Most of people think of Social Security as a government managed savings program similar to a 401k plan: you pay into the system when you are working; you draw from the system when you retire.
More informed people will point out it isn’t so. It’s a pay-as-you-go inter-generation transfer program. The money you (and your employer) pay today supports today’s seniors. When you retire, the younger generation supports you. It’s a social contract. Because mom and dad supported grandma and grandpa, you will support mom and dad.
That sounds good to me. However, because it’s an inter-generation support system, there ought to be some fairness between generations. What should one generation ask the next generation to shoulder and what shouldn’t? I see a breakdown to this question in the area of Social Security spouse and family benefits.
Investment advisor and author Larry Swedroe posted a very interesting article on his blog yesterday: What You Can Learn from Donald Trump’s Wives About Social Security. It uses Donald Trump as an example to show who are eligible for Social Security benefits based on his work history. Here’s a summary:
|1X at Full Retirement Age, reduced if taken early
|Former spouse #1
|If not remarried, 0.5X at Full Retirement Age, reduced if taken early
|Former spouse #2
|None, because marriage didn’t last 10 years
|0.5X until age 18 or 19
|Current spouse caring for minor child
|0.5X until child reaches 16; 0.5X at Full Retirement Age. Subject to family maximum.
|0.5X until age 18 or 19. Subject to family maximum.
For the time being, I’m setting aside the question whether Donald Trump needs Social Security. Those who support the idea of "means testing" argue that since Donald Trump has enough money to support his former spouses and his family, the benefits should be saved for those who need the money more. I see a point.
I would also say since Donald Trump paid Social Security tax like everybody else to support the seniors in his time, there’s no reason to punish him just because he made money elsewhere. His success is orthogonal to the inter-generation transfer system: you support the previous generation; the next generation supports you.
I’d like to focus on the spouse and family benefits. Suppose there’s another guy Tom who paid the maximum Social Security tax every year, just like Donald Trump did, but Tom never married. Only Tom himself would receive Social Security. Tom’s benefits will be the same as Donald’s. Why? Tom’s family life decision saved the next generation a bundle but he’s not getting any credit.
Now suppose Tom decides to marry a woman right before he takes Social Security. Tom’s new wife all of a sudden will get on the payroll from the next generation. That makes Tom a hot guy. Whoever convinces Tom to say yes will have an income stream coming. It’s a head-scratcher to the next generation: how come their bill goes up by 50% just because Tom decides to marry?
Donald Trump married three times. The next generation pays benefits to his two spouses (three if the other marriage also lasted ten years). If Tom marries only once, the society pays benefits to only one spouse. Why does someone’s love life doubles or triples the bill to the next generation?
Donald Trump has minor children when he takes Social Security. The minor children and his current wife will also receive benefits. If Tom’s children are grown when he retires, he gets none of that. It costs money to raise kids, but if you have kids late in your life, you get help from the next generation; if you have kids early, you don’t. Why?
I can’t make any sense out of these. If we are talking about the possibility of cutting Social Security benefits for workers, we ought to take a serious look at these spouse and family benefits. Is it fair for the next generation to pay more just because someone decides to marry, divorce, or have children late in their life?
Make the benefits payable solely to workers who supported the previous generation. If there are spouse and kids to care for, the money ought to come from the worker’s benefits. That’s fairness. If we just do that, maybe we won’t have to raise the retirement age or change the benefits indexing formula.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.