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From: orb@whuxl.UUCP (SEVENER)
Newsgroups: net.politics
Subject: Re: Calculation of Social Security benefits vs payments
Message-ID: <812@whuxl.UUCP>
Date: Wed, 13-Nov-85 15:57:15 EST
Article-I.D.: whuxl.812
Posted: Wed Nov 13 15:57:15 1985
Date-Received: Fri, 15-Nov-85 21:09:55 EST
References: <549@drutx.UUCP>
Organization: AT&T Bell Laboratories, Whippany
Lines: 41

Opponents of the Social Security system like David Olson
apparently have trouble understanding the power of compound
interest.  Although the Social Security Trust Fund is not
actually run by putting current payments into an interest-bearing
fund, this is a reasonable way to properly consider the
relation between payments and benefits: what would people's
payments into Social Security be worth when they retire
if they had been able to collect interest for all that time?
When considered in this light, Dave Olson's comment:
> From Dave Olson 
> As it stands now, on the average for every dollar one collects of the
> money he paid into SS, he also collects about 3 from somebody else.  In
> reality, SS is another pyramid scheme, no matter who collects it, or
> how badly it is needed.
>  
The relation of 3 to 1 between payments during one's working life
and benefits upon retirement is hardly unreasonable when one
calculates the effects of compound interest.
 
To demonstrate this, let us suppose that we take $100, and
provide an annual interest rate of 5% on that money.  Here is
what that payment would be worth after various time intervals:
       
           20 years    $265.18
           30 years    $431.88
           40 years    $703.42
 
In other words, after 40 years this initial $100 has increased
7 times in value.  After about 25 years it has tripled in value.
If the average working lifespan is 25 years or over a ratio
of payments to benefits of 3 to 1 is therefore perfectly reasonable.
I am not sure of either the average working lifespan before
retirement nor the minimum number of quarters which must be
worked before one can collect Social Security.  I think I
remember my mother (who works for Social Security) saying that
you have to work at least 11 years to collect any Social Security.
This is less than the 25 years at which a 3 to 1 benefits/payments
ratio would take place.  On the other hand, it seems quite likely
to me that the typical working lifespan is much more than 25 years
therefore the amount actually paid in is greater.
             tim sevener  whuxn!orb