Even if they were willing to take it (and many were not), only a small percentage received government aid.

Social Security changed all that. It enabled the elderly to get help through a program that resembled a pension, not public assistance. What they paid during their working years, many believed, came back with interest after they retired. Largely because of this help, the elderly’s poverty-rate is now below ten percent, much less than that of the rest of the population.

Yet, it was always a fiction that the elderly received only what they had paid for. Social Security was designed so that taxes collected from the current generation of workers financed the benefits going to retirees and gave them more than what they had contributed. As long as the ratio of workers to retirees was high, this fiction did well. But the ratio has been steadily declining, meaning either higher taxes or other sources of revenue will be needed in the future to provide what retirees think they have earned.

A better course would be to get Americans to save more during their working years, to create, in other words, a real pension plan. There are many ways of doing so. But none will succeed until the octogenarian Social Security gives up the illusion of its youth.

Sources:

Poverty-rates during the Depression
“Social security and elderly poverty,” National Bureau of Economic Research
Current poverty-rates
Worker-retiree ratios

Before serving the steak, he spent an hour and a half recounting his personal story of business failure and dismissing other financial options as too risky. “Stock brokers hate me,” he claimed. He also said he doesn’t take fees for his advice or services. “Hmm, something for nothing!” I thought.

Knowing that risk and payment for real value are unavoidable in life, I was curious.

His offer was some kind of life time annuity. You give him a lot of money, and he promises to send you checks the rest of your life. Something like Madoff. The check amount would vary with your age, of course. The waiters told me that the steaks were scheduled to come before he let anyone ask crucial questions, so I left hungry.

What are the crucial questions? First, what is his monthly payoff rate, and how do they compare with annuities offered by TIAA-CREF and well-known insurance companies?

That would probably be revealed in a “free” office visit, when people might not have time to inquire about the competition. Secondly, how does this individual and his new company guarantee those payments until the end of your life, say 30 years from now? There is no insurance against another bankruptcy in his business life.

I do think lifetime annuities might well be part of everyone’s retirement planning. That’s what Social Security is. I urge all my friends to get competent and disinterested advice and not buy snake oil for every problem in our lives.