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?

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.

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

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.

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