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If you’re not into economics or following our pension crisis, this is a primer on one key matter.

An interesting, short analysis published this week by The Economic Policy Institute discusses the difference between a guaranteed benefit and one that’s merely hoped for. The difference is enormous, and understanding that is key to understanding our pension problems.

The main finding of the study, if true, may surprise: Social Security is a pretty good investment. The key conclusion is that a young worker today with average career earnings will receive Social Security retirement benefits equivalent to total employer and employee retirement contributions plus a 5.7 percent annual rate of return. It depends, however, on how old you are and how much you are making.

The reason that indeed would be a good investment is because Social Security benefits are very low risk compared to what you can expect in the stock market or a 401(k), where you get only hoped for returns. I know, I know, Social Security benefits may get adjusted and the system has problems, but short of an annuity secured by treasury bills, it’s pretty much the least risky form of retirement benefit. It’s part investment and part “insurance plan,” as the authors put it.

How does this relate to public pensions? Pension contributions are calculated as if the benefit obligations are only hoped for, which means low contributions to purchase relatively small, high earning assets. Pension benefits, however, are guaranteed, which should require huge contributions to buy lots of low risk, low return treasury bonds and the like.

That makes all the difference in the world, and it’s why you hear so often about the rate of return pensions assume on the contributions they take in. Most pension report their unfunded liabilities assuming their assets will earn 6.5 to 7.5%, which is a hoped for return, and that means official national total unfunded liabilities are usually reported as $1 to $2 trillion.

But if you really wanted to guaranty pensions’ ability to meet their promises you’d need to have them invested in low return bonds — and have far more investments on hand. That’s what takes other measurements of national total unfunded liabilities to $6 trillion or more.

Getting back to Social Security, it’s a different system. Though it has severe problems, the federal government has far more capacity to deal with shortfalls than do states and municipalities, which is what makes that 5.7% return on Social Security attractive.

States and municipalities, however, are trying to have their cake and eat it too. They, and workers, fund public pensions as if the benefits are just hoped for, when in fact they are guarantied. It’s a fundamental design flaw.

Who is really bearing the cost of that guaranty?

Taxpayers, unless they flee.

By the way, I am not vouching for the accuracy of that 5.7% return number on Social Security. However, I did bounce it off one actuary who thought it looked “plausible.”

-Mark Glennon is founder and Executive Editor of Wirepoints.

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I have $6 Trillion to deposit into Social Security

Here’s how:



I enjoy the articles at Wirepoint immensely, but this article, while the central point is well taken misses the boat by a wide margin. SS is not comparable to a public sector defined benefit pension. For one you have zero guarantee with SS. They can and do change the rules on the fly. There is no tax payer funded union that endlessly lobbies, 24x7x365 for SS recipients like the public school teachers have. And most importantly there is no way to spike SS earning. The system is designed to rob high earners and take the just fruits of their honest… Read more »

Rex the Wonder Dog!

Social Security should be just like CalTURDS, pension based on highest (not last) year of earned income employment. Social Security should have mandatory COLA’S of 2-3% irrespective of the actual rate of inflation. Social Security participants should be able to claim that Social Security is “deferred income” and guaranteed under the Contacts Clause. Social Security should allow me to “retire” at age 50, and then take another job somewhere else. Social Security is MINE, I EARNED it, I am ENTITLED to it. ….Hehehe…OK, that was just Rex being sarcastic, playing the fallacious Public Employee role so everyone who lives in… Read more »


The Federal Government has the ability to print money and the states and local municipalities can only tax and we (Illinois) are taxed out. Social Security and Medicare costs are spread out thru out the entire country which reduces the per person cost. Illinois has 12.8 mil people and decreasing daily and is liable for approx $250 Billion ( one quarter of a trillion) to maybe 8-9% of total population so the per person costs are much higher. When pensioners file taxes they still have to pay federal tax? Does that not impair or diminish the pensions? Also management fees… Read more »

Tough Love

I too believe that the 5.7% may be “plausible”, but the reason why the dependence on …. “average career earnings”. SS payments are highly “progressive”, with the benefits payment decreasing as income rises (up to the SS maximum wage base). And a key point to keep in mind is that Public Sector workers have far higher “average incomes” than the average worker, and that is especially true for Safety workers. The SS Primary Insurance Amount formula is: For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2018, or who dies in 2018 before… Read more »