This is a follow-up to yesterday’s post, which you can read here.
As I mentioned yesterday, I have monthly total return data for BOTH the S&P 500 Index and the Barclay’s Aggregate Bond Index going back to January 1991 (I have S&P data going back to 1926). I thought it would be interesting to look at how much a person could have accumulated over the last 21 years had they been able to invest their social security contributions on their own.
The results were somewhat surprising.
According to my numbers, the portfolio that offered the highest end value was the one invested 100% in the Aggregate Bond Index: SS Invested in S&P 500 with Bonds (1991 – 2009).
Actually, when you consider the way the market has gone over the last 20+ years, it’s not surprising that the bonds outperformed stocks from a dollar cost averaging standpoint. Why? For one, when you’re investing a small amount of money over a long period of time, it’s best for the market to trend upward slowly so that you can accumulate more shares at the beginning, which will increase in value as the market increases. What we saw in the 90s and 2000s was a massive run-up followed by a massive drop.
Anyway, were social security contributions your money, and you maxed out those contributions over the last 21 years, you (and your employer) would have contributed $176,779 (I’m only counting the portion that goes towards social security, not disability). Your account balance would have been somewhere in the neighborhood of $322,000 to $335,000 (depending on your chosen asset allocation). And…that’s only for the last 21 years. Most people work much longer than that. So, it’s not out of the question that the account would be worth $450,000 or more over a thirty year (or longer) career.
Now some may look at those numbers and think that what social security is offering is a better deal. Here’s the thing: there is no free lunch! If social security is paying out more than a person could have earned investing in stocks and bonds, then that tells us the program is based on taking from the current earners to pay the current recipients. It’s “fine” as long as there are a greater number of employees contributing than there are retirees receiving. Not only that, if you did max out your social security contributions over the last 21 years, the government most likely will consider you rich and will take back a portion of your social security payment by taxing them.
So take a look at the PDF I put together and let me know what you think. Is there anything else you would like to see?
NOTE:Also, if you have monthly total return data for the Aggregate Bond Index that goes back farther than 1991 (and you’re willing to share), please let me know. It would be cool to be able to run different scenarios using more data.