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How Much Could You Have if Social Security Was YOUR Money?

By JLP | May 16, 2008

Imagine you were 22 when you started working back in 1978. Do you know how much money you would have if, instead of paying in the maximum Social Security tax over the last 30 years, you were allowed to keep it? It’s probably more than you think. Take a look at the chart below, which shows a 30-year history of Social Security:

30-Year History or Social Security

If you could have kept the maximum amount withheld for Social Security over the last 30 years and invested it at a 10% ROR it would have grown to over $418,000. Of course I used straight-line appreciation, so the actual amount would be quite different but this will work for comparison’s sake.

According to my calculations, the amount subject to Social Security tax has had an average annual increase of 5.85% through 2007, while the maximum tax itself has increased 6.58% over the same time period. The difference between the two numbers is due to the increase in the tax rate over the years.

30-Year History or Social Security

As I stated in the first sentence of this post, you were 22 when you started working 30 years ago, which would now make you 52 years old. If you continued to work and paid in the maximum amount into Social Security, how much could you have by the time you were 62? For 2008, the maximum Social Security tax is $6,324. If we increase that amount by the average annual increase of 6.58% for the following 9 years, it would look something like this:

30-Year History or Social Security

The forward-looking numbers are adjusted for inflation and assume a more conservative 8% ROR minus a 3% inflation rate. So, IF the money were yours to do with as you please, you could have over $789,000 by age 62. A 4% withdrawal rate would give you a first-year income of over $31,584 or $2,632 per month. I haven’t done enough research to know how that number would compare with a Social Security payout (that’s the topic of a future post).

An Observation

I think the past 30 years of Social Security history is NOTHING compared to what the future will be. I can only see more and more income being subject to Social Security tax because of the fact that we have the Baby Boomer generation retiring and fewer numbers of current workers to support them. So, the amount that my generation and the following generations will have to pay into the system will most likely be greater than the benefits received at retirement. That’s why I get so irritated everytime I see how much money is being sucked out of my paycheck to go into the blackhole we call Social Security. I know there’s not a snowball’s chance in hell that my wife and I will see the bulk of that money.

It’s really sad when you think about it. The program could have been so much better had we used to provide a safety net rather than giving it to everyone. It should have been based on need. Instead, everyone got benefits whether they needed them or not. Politicians didn’t care because there was an ample supply of Baby Boomers to fund current retirees’ needs.

Eventually our politicians are going to have to make some tough decisions.

NOTE: As Jeremy mentioned below, I left out the employer’s portion of the Social Security tax, which is equal to the amount the employee pays. When the employer’s portion is factored in, it really makes Social Security security look bad. Thanks for the catch, Jeremy.

Topics: Social Security | 52 Comments »


52 Responses to “How Much Could You Have if Social Security Was YOUR Money?”

  1. Jeremy Bettis Says:
    May 16th, 2008 at 12:27 pm

    You understated the social security tax by 50%, since you only included the employee portion of the tax, not the company “matching” tax. If there never had been any SSI the company would have paid that money to your IRA instead in your hypothetical world.

  2. JLP Says:
    May 16th, 2008 at 12:35 pm

    Jeremy,

    That’s a good point. I’ll make a note of it in the post.

  3. Valerie Says:
    May 16th, 2008 at 12:55 pm

    Amen, I wish the government would allow people to be responsible for themselves and save for their own retirement. I am sure a lot of the money is eaten up by administration cost. I know my brother worked for a university and he had the option to opt out of paying social security tax. Not sure why and maybe I have my facts wrong but I would be interested to know more about that.

  4. Andy Says:
    May 16th, 2008 at 1:04 pm

    I think social security won’t go away. The changes required to keep it solvent indefinitely are quite easy. For example, eliminating the income cap would do it. Or raising the retirement age (62 is way too early anyway).

    But I agree that it should be based on need. I would only give it to people below the poverty line.

  5. Dedicated Says:
    May 16th, 2008 at 1:35 pm

    You know, you know this is true and happening and yet we ignore it. For the most part.

    Right now, after your enlightened post, I just feel robbed!

  6. Jeremy Says:
    May 16th, 2008 at 1:51 pm

    For 2008, the maximum SS benefit at full retirement age is $2,185 per month. Just to give you a head start on your research for the upcoming post :)

  7. Joe Says:
    May 16th, 2008 at 2:56 pm

    “…It should have been based on need. Instead, everyone got benefits whether they needed them or not…”

    Why should I not be entitled to future benefits if I am responsible and save for my own retirement? This is not a socialist country. Or is it?

  8. Lord Says:
    May 16th, 2008 at 3:08 pm

    You are making the mistake of assuming future returns will be like those of the past. This is unlikely to be the case. Returns are dependent on growth and slower population growth means lower growth and smaller future returns. This is what SS assumes. Investment expenses will also reduce it. SS also provides disability and survivor insurance so you would have to pay for those out of this as well. It also provides the lowest cost indexed annuity available. In addition, it provides a safety net for those with low incomes over their working lives. Would you be better off if it wasn’t collected during their working life and you were taxed afterwards to pay for it since you would have the income? SS provides only a modest level of benefits and you are well able to supplement it, but you will have it even if the market collapses at your retirement or your account is lost. And while SS won’t provide as much, it will still provide much.

  9. Dave Says:
    May 16th, 2008 at 3:20 pm

    My work history began in 1970, after graduate school, and ended in 2000, when I quit my job to become a missionary. Thus, it covers a 30 year term like your example. I started collecting Social Security benefits at age 62, and now, at age 65, my monthly payment is $1,494, while my wife’s is $692. An inflation-adjusted annuity providing the same income streams would be worth $347,183 for me and $140,690 for my wife, for a total of about $488,000. That is reasonly in line with your example.

  10. JLP Says:
    May 16th, 2008 at 3:38 pm

    Lord said:

    “You are making the mistake of assuming future returns will be like those of the past.”

    If you read carefully, you’ll notice that for the future I projected a real return of 5% (8% – 3% inflation), which is lower than the 7% real return we have gotten in the past.

  11. Jim Says:
    May 16th, 2008 at 4:23 pm

    I’ve recently discussed the costs of fixed immediate annuities that would compare to SS retirement benefits (lifetime monthly payments with inflationary increase).

    http://freeby50.blogspot.com/search/label/retirement%20planning

    If you were to replace the social security retirement benefits with a fixed immediate annuity with inflation increases bought from Vanguard then you’d have to pay about $510k for an annuity to equate to the maximum SS payout of $2185/mo cited above.

    Your analysis does not consider the value of social security disability insurance. I’m not sure how you’d go about determining what thats worth though.

    Jim

  12. Jim Says:
    May 16th, 2008 at 4:28 pm

    Your analysis does not consider the value of social security disability insurance or social security insurance. I’m not sure how you’d go about determining what thats worth though.

    Jim

  13. Jim Says:
    May 16th, 2008 at 4:31 pm

    Oops double post sorry.

    Actually never mind about social security insurance (SSI), I just read that it apparently isn’t funded by SS taxes. SS disability benefits ARE however a benefit of our SS taxes.

    Jim

  14. Lord Says:
    May 16th, 2008 at 4:55 pm

    Yes, I saw that, but even that may be too optimistic, especially with investment and other costs and poor money management most do. I have no doubt someone astute could do better, but also that the average will do worse, some much, much worse.

  15. Debt Says:
    May 16th, 2008 at 5:07 pm

    There a too many people in this country like my own mother who think the Social Security system is a good one, albeit not a perfect one. I’ve tried to explain to her, on more than one occasion, how we are being short changed by the system, but she responds with comments such as “the people in Great Britain think it’s the best one in the world” I have yet to put a chart in front of her eyes with actual figures, such as the ones in your post, to demonstrate the fallacy to which she’s subscribing, but that day isn’t far off.

    I have shown her results from other municipalities and countries where they allow you to actually keep and invest your own money, in your own account, that hey, you actually OWN. You can actually live on the income stream generated by your retirement in those areas. There could even be an approved fund list, if the powers that be so desired, as long as we could generate returns twice what we’re getting now (like 5%).

    The irony is that the socialism aspect of the program we are certainly getting, but the second half of the name, security, we’re not.

    Have a great weekend!

  16. JLP Says:
    May 16th, 2008 at 5:44 pm

    Joe said,

    “Why should I not be entitled to future benefits if I am responsible and save for my own retirement? This is not a socialist country. Or is it?”

    I don’t think I made myself clear. I meant that Social Security could have been much better had they stuck with just offering a “safety net” for retirees instead of providing benefits to everyone.

    I would much rather pay a smaller percentage (say 1% to 2%) and have the program used on an “as needed” basis than to have them take 6.2% and then give it back to me later.

  17. more Says:
    May 16th, 2008 at 5:44 pm

    not a lot.
    you would be bilked out of it by the banking and finance industry, a la typical boom-bomb-bankruptcy-bailout-$300 consolation check style.

  18. JLP Says:
    May 16th, 2008 at 5:47 pm

    Debt,

    It’s gonna be tough for this country to move to personal accounts because we’ve built the system on current workers providing for retirees. It was all fine and dandy when you had the Baby Boomers in the workforce but now that they are starting to retire and the following generations are smaller, the program is going to falter unless changes are made.

  19. lorax Says:
    May 16th, 2008 at 6:02 pm

    I could swear I read this post before.

    Anyway, SS is two things 1) an annuity and 2) an insurance policy for survivors if you die early. It also diversifies risk from market risk to political risk.

    There are inefficiencies, but overall I think it is a good plan, as the “safety net” of retirement.

  20. Kirk Says:
    May 16th, 2008 at 6:36 pm

    To Dave: Your projection assumes you will live to receive the full benefit. If you die tomorrow, which I hope doesn’t happen, you would be shortchanged big time relative to the taxes paid. Secondly, you pass nothing to your heirs. Even if we only earned the equivalent of the current SS benefits in a private account, we would at least own the asset to do with it as we pleased.

    For JLP: it would be tough to move to private accounts due to the dependence on working taxpayers, but it could be done if all parties involved realized a sacrifice. For instance, if we were able to put half of our tax into a private account, but we forfeit the right to receive Social Security. And, the current beneficiaries need to realize the benefit increases at a rate lower than inflation. Or, 100% of it is taxed as ordinary income. It can be done, but someone or everyone will have to sacrifice. Americans aren’t good at sacrificing and politicians won’t upset a big voting block. So I fear you are right.

  21. Dave Says:
    May 16th, 2008 at 7:46 pm

    To Kirk: No. I didn’t project anything. I priced an inflation-adjusted annuity on the Vanguard website that would produce approximately the same income streams as our Social Security benefits. Mortality is figured into annuity pricing. My point was that with approximately the amount of money JLP figured ($418K) you could purchase our Social Security income stream, guaranteed for life. All without the market risk of the 30 accumulation years.

    In your second point, with a private account, you are taking on the risk of running out of money if you live too long or the market underperforms, and balancing that against leaving an inheritance if you die too soon or the market overperforms. Which is more valuable to you: not running out of money or leaving an inheritance? Personally, I don’t care if I leave my children anything.

  22. Lord Says:
    May 16th, 2008 at 8:28 pm

    It may not be yours to do with as you please (although it wouldn’t be under any sound policy), but it also provides disability and survivorship. Those are particularly expensive young since they would last so long. Your spouse and children benefit from this and would benefit far more than any private account that early. Without it you would have to invest much more conservatively in retirement which would also reduce returns. It is actually the majority of income for some 60% of the retired so it is hardly lavish. Without it, most may save nothing in order to fall into the safety net.

  23. EnoughWealth Says:
    May 16th, 2008 at 9:37 pm

    You can’t use the ROR rates you picked for a sensible comparison of social security to a “DIY” alternative. For someone in your example (who started paying SS 30 years ago and will soon start to claim benefits) the SS scheme is practically “risk free”, hence a comparible ROR is more like 5%, not 10%. Try using that figure and see how much money you’d have if you’d kept the SS contributions and gone down the DIY path.

    The other side of this same coin is that if people were allowed to keep the SS contribution money and invest it themselves, lots would invest very conservatively (think cash ROR), as is the case with our compulsory, but personal, superannuation account system in Australia. In that case the end benefits would be very low, and you’d need a publicly funded, means tested age pension in additional to the SS amount saved in personal accounts! This is what we have in Australia – people with insufficient retirement savings in their retirement accounts, and a means-tested aged pension that is in danged of becomming unaffordable due to shifting age demographics and lower worker:pensioner ratio.

    Finally, if you resent paying into SS when you are unlikely to get you money back in SS payments, just think how much you’d really like it if you were paying the same SS contributions (via taxes) but NOT be entitled to ANY payout (under a means-tested aged pension style change to SS payments)!

  24. Bozo Says:
    May 16th, 2008 at 9:48 pm

    One thing most folks don’t consider about Social Security is that it is guaranteed. There might be some political risk (means tests going forward, for example), but there is no solvency risk. When you buy an annuity in the marketplace, there is always the chance the insurance company might go under. I’ve never seriously considered an annuity (I do my own CD ladder, sort of a self-directed annuity, all FDIC/NCUA insured), but it would give me the willies thinking I handed over $500K to an insurance company which might go BK.

    With no risk, you should expect a somewhat lower yield.

    Anyway, it’s a moot point, since the last I checked, nobody ever offered me the option to stop paying FICA.

    Yours,

    Bozo

  25. Michael Says:
    May 16th, 2008 at 9:58 pm

    In addition . . . If your gross paycheck was $1,000.00 you would pay $76.50 in social security taxes, yet the entire $1,000.00 would be subject to income taxes. When you retire, you would pay income tax on money that you did not get a tax deduction for. It will likely be subject to income tax when you receive it. Thats the injustice for a “silver hair” like me. The injustice for you young whipper snappers is that you won’t receive any social security benefits at all. It will all be “needs” based at some point.

  26. Wilson Says:
    May 17th, 2008 at 1:03 am

    Let’s rename social security to universal security, so that we can tax aliens in the galaxy…

  27. Phil Says:
    May 17th, 2008 at 4:41 am

    This analysis is idiotic. Take any govt program, use 20/20 hindsight and you’ll always come out better if the money had been yours. As posters have said before, SS comes with zero risk.

    Here’s a more realistic analysis: Take the average American and allow him keep what would have been the SS tax. After 30 years he would have: nothing since he would have blown it on crap he didn’t need from Asia.

  28. JLP Says:
    May 17th, 2008 at 10:40 am

    Phil,

    Social Security DOES NOT come with zero risk! What about all the younger generations who are going to have to foot the bill for a much larger Boomer generation that is about to start taking benefits?

    The fact that they can just raise our Social Security taxes by raising the income that’s taxable, raising the tax rate, or both, makes Social Security VERY RISKY in my eyes.

  29. Richard Says:
    May 17th, 2008 at 11:37 am

    This is a 2nd try to get this comment on. Excuse any duplication.

    The thing that bothers me the most is that the FICA tax is not graduated and therefore a greater burden on lower income people. A better solution would be to eliminate the FICA tax and have the SS payments come out of the general revenue; in other words, financed from the income tax, which is graduated and designed (ostensibly)to increase as your income increases.

    If we can’t afford the system we have and it has to be means tested, so be it. A safety net is essential for those of us who somehow mess up by not having enough for our later years. These people would be on welfare anyway and that also would come out of the taxpayer, so it would probably be close to a wash as far as cost is concerned.

    I know it sounds attractive to think that if the money we put into FICA could have been given to us for private investment, that we could have done much better with it. But don’t be so sure. Some of the rates of return we hear about sound nice, but are not always easy to obtain. Investing isn’t without its pitfalls, and the economy is fickle. And many people don’t have a clue how to invest anyway. Social Security is the only sure thing we have to fall back on.

  30. Richard Says:
    May 17th, 2008 at 11:45 am

    JLP

    The risk we’re talking about is the safety net that SS provides. It may eventually be means tested to be affordable, but no congress is ever going to eliminate the safety net aspect of SS. They would be thrown out in an instant. Yes, there is a risk we might have to pay more to get this benefit, but I think you worry needlessly that the benefit itself will somehow disappear.

  31. Harry O Says:
    May 17th, 2008 at 3:37 pm

    You want you own SS money.
    Hmm ok after 3 years of having you own money
    and getting your great interest for you future,
    you get injuryed and can’t work, divide your
    “money” over the next 60 years and live of that.

  32. BradfordL Says:
    May 17th, 2008 at 4:31 pm

    \” Today, we have a national retirement program called Social Security that forces Americans to pay 12.4 percent of theirincome into a \”system\” that gives total control of their earnings to 535 politicians.

    We have no legal right to the money, we cannot leave it to our loved ones; and what we get back is entirely up
    to those politicians. Where is the respect for the dignity of human life in such a system ? \”

    — Edward H. Crane

  33. David Says:
    May 17th, 2008 at 5:15 pm

    I agree that the system went awry when it opened the gates to the middle- and upper-middle classes in the form of generous pensions. Social Security at that point departed from its original mission as a safety net. Entrenched interests (AARP and the vast portion of Americans in the mid-to upper-middle classes) will preserve the current payout philosophy until we can actually see blood pouring from the coffers.

    One suggested solution for solvency would be to establish a needs test at a moderate level (freeze payouts at the rate earned by say $50k). I feel uncomfortable with SS paying for cruises of higher-income folks. They couldn’t tolerate the needed hefty increases in FICA, and to appease them we opened the spigot. The blood isn’t running yet, but it will be. I think it was a good system before the comfortable-income people prevailed. In my opinion SS should be a safety net. Decreasing its outlays might over time enhance the system’s solvency to the point where FICA taxes could be reduced. This might take a generation, e.g., once the boomers have swallowed their last sip of prune juice.

  34. clear1 Says:
    May 17th, 2008 at 9:30 pm

    All I kept thinking was “Obama (and the rest of the democrat party) will never let citizens have control of OUR money”. We should all keep this in mind as we vote in November…it is not just about style/personality/skin color…vote for a socialist and watch the caps come off the social security withholding limit taking more of our “contributions” into a government black hole.

  35. Richard Says:
    May 17th, 2008 at 11:44 pm

    Sorry clear1, but you guys had near total control of the government for the last 8 years. I did not see any concern for OUR money except to borrow and spend it as fast as possible. Not only was OUR money spent like water, but that of our kids and grandchildren as well. The resulting debt will be THEIR debt, so I guess that gets US off the hook. Truly, accusing the democrats of mismanagement of government spending was meant to be a joke, right.

  36. Don Says:
    May 18th, 2008 at 8:35 am

    @Lord: thank you for reminding people that SS includes disability insurance. That has made a huge difference to my family, after my wife became disabled at 35 years of age. Naturally it was unexpected; no one expects to be disabled at 35.

    I have disability through work, but she was only working part time and had nothing similar, except for SS disability.

    It’s stuff like this that make me realize that insurance-through-work is kind of nuts. Why should I have a harder time getting health insurance when I’m between jobs, for example?

    I could possibly retire early, 16 years from now, if I’ve saved enough. But that will not be possible if I don’t have health insurance and I won’t be old enough for medicare. Why should affordable health insurance be tied to working a job?

  37. Lord Says:
    May 18th, 2008 at 9:18 pm

    I hope those who think SS is generous don’t bother to save anything so they can find out for themselves. The problem with means testing is it is so pointless. It would raise next to nothing and disincentivize more from saving than already don’t. Currently, everyone will recover what they paid in, it is only the return that is in doubt. Under low cost, there is no problem at all. If there are problems, it is far too early to tell. If there is a problem, private accounts wouldn’t help because the economy would be doing badly. We already have private accounts and they are better than anything that can be proposed. They are retirement accounts.

  38. JimmyDaGeek Says:
    May 20th, 2008 at 9:41 am

    Don’t forget that SSA also pays for long-term, any occupation disability, SSI (welfare), and survivors (life insurance) claims. You need to factor in the costs for these insurance programs, if you wanted to replace them for yourself.

  39. BradfordL Says:
    May 20th, 2008 at 12:47 pm

    .

    “A government with the policy to rob Peter to pay Paul can be assured of the support of Paul”

    (– George Bernard Shaw)

  40. Jimbo Says:
    May 20th, 2008 at 9:22 pm

    Giving SS to everyone is equivalent to government subsidized home loan interest. Every only pays down the principal. The government would pay the interest. There is no limit on how much you could borrow. It would be based on your ability to repay the principal. The analogy is that government now pays no interest on your SS contributions. The new plan would be a turnabout.

  41. Kevin Says:
    May 23rd, 2008 at 10:12 am

    Valerie Says: “Amen, I wish the government would allow people to be responsible for themselves and save for their own retirement.”

    Then your wish has been granted! The government does allow people to save for their own retirement! They even allow some people to claim tax deductions for current constributions (IRAs/401ks/etc) or (at the moment) no tax at redemption for earnings (Roth IRAs).

  42. Jimbo Says:
    May 24th, 2008 at 12:06 pm

    Kevin says:

    Then your wish has been granted! The government does allow people to save for their own retirement! They even allow some people to claim tax deductions for current constributions (IRAs/401ks/etc) or (at the moment) no tax at redemption for earnings (Roth IRAs).

    True, But I’m sure that Valeries point is: What does a 12% tax on an individual’s income, expressly for the retirement of others, have to do with one being responsible for his personal retirement?

  43. Linda from Deerfield Says:
    May 27th, 2008 at 6:13 pm

    This is something I’ve been meaning to do for a long time. Thanks, it looks like an honest attempt. There are some points that tend to be overlooked, though, and I’ll try to speak to them with similar honesty.

    The 10% Rate of Return figure is commonly used — it assumes that one is always invested 100% in the entire U.S. stock market, and that the market achieves the average return that is calculated from many decades of performance data. It does not allow for conservative allocation between stocks and bonds, and it does not allow for forays into riskier approaches.

    At the risk of choosing a source that might seem biased, I will leave it to the reader to find any of multiple, credible sources that calculate a lower average return for the timeframe you’ve chosen, closer to 7.5% than to 10%.

    I am glad that you assumed a lower return for the last years, because failure to back away from the stock market as retirement draws near can leave the individual drawing down assets that are already in freefall. For example, in an EZine article by Ouida Vincent, the

  44. Linda from Deerfield Says:
    May 27th, 2008 at 6:52 pm

    (sorry, I hit return accidentally) CIO of the Yale Endowment, David F. Swensen, is quoted as saying in his book, Unconventional Success, that from the market peak in 1929, it took 21 years and 3 months for stock investors to match returns achieved by bond investors. The same author points out that bond investors have outperformed stock investors for the last 7 years. Other sources say that the stock market lost 50% (!) in just 2 years in the mid/late 1970’s. I’m just saying that it takes enduring a lot of risk and stamina to get that 7.5% return. I need not mention the current state of residential real estate as a retirement investment.

    I also want to point out that careers and wages carry their own risk. Many people lose some salary throughout the years, but Social Security forgives that. Also note that very, very few people achieve that max SS wage year in and year out. There was not supposed to be a shortfall, but I’ve seen numbers that show it is actually the falling of real wages that got the system into trouble (not as many people hitting the max as predicted).

    Even though I spent my career believing that SS might not be there for me, I’m old enough now that most politicians are not threatening to change the rules on me at the last minute. When I defend Social Security, it is not myself I’m thinking of, it is all younger people. It is insurance to cover for bad moves and bad luck and bad times. Incredibly, it even promises a cost of living adjustment. I have read enough criticism of annuities that I personally would not put my trust in one. I recognize that for the average stock market return to be 10%, or 7.5% (or even less by some calculations), then half the investors made less than that, and I do not care to put half the people in that position.

    It is even possible that the subconscious effect of knowing that Social Security is there has enabled investors to take the risks that have kept the market robust (no way to prove, I realize).

    Sorry for the lengthy comment, thanks for bearing with me.

  45. Linda from Deerfield Says:
    May 27th, 2008 at 7:08 pm

    Sorry, I misspelled the Yale Endowment guy’s name — it is David F. Swenson, not Swensen.

  46. Jimbo Says:
    May 30th, 2008 at 12:04 am

    Message to Linda:

    My spouse has worked for 1/4 the time for 1/8 the total wages, and receives 2/3 the payout from SS. Your argument is: This is good!!!???

    Again, this is robbing hubby to pay spouse. Some people who are in business for themselves write large dividend checks to themselves (no SS tax)at the end of the year, because they know they will get the benefit, whether or not they pay in. When the incremental rate was 90% for income tax, many shop workers took off for six months.

    Jimbo

  47. Andrew Biggs Says:
    June 27th, 2008 at 8:09 am

    These comparisons of rates of return (or how much you could get by investing your Social Security taxes privately) are common, but flawed. Let’s say that Social Security has a return of around 1.5% above inflation while stocks have a (geometric mean) return of around 7% above inflation. Obviously, if you compound 12.4% of your wages at these different rates you’re going to get VERY different end balances. But what accounts for the difference?

    Two things: First, Social Security is a pay-as-you-go system, which essentially transfers taxes from workers to retirees (while in a funded system workers put aside money which compounds until they become retirees). A paygo transfer system’s internal rate of return is essentially equal to the growth rate of the wage base, i.e., labor force growth plus real wage growth. That’s projected to equal around 1.5% going forward. This makes the system appear to be a bad deal, but you have to remember that a paygo system can (and did) begin paying benefits immediately, while in a funded system you have to wait a generation before retirement benefits start being paid. So the total benefits paid by both systems are the same, except that the paygo system pays an extra generation of benefits up front but pays relatively lower benefits to each succeeding generation. That may or may not be good policy, but since that first generation of benefits has already been paid there isn’t anything we can do about it. Put another way, you can’t pull your Social Security money out to invest on your own without cutting Grandma’s check. If you factor in the costs of supporting Grandma while investing on your own, the rate of return is lowered a lot.

    And second, Social Security is a far lower risk “investment” than stocks are. People don’t say stocks are a better deal than bonds simply because they have a higher average return; the risk matters as well. To the marginal investor, who has access to both, the “deal” offered by stocks and bonds is the same.

    So, the first paygo issue basically accounts for the difference in return between Social Security and a low-risk investment like government bonds, while the second issue accounts for the difference in return between bonds and stocks. Put them together and you can understand why Social Security’s return is so much lower than stocks, but that there isn’t really a ton we can do about it.

  48. GeorgeM Says:
    August 28th, 2008 at 5:06 pm

    Social Security is meant to be secure, what would you tell retirees who are ready to retire in days like this when their portfolios may be down 20% in just a short year. Over the past 8 years the stock market has essentially had no gains. We have retirement options such as 401Ks which I max out each year but as a nation we still hardly fund our 401Ks. And keep in mind over the last several years we have been “borrowing” hundreds of billions of dollars from Social Security to pay for the recent increases in government spending. That money has to be paid back. There is a reason that something like 97% of people over 50 want to preserve social security. When you start staring retirement in the eye I’m sure the guarantee of that monthly income becomes crucial.

  49. Alan Says:
    September 6th, 2008 at 5:00 pm

    JLP, nice writeup, but let me try a simpler analysis. Someone retiring today, making $80k/year, and collecting SS at age 65 would get a monthly SS payment of $1,677. Or (using the SSA online calculator) a 25 year old making $80k today, and retiring at 65 would get a monthly payment of about $1,900 in today’s dollars, so the two numbers aren’t far off. I’ll use the 25 year old, starting out today.

    Take the 12.4% tax (individual and company contributions), and let it compound over 40 years. At a reasonable 5% above inflation, you have a total savings of about $1.26M, which could give you a monthly payment of $5,250 – assuming the same 5% return, and not even touching the principal (all this done in today’s dollars). If you want to be very conservative, 3% interest gives a payout of $1,925/mo, again not touching the principal – that matches the SSA monthly payment, but of course you have over a million in principle to spend as well (or pass on to your heirs).

    What’s interesting is if you drop the income to $40k, the SS payment doesn’t drop linearly, but goes to $1,314/mo at retirement. I had not realized that the payment schedule was so progressive (meaning that it already has some means-adjusted income factor built in).

    Any way you look at it, SS is not going to change in any dramatic way from what it is now. The inertia is simply too large. But it is useful I think to help the average American understand what it is costing him/her. In all honesty, it is probably a good program for the average worker, who might not otherwise save properly for retirement. For anyone who wants to take personal responsibility for their own retirement savings, however, it holds no advantages.

    One of the negatives often cited about the US economy is the lack of savings. When you’re already “saving” 12% of your income in the form of FICA payments, is it any wonder most people don’t save much more?

  50. Billy Young Says:
    November 27th, 2008 at 4:51 pm

    Valerie, on May 16th,wrote she would like to have the people be allowed to take care of their own SS investment. I’ll only point out that down here in Australia the process, called the self-managed Superannuation program, does just that … and due to the present global financial crises nearly everyone’s investment has lost on average half. Think how your SSI would be faring right now if Bush’s earlier plan to make SS a self-managed program had been adopted. Ugh!
    The original thought behind SS was only to supplement people’s retirement, not become anyone’ entire income after reaching 65 … but then Congress in its wisdom saw it as a fund they could ‘borrow’ from at will … and since then it’s been a fight for that same body to attempt to pump it back up to sustainable levels. Ah, so it goes…

  51. julie Says:
    December 15th, 2008 at 4:00 pm

    hey my name is julie sosa and i wantedto know ho and when can i use my social security money now that am 25 years old i have two kids and am not working right now

  52. Jimbo Says:
    December 15th, 2008 at 11:11 pm

    Social Security has always been a sore point for me, even though it’s now a good portion of my income. For Alan: But even though a person saves 1.24 million over his working years, the 5% drawdown is not really fair. The benevolent fathers in charge don’t allow anything for heirs. They work with annuities. If one takes the same $1.24 million, and lives his life for the average 12 years after retirement, in an annuity he should get about $11,000/ month, and not the benefit’s $1990/month. (3.5% return) The bottom line is that Social Security has robbed everyone of up to 80% of their wealth. That fact that the government would go belly up without this 80% of funding could be a blessing.

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