What If You Could Dollar Cost Average Your Social Security Contributions

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.

9 thoughts on “What If You Could Dollar Cost Average Your Social Security Contributions”

  1. Fantastic!

    Can we take this back 40 or 45 years just using the S&P numbers? Actually, instead of the Bond Index, why not treasury bonds?

    The biggest fear people have about privatization of SS is risk. Why not allow for only 2 investment options: Total US Stock Market or Treasury Bonds.

    The SS Admin should make it so you can have any asset allocation you want, but when you reach your late 40s to early 50s… your asset allocation automatically changes favoring treasury bonds. This way Americans can’t complain when the stock market falls in any given year and wipes out 10% of their savings. They would be insulated by bonds.

    There really should be no need for management fees as the fund fees would cover that. If a financial management firm wants to manage your SS money for you, i.e. adjust your asset allocation, they can only charge a .05% annual fee.

    Am I off base with this? I think it could work.

  2. Tom,


    I don’t know where to find monthly bond (or fixed income) data. I don’t even have to have the actual data. All I need are the total return percentages.

    But, yes. Your plan WOULD work. The problem is we have created a monster to feed and diverting current contributions into private accounts would take away from the money needed to fund current retirees.

    FDR should have thought this through better when he created the plan.

  3. JLP, your 10-year projections are a little off. Assuming the 6.93% return on the bond fund holds, the money currently in the fund will almost double in ten years. That alone will give you about $650k, plus about another $150k from the investments you will put in over those years. $800k is not out of line.

    Assuming a nominal 4% withdrawal rate, that’s $32k per annum. This is on par with the maximum Social Security benefit, with the added benefit that it is YOURS, and can be passed on to your heirs when you die.

  4. SS is a wealth transfer system, taking money from the young and giving it to the old.

    Wish the Supreme Court would take up the conditionality of SS, if anything, from an age-discrimination point of view.

  5. Of course it’s unconstitutional, BG. The argument they had to come up with, because it deals with the welfare of individuals instead of the general welfare of the United States, was this:

    1) Because unemployment can spread from state to state, unemployment insurance provides for the General Welfare of the United States.

    2) Because Congress can give money to individuals for that purportedly constitutional reason, it can give money to people if they are unemployed because of old age. (Despite the fact that there is no chance that unemployment due to old age will spread from state to state.)

    That is why the Court had to first rule on unemployment insurance (the same day) — so they could use it as a “precedent.” (Despite the fact that it cannot be a “precedent” if the rulings occur at the same time.)

    In short, if the government can do a thing for a constitutional reason, it can do that thing for ANY reason.

    That is insane.

  6. I have considered the idea of substituting or replacing the Federal SS Program with direct investments into Treasury Bonds (specifically 30-40 year TIPS). It would give a certain level of “ownership” to workers.

    Fact is, it’s the same as the SSP is today with little added benefit. In essence, it will still be taxing future generations to pay for today’s TIPS Bond investments.

    The underlying issue being, is today’s govt spending our tax dollars wisely to promote productivity in future years and decades?

    So, as the idea is appealing on the surface, it still has all the underlying long term problems with today’s SS Program.

  7. Your first assumption – max investing FICA in S&P instead of the SSP over the last 21 years – although interesting in theory is far from reality for most US workers.

    That assumption means investing, on average, 8K+ each year. That means the worker is earning wages above and beyond FICA cutoff limits (106K for 2012) for each of those years. As that is a very low percentage of the population, the exercise is somewhat academic.

    Take an average teacher who made 20K in 1991 and their FICA would have been about 2K. As their career grows, so would their FICA contributions. Yet, they will never reach 106K in annual salary.

    Say they achieve 75K in 2012 (FICA of 7K). What numbers does your spreadsheet generate under those assumptions? What about the effects of continuous inflation? Are the results impressive enough to retire above the poverty line?

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