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

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.

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

  1. 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

  2. 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.