I like looking at numbers. I like taking situations and looking at them differently. One of the areas I have been thinking about lately is social security. A lot of us just dismiss social security as something that we pay into over a career and then the government will pay us back when we retire. This little exercise is an excerise in “what if…” analysis.
Imagine had you began a 30-year career in 1980, making $25,900 (the maximum amount of income subject to social security withholding). Imagine over your career you were always subject to maximum withholding. How much would you have paid into social security over those 30 years? Well, the graphic below will show you:
The wages subject to social security withholding rose 4.84% per year (geometric average) while the maximum amount paid in rose 5.53% per year (due to the increase in the withholding percentage). Over a 30-year career, you would have paid in over $115,000 and your employer would have paid in another $115,000. Your total contributions would have been over $230,000.
Of course this only tells part of the story because had you not paid social security, the money could have been invested elsewhere. Over the last thirty years (through 2009), the total return for the S&P 500 Index has been over 11.24% per year (.89% per month). If we assume fees of .50% per year, that brings the average annual total return down to 10.69% per year (.85% per month)*. Based on that, the account could have been worth over $739,000 at the end of 2009 (including the employer match). At a 4% withdrawal rate, the account would kick off nearly $30,000 in income the first year ($2,500 per month). Keep in mind that this is only for one person. Had your spouse also worked, the “account” would be much larger. According to the Social Security website, the maximum benefit in 2010 is $2,346 per month (at age 66).
I understand that social security is just that…SOCIAL SECURITY. Meaning, it’s supposed to fund a minimum retirement for people and is not actual accounts for those who make annual contributions (though the social security statement you receive makes it seem like you do have an account). This program could have been so much better had they stuck with a bare bones plan that took care of the indigent instead of everyone.
*My numbers may not appear to match up properly. The difference is due to rounding and the compounding of fees.