Saturday, December 01, 2012

Basic Math, the Fiscal Cliff and Entitlement Reform

Was just listening to Matt Miller, moderator of KCRW's Left, Right and Center podcast (and a guy I normally agree with).  In addressing the fiscal cliff, and the perceived insanity of not reforming the so-called "entitlement programs," he complains:

"It's not widely understood that people get back many many many more dollars in benefits than they actually paid into the system, so the typical -- I'm working on a column on this now -- typical medical beneficiaries maybe paid in $120-$140k into the program during their lifetime get back $350k." if the government shoves your money under a mattress and it does nothing for the 47 years you pay into the system.

The math of this isn't complex.

Let's use $130k for the amount paid into the system, that's right in the middle of his quoted range.  Divide that into the forty seven years that beneficiary pays into that system, that's $2,765 per year the average individual pays into the system.

The Dow Jones average has gone from 880 in 1965 to 13,025 in 2012.  That's an increase of 1,400%, or 14x.  In other words, if you'd invested $1 into the DJIA index itself -- which is not an individual company but a stock which reflects the market as a whole -- today you'd have $14, which puts the rate of increase around 5.65% per year.

Keep in mind that this 1,400% return spans 1966 through 1984 where the DJIA literally didn't move, the Savings and Loan collapse of 1988 and the the Bush presidency where the market opened 2000 at 13,113 and closed out Bush's term at 12,800.  Some years were better, some were worse, but if you simply started with $1 in 1965, you'd have $14 in 2012.

So now we take that $2,765, put it in the bank at 5.65% per year (I won't even compound it monthly, this is simple interest) and repeat for 47 years, here's the year-end balances:

1975: $42,938.25
1985: $112,271.22
1995: $232,396.62
2005: $440,524.30
2012: $671,486.69

So Miller is complaining that people pay $130k into the system, the government pays out $350k then pockets the remaining $321k?

Somehow this is a system that needs REFORM by way of LESS benefits for citizens?

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