Flashback – Social Security Myths

[Here is a brief excerpt from a long rant on Facebook about how unfair the Social Security system is and looking for support. 

“This is NOT a benefit. It is OUR money, paid out of our earned income! Not only did we all contribute to Social Security but our employers did too! It totaled 15% of our income before taxes. (This should be enough for you to forward this message, If not read on.)”

Despite my posting only 6 months ago the following full explanation of why this idea is complete hogwash, the misunderstanding continues. If you pass anything along, this should be it, because it is the truth.]

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Social Security Myths

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Taking Retirement Seriously

When I started my first job after leaving the army, part of my orientation was a description of the company’s pension plan. That didn’t seem important to me at the time. It was not realistic to be looking 40 years into the future after just two days on the job. Unfortunately, some people seem to have a similar reaction as they reach their 40s and 50s. They will reach retirement age and be forced to keep working, painting themselves as unfortunate victims of the economy (or something else). In other cases, they barely scrape by, and look for help from the government or AARP lobbying while complaining about being on a fixed income.

“According to the research, the average retirement savings for people in their 50s was $124,831 in 2018. It was $163,577 for the people ages 56 to 61.” That’s not nearly enough. In a different article, CNBC states, “Although $1 million is the oft-cited amount needed to retire comfortably, data shows it might not be enough” to maintain a comfortable lifestyle based on current life expectancy. The recommendation is to have saved at least 10 times your annual pay.

But one million dollars seems like an enormous sum in this environment where data from earlier this year shows that “just 40 percent of Americans could pay an unexpected $1,000 expense.” Can’t save a thousand; can’t even imagine saving a million! Most consider having a million dollars set aside as being rich.

The secrets (if they can be called that) lie in discipline and perspective and were summed up in three articles I read recently.

The first was about how to become rich and gave two pieces of advice that could apply to any saver. “Take a percentage of your income, say 5%, and have it automatically invested.” Then adjust your spending to correspond to what’s left. This can be adjusted upward as time passes. (Retirement websites advise setting aside 10% as a minimum.)

The second piece of advice is to be thoughtful about life’s major purchases. “A big reason people struggle to save 10% or so of their income is they buy houses and cars they can't afford.” Houses on average appreciate only at the rate of inflation. Some get lucky on the timing but in general, a house is shelter, not an investment. And cars depreciate over time. Look back 50 years. The fact is that average house size grew while family size was shrinking.

Those rules are a good start, but the problem remains of adjusting lifestyle after setting aside savings. Market Watch had a recent opinion piece with some suggestions. “These 16 money wasters are why so many Americans can’t save for retirement.” Here is part of the list as presented with the comments abbreviated and modified:

• Vacations. Never go into debt to pay for one, even adding to credit card debt. Relaxation does not require traveling.
• College. Consider affordability over prestige.
• Restaurants. Eating out is expensive, especially the daily luxury coffee.
• Opportunities lost. The standard examples are the employer match on a 401(k) plan or other tax-free opportunities such as Roth IRA or a flexible spending account.
• Transportation. As mentioned above, don’t buy too much car or an unnecessary truck.
• Credit cards. If you use them, pay them off monthly.
• Lottery. Don't throw money away on a long shot.
• Clothing.“The average adult spends $161 a month on clothing. We are obsessed with keeping up with the latest fashions” and fads.
• Shoes. See clothing.
• Extra Stuff. Many of my neighbors can’t park in their garage for all the stuff. Look at the explosion in the self-storage business.
• Holidays. Spending too much on gifts, decorations – Halloween costume for the dog?
• Toys. For children and adults.
• Haircuts. In most cases there are less expensive options (barber vs. salon).
• Cell Phones. Besides demanding the latest model, “Americans also spend approximately $88 a year on apps and unlimited data plans typically cost around $80 a month.”

That is not an exhaustive list, but it all adds up. It takes perspective to separate wants from needs, and discipline to stick with those decisions. It may not sound like any fun, but what fun is it to try to retire when you're broke?

Save Your Vitamin Money

At least once a month we see reference to one or another survey or report about people being unable to afford retirement. They haven’t saved enough money, but may not be able to keep working either. But now just when it’s needed, along comes a reliable tip on how to save a little more: Don’t waste your money on vitamins. 

This is not the first time I have written about the waste and potential dangers of dietary supplements. The last entry on the subject of supplements in general was about two years ago where I quoted from the New York Times saying that annual spending in America averages about $100 per person. I focused on vitamin and mineral supplements as recently as last September. I was hoping after many attempts to have wrapped it up, but it’s good advice, so I will give it another shot based on some fresh headlines.

About two weeks ago researchers from West Virginia University School of Medicine published a study in the journal Annals of Internal Medicine showing “that although reduced salt intake and certain supplements may lower the risk of cardiovascular diseases, most nutritional supplements do not improve the risk for heart disease or death.”

An article reviewing that study quotes the lead researcher: “The reason we conducted this study was that millions of people in the United States and across the world consume supplements or follow certain dietary patterns, but there was no good-quality evidence to suggest that these interventions have any effect on cardiovascular protection." 

The study itself was not a clinical trial but a review of 277 other studies with a total of nearly one million subjects. It looked at the effectiveness of many popular nutritional supplements and 8 diets. “Findings show that of the 16 dietary supplements, only two showed beneficial effects on heart health, namely omega-3 long-chain fatty acids and folic acid….[whereas] selenium, vitamin B6, vitamin E, vitamin C, iron, and vitamin A, among others, show no significant effect on heart health.” 

Other important findings were that some supplements by themselves, not just the tainted ones that appear in the news from time to time, are potentially harmful. Another surprising finding was that “most diets, like modified fat intake, the Mediterranean diet, and reduced saturated fat intake, had no effect on the heart at all.”

Some other sources reporting on the same study had more watered down headlines. This one says, “For Heart Health, Some Popular Supplements Aren't as Helpful as We Thought.” But the sub-headline is more direct: “Consumers should ‘stop wasting their money on these products.’ ”

Another one is even more careful in its wording: “Nutritional supplements and diets not always protective, research suggests.” But they did provide a link to another study from 14 months ago that also came to the conclusion that “most commonly consumed vitamin and mineral supplements provide no consistent health benefit.”

The final conclusion as always is “only eating a healthy balanced diet is the key to overall health.” That shouldn’t come as a surprise to anyone who has been paying any attention to and looking into health news over the years. Once again, it’s looking for the easy, magical answers that cause us to waste time and money on pills and fad diets. Avoiding that mindset is, though, an easy way to come up with some extra money for that problematic retirement savings plan. 

Where the Money Goes

An email arrived last week in my inbox that I had trouble believing. If it had not come from a company I was already doing business with, I’d have sent it straight into the spam bin.

The email was from one of my credit card companies suggesting that I “make tax season a little brighter. Simply use your [credit card] to pay for your federal or state payments online and you’ll be rewarded.¹^,² Not only is the process fast and secure, you’ll earn valuable points you can redeem for travel, gifts and more." (Footnotes say that only some states accept credit card payment and that additional fees may apply.)

There was a time when financial advisors would urge, even beg, people to use their tax refunds to pay down their high interest credit card debt. Now we get the opposite; pay the taxes on time with the credit card, so instead of paying interest and penalties to the government for late payments, we open up the possibility of paying interest and penalties to the card company. This seemed pretty crazy until I noticed some of the other financial decisions happening across the country.

This recent USA Today piece tells a scary story. Many Americans have gotten into the habit of ignoring the total price of things they buy. If they believe they can fit the monthly payments into their budgets, they go ahead with no consideration of overall cost, including interest on the loan. 

The particular example here is car buying. In one expert’s opinion, "Easy credit and longer repayment terms have coaxed many consumers into buying more car than they can really afford," causing car debt to reach an all time high of $1.2 trillion. 

One banker remarked that his company limits auto loans to 72 months, but some competitors offer 84-month loans. That seems a little strange as the average length of car ownership hovers around 80 months. It’s more like renting a car than really owning one (and owing more than it’s worth for almost the entire time). But this mindset is to look at the monthly payment, to ignore the regularly increasing interest rates and to buy as much car as fits the budget. So people can be easily drawn to the midsize SUV rather than a midsize car with a price difference of almost $13,000, just increase the length of the loan.  Meanwhile GM is forced to close a small car assembly plant in Ohio due to fewer buyers. (Then the price of gasoline goes up, and everyone  starts complaining! Whoops, behavior has consequences.)

What most don’t realize at the time of purchase is that the car is collateral for the loan. One downturn in the economy or one temporary job loss for any other reason could mean losing the car no matter how faithfully payments were made up to that point. An example from the article tells of a 26-year-old, who lost her job at as a legal researcher and was unemployed for two months. She went into default and her 2010 Chevrolet Equinox was repossessed. That is not an isolated case. “More than 7 million Americans are now at least three months delinquent on their auto loan payments, the benchmark for many lenders to trigger a repossession.”

The behavior continues. Credit cards offer deals to help you earn “valuable” points, while banks and finance companies offer longer and longer loan durations to keep payments down (and their profits up). Everyone thinks in terms of installments rather than total cost. When the shocking news comes that you can’t buy a retirement on those same terms, it’s too late. The consequences of poor economic understanding coupled with poor critical thinking will be devastating. Everyone will be looking to the government for a bailout, a government with the same attitude of buying now and borrowing to make up the difference with no concern about the future.

Another Look at Retirement

Last time I wrote about the inability of most Americans to cover a $1,000 emergency from their savings. What will they do when they decide to stop working?

This article from CBS puts it bluntly. “The vast majority of older working Americans don't have sufficient savings to retire full-time at age 65 with their pre-retirement standard of living.” Most haven't even been saving at the rate they should have been from the start and sixty percent of those between 55 and 64 are not participating in company retirement plans like a 401(k). The facts that people are living longer and social security is on shaky financial ground only compound the problem. The obvious solution is to dramatically reduce their standard of living, continue working or both.

Similarly this promotional piece from Merrill Lynch reports “most American Baby Boomers under-save [for retirement] by about 20%, but almost two-thirds believe they can retire with a comfortable lifestyle.” They over-estimate how much their contributions will increase in the future and under-estimate how long they will be living in retirement. Most don’t even consider the additional heath care costs that may not be covered by Medicare.

This warning is backed up by an opinion piece on the Bloomberg site. “Too Many Americans Will Never Be Able to Retire." The solution suggested by this author is to increase the number of babies and immigrants, hoping to develop enough workers to support the aging population.

The article argues that this situation where many Americans can no longer look forward to a comfortable retirement and must continue to work is blamed in part on the financial crisis, but the above survey report belies that idea.

On the plus side, some see as a positive trend that more and more older people are still working, “because it adds to the economy.” But others see it as a sign that many will never be able to retire at all.

So his main argument comes down to the problem that the fertility rate in the US “has fallen to 1.8 in 2016, implying long-term population shrinkage.” This will lead to “fewer young workers to support an increasing population of retirees” through Social Security and Medicare contributions. That's why we need cheaper housing, generous child-tax credits and universal pre-K education, in order to bring down the costs of having children. 

Unfortunately, there are a couple of serious flaws in this approach. First, a lower birth rate is characteristic of advanced economies. As the BBC reports: “There has been a remarkable global decline in the number of children women are having.” The global fertility rate has dropped from 4.7 in 1950 to 2.4 children per woman by 2017. Three factors contribute to this drop: fewer deaths in childhood, greater access to contraception, more women in school and working. It’s not just the US, and it’s unlikely that encouraging more children or more immigration will have any effect on a worldwide trend.

Second, the idea of having more children to help support the older generation seems strange. Why should we reward the negligent behavior of parents by placing extra burdens on their children – more Social Security contributions and more taxes to support those "needed" government programs? Within families, grandparents only want the best for their grandchildren, but inter-generationally, they seem to have no problem dumping the cost of their extravagance and their inability to plan onto everyone else's grandchildren.

Is Social Security Really "My Money"?

It’s a common argument among retirees, encouraged by organizations like AARP, that Social Security is my money and the government cannot be tinkering with it. It’s strange how this argument never came up years ago when the government decided to add an annual cost of living increase. Tinkering in the positive direction is fine. 

But advocates take advantage of retirees lack of perspective, critical thinking and economic understanding by pushing all kinds of myths and untruths to get them riled up enough to vote in a particular way.

Lack of perspective is evident when the announcement of the year’s cost of living adjustment is routinely met with complaints  that it is not really enough to keep up with inflation. They don’t understand that it was never in the original plan and any increase should be greeted with gratitude.

Lacking critical thinking, most don’t even make the effort to do a little simple research to find out how Social Security works. It’s clear that it’s not your money simply by the fact that when someone dies before retirement age, the SSA does not treat it like an inheritance to be divided among next of kin. No, the money was paid into Social Security and will be used for Social Security purposes.

There is also the lack of understanding about the government having “robbed” the Social Security trust fund and spent all the money on other projects. Consider this. Social Security since its beginning and up until this year has been collecting more money than it was paying out. The surplus had to be invested somewhere.

They can’t put it into a commercial bank or credit union. That would be an unfair windfall for that bank relative to its competition and would likely involve political favoritism. Investing in the stock market could not be justified, seen as “gambling with my retirement,” and equally problematic from the favoritism standpoint. Likewise corporate bonds are out of consideration.

What’s left? Government bonds. And what are government bonds used for? They are used to borrow money for the government to spend! The government has not been robbing from the “trust fund.” They have been borrowing the money with an obligation to pay it back, just as they must eventually pay back other bonds they sell to raise money when they spend more than they have. (They face that obligation now, as contributions are no longer sufficient to cover promised benefits.)

Finally, Social Security does not favor the rich. It is skewed in the opposite direction. Taking a look at the generic benefit calculator on the SSA website shows the difference. In one case, a person born in 1958, earning $50,000 per year, and planning to retire at 66 years old will receive $1460 per month (estimated). Leaving all assumptions the same and only changing the earnings to $100,000 gives an estimated monthly payment of $2276. Double the earnings and the benefit increases by only 56%.

 This is not my first tirade about Social Security (see here, here and here) and will probably not be my last. I just get very frustrated when people continue to fall for all those lies without doing a lick of work to investigate.

Why Do We Work?

On Labor Day it’s probably appropriate to ask yourself the question: Why are you working? Popular culture will tell us “Everybody’s working for the weekend,” but there must be more to it than that.

In reality we work to pay the bills, to put a roof over our heads, to eat and be comfortable most of the time, to pay for education and to afford transportation. (In the last two instances, many pay them off after the fact.) One important, less obvious reason – we work so that some day we can stop working. It’s called retirement. It’s not something that just happens by magic, and it’s getting to be more and more challenging. 

Although for ordinary people it is a fairly recent development, less than 90 years old, with the help of organizations like AARP, most of us take it for granted. But it’s not a right; it’s something that must be earned and planned for.

Social Security has been in place since 1935. We see the deduction from every paycheck. It’s easy to assume that retirement is taken care of. This Motley Fool article warns that is clearly not the case. Some struggle to get by on Social Security alone, however one emergency can put a senior behind financially with little hope of catching up; healthcare costs continue to rise, especially for older people; and the annual COLA doesn’t keep up with real cost increases. “Social Security benefits are clearly insufficient to live on under the current system – but things could actually get worse. Social Security's trust fund reserves are expected to be depleted by 2034, and if no steps are taken to fix funding shortfalls, Social Security will only be able to pay 77% of expected benefits.”

This is not because the government is stealing from the so-called trust fund. It’s a feature of the original design that did not account for the baby-boomer generation or for the trend toward fewer workers. (For those still stuck on the myth that “it’s my money and they owe it to me,” here is a clear explanation from about two and a half years ago of why that’s not the case.)

Another article from Yahoo Finance tells the stark reality of the current situation: “Despite the fact that it was never meant to act as a main source of income, nearly one in five married retirees and one in two unmarried retirees say they rely on Social Security for the bulk of their income, according to the U.S. Social Security Administration.” To make ends meet, they must rely on Food stamps and other government programs.

With traditional pensions disappearing and Social Security an inadequate replacement, retirement savings cannot be considered a luxury. No one can afford to wait.

On average Americans are far behind. To be on track, by the age of 30 workers should have saved the equivalent of one year’s pay. Most are behind but have time to make it up, unlike their parents. “According to the research, the average retirement savings for families aged 50 to 55 is $124,831. For families aged 56 to 61, it's $163,577. Those figures are far less than the $1 million that many experts recommend as a target for retirement savings.” The one-million-dollar figure may be high, and this site, complete with calculator, recommends only $480,000 – still a lot more than the average of $163,000.

The answer then is simple. You are working to some day not have to work any more. But it’s not automatic. It takes planning, perspective and discipline. Without it anyone could end up in the category described in this CBS report: Broke and Bankrupt in Retirement.

Simple Calculations

I’ve always liked numbers. That’s why I was so disappointed when I got into the first grade and found they were not teaching arithmetic. In my school in my time, arithmetic didn’t happen until the second grade. Today not knowing your numbers and being able to do a little adding and subtracting when you start kindergarten means you missed out on the preschool or Head Start program that would have properly prepared you.

In any case I learned some arithmetic in the second grade.  The third grade had two classes taught by Mrs. Ener and Mrs. Bugbee. You were lucky if you got into Bigbee’s class because she was the “easy one.” But I got Mrs. Ener, who required every student to pick a day to stay after school, stand next to her at her desk and give the answers to the 100 addition facts on a book as she pointed to each one. If you missed a single one or took too long, you were out.  Come back and try again.  It was considerable pressure for an eight-year-old.  Besides, you had to give up your free time, staying after school and waiting in line behind others, giving you plenty of time to psyche yourself out.  After you successfully ran that gauntlet three times earning three stars on the bulletin board, the same routine followed with subtraction, multiplication and division – perfectly three times each.

As nerve-racking as it was, perhaps everyone needs a Mrs. Ener somewhere along the academic path, because so many problems we run into in daily life come down to simple arithmetic. One example was when I handed a cashier $22.59 to pay a $7.59 bill.  She thought the $20 bill was a $5 bill and rang up $7.59 on the cash register, which told her not to give me any change.  A co-worker pointed out that I had given her a twenty and panic set in. How much change should I get?  How about 20 – 5 dollars?  (The matter was resolved after a couple of wrong guesses.)

Here is another I came across in a magazine ad for a wristwatch selling for only $29 plus shipping and handling. The copy read: “Precision timing that’s accurate to four seconds a day – that’s more precise than a 27-jewel automatic priced at over $6000.”  That sure sounds impressive – until you do the numbers.

Four seconds a day means 4x30 seconds per month (approximately) = 120 seconds or 2 minutes. So far the calculations are easy. Two minutes a month will not make you late for very many appointments, although it might make catching a train in Tokyo a little iffy. But 2 minutes a month times 12 months (another easy, do-it-in-your-head calculation) comes out to 24 minutes a year – almost half an hour! Is that precision?

When we change time twice a year (from EST to EDT and back) and I have to reset the clock in my car, I just push the button to adjust the hours. I don’t expect the minutes to be about 12 minutes off. I expect the minutes to be pretty darn close, and they are! Does that mean the clock in my car is enormously more accurate than a $6000 wristwatch?  Maybe so, but it’s what I expect.

Doing simple calculations is a small part of critical thinking. Do the advertisers think that most people will breeze right by without thinking, accept their assurance of world-class accuracy, and  send in their $29 plus S&H? Apparently so. This great deal is limited to the first 1900 that call with the special offer code – better hurry (and not think about it too much)!

The simple-calculations habit can save a lot more than $30 over the course of a lifetime!

Help With a New Year's Resolution

People want to save money (for education, for retirement) but find it difficult and sometimes scary.  Is putting money in the stock market the same as gambling?  Let’s take a look.

Here is a story from 2015 reporting that Americans spent $70 billion on lotteries the prior year, “more than $230 for every man, woman and child in [the 43] states where the lottery is legal.”  This amount varied from $36 in North Dakota, to nearly $800 per capita per year in Rhode Island.  (It could have something to do with access to high-paying petroleum jobs in North Dakota while the Rhode Islanders might catch a glimpse of all the rich people’s yachts and want to join them – or maybe not.)

To update the information a bit, I found a  CNN Money piece from last year giving the total lottery spending of $80 billion.  That would move the current average closer to $260 per person per year.

I’ve written about lotteries before, about what a bad deal they are, how the states consider them voluntary taxes, how you get better odds from casinos and how they generally prey upon the poor.  This is well reported on the news and should not surprise anyone.  But the bets are small and seem affordable even if the odds are terrible.  You can get rich quick but are much more likely just to be making a weekly donation to your state’s tax revenue.

What is the alternative?  If everyone took their (average) $260 per person and put it into a conservative investment portfolio, the results would add up surprisingly well.  After 10 years such a fund could have grown to over $3,600 per person or about $11,000 for a family of three.

To get those numbers I used a theoretical mix of real index mutual funds with 62% invested in stocks, 32% in bonds and the rest in a money market fund.  This is a very conservative and reasonable mix for a younger person (30-45).  It is also highly diversified and automatic by virtue of being an index fund.  When I looked up the returns for that mix over the last 10 years, the rate was 6.1% compounded annually.  Remember, that 10-year period includes 2008 when the stock market was seriously tanking and 2017 when it was soaring.  There was much variability, which can be scary, but the overall trend over long periods has historically been positive.

The question is whether it’s smarter to invest your money at those pathetically poor lottery odds – 10,000 to 1 on a simple pick 4 card or about 290 million to 1 for the Power Ball – or to actually have (in your pocket, so to speak) $11,000 for your family.  Making the right decision shows strong behavior in critical thinking and discipline.

Other sources of potential savings with no downside include homeopathic remedies.  After I mentioned them in an essay before Christmas, a reader sent this link to CBS with this excellent summary.  “The market for homeopathic ‘medicines’ has grown to $3 billion, according to FDA. These remedies are often sold next to bona fide treatments like Tylenol and aspirin despite little evidence they actually succeed at treating anything at all. In fact, homeopathic products have sometimes been ripped from shelves due to deleterious side effects, as when more than 100 people lost their sense of smell using products with zinc gluconate in 2009, or when a brand of teething tablets was linked to seizures and death in infants and children.”  Throw in another $28 billon spent on nutritional supplements and we are looking at the potential for big bucks in your own account, not gambled away on the lottery or outright thrown away on ineffective medicine.

This and That

Critical thinking leads to some interesting questions and observations.

A friend recently asked me why he has to pay for syringes for his wife’s diabetes injections while drug addicts on the street can get them for free, funded by taxpayers like him.

How can people plan to pay for their children’s education or their own retirement when they can’t even plan for an annual vacation?  “According to a survey by financial planning company LearnVest, 74 percent of Americans have taken on debt to go on vacation.  The study surveyed 1,000 adults. It showed that, on average, Americans take on about $1,100 in debt for each vacation.”

The article adds:  “Around 55 percent of Americans forget to plan ahead for vacations when setting their budget for the year, according to the survey. It also shows that one-third of Americans would rather save money for a vacation than for a house or retirement.”  (See my earlier comments on vacation planning and gasoline price.)

People are puzzling about the drastic increase in overweight pets.  An analysis from veterinary clinics across the country of about 2.5 million dogs and 500,000 cats treated last year found an increase of more than 150% in overweight dogs and cats over the last 10 years.  About 1 in 3 are either overweight or obese.  The only surprise here is that they are still doing better than their owners.  (Can I say owners or do I have to call them pet parents for fear of offending someone?)

What is the city council of Minneapolis thinking?  They want to “require stores to charge a fee for any type of bag — paper or plastic — they give out.”  Can’t they see that this will hurt the poor the most?  Don’t they know that more people know about recycling than know that cloth grocery bags should be washed out periodically to avoid cross-contamination?

Two studies, one from University of Washington and the other the University of California, Berkeley, about the effects of the first tier of minimum wage increases in Seattle came to different conclusions.  One says it hurts the workers; the other says the workers benefit.  But Forbes reports there are “potential problems with both studies.”  The jury is still out and many economists do agree that the potential success or failure will be influenced by factors unique to the Seattle economy.  This is why it’s so important to conduct most of these experiments on the state and local level, rather than trying to impose a one-size-fits-all solution from Washington, then wring our hands as flaws later appear.

Here is a link to an informative table.  It shows murder rates by state by year from 2001 to 2015 with highlights showing which states had the death penalty (also by year).  It appears that the death penalty has no effect at all on the murder rates, even looking at data from individual states that banned it during that time period.  But some persist in defending capital punishment despite the fact that besides apparently not deterring crime, those cases are many times more costly than comparable cases.

Also interesting is that, despite what we might hear on the news or from politicians, the overall murder rate in America is half of what it was in 1980.

It’s a strange world we live in.  We all must be critical thinkers and question rather than passively accept any idea just because it sounds good.