Perhaps at that point, if you have been following the national debt, you are more worried about the return of Social Security than the return on Social Security. Given that we are $14.3 Trillion dollars in debt — a sum that in dollar bills laid end-to-ten would stretch out beyond Uranus and take light about 2 hours to travel from end-to-end — no one would blame you for that. As many of my generation have, I’ve always just regarded Social Security as a tax and don’t expect to see a dime returned in the end. The demographics don’t allow it. But let’s say that Social Security remains solvent and there actually is a payout. Or, let’s just look at the returns for those who are retiring now compared to standard investing.
Currently individuals receive about $1100 per month, or $13,200 per year, from Social Security. This is way below the poverty line, but of course Social Security has always been touted as a supplement rather than a pension. At that rate of payout, a private account worth about $165,000 would be able to make those payments and grow with inflation without ever decreasing in value. With a private account one would be able to leave the balance to his/her heirs, but with Social Security it all disappears when one dies (even if one dies before receiving the first payment), so the actual account value might be $120,000 or even $80,000, depending on how long lives and collects payments. Note that it is in the interest of the Social Security program that you die young.
Now let’s look at the return on private investing. One pays about 13.5% of one’s paycheck into Social Security every two weeks. At that rate, even the fry cook making minimum wage his entire career (very unlikely)would retire with about $800,000 dollars in a private account (invested in mutual funds). Someone making around the Social Security maximum would retire with about $5 million. They would then be able to withdraw between $64,000 and $300,000 per year without the balance decreasing. That is between $5300 (fry cook) and $25,000 (upper middle-class) per month. This means that the fry cook could afford to live in a nice house and a nice domestic trip each month in retirement. The average middle-class worker could take a trip to Europe every month. When each of them died, their savings would still be there to leave to the next generation or donate as they saw fit. From Social Security, they would receive $500 in death benefits, to tip the undertaker I guess.
So why the difference? The reason is that putting money away in an account is true investing, while Social Security is a Ponzi scheme. When an individual puts the money into a set of mutual funds, that money is used to build businesses. As those businesses grow, the value of the stocks in the mutual funds grow, so the value of the money in the accounts grows. The amount at the end when the individual is ready to retire is mostly due to that growth – the percentage of the money that was actually taken from the paychecks is very low.
With Social Security, just like in Madoff’s schemes, money for people collecting benefits is paid out of the money being collected from those still working. If there is extra money left over, that money is spent by the government (remember the $2000 hammer?). Even worse, the government borrows more than it collects, so some of the money is used to pay interest. This means that the opportunity for the money to grow is not there, so all of the benefits provided need to be paid for directly with earnings, plus the amount spent on interest.
There is much talk about “saving Social Security for the next generation.” Is this type of system really worth saving?
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