Replacing Social Security for $43 Per Month

$8 Bottles of Water
$8 Bottles of Water

Social Security was every bit as controversial when it was passed in the 1930’s as Obamacare is today.  When it started, it was  a very small tax (a couple percent of pay) that provided a very small benefit – just enough to keep people from starving to death.  Over time the benefit remained low but the cost increased.   Today individuals pay 6.2% in Social Security taxes and their employers pay 6.2%, for a total of 12.4% of your paycheck.  If you are self-employed, you pay both sides.  Actually, you pay both sides in either case since you would receive higher pay if your employer didn’t need to pay Social Security taxes, but you pay it directly if you are self-employed.

When Social Security was first being debated back in the 1930’s, there were two options.  The first option – the one chosen – was to have individuals pay into a big kitty and then have the government pay out of that kitty to those receiving benefits.  Anything left over could be spent as the government saw fit, so long as they left an IOU.  The second option was to have individual accounts where each person would have a private account to which he/she would contribute and then withdraw from at retirement, kind of like the 401k of today.  The issue with the second method was that it would take a few years to get going – those who were retiring immediately would still need to find a way to make ends meet.  With the first option, they received a windfall since they paid in almost nothing and then got benefits for the rest of their lives (lucky folks).

The issue with the first option is that it ends up being a giant Ponzi scheme.  Initial investors are paid by later investors with the left-over money going to those running the scheme.  This works fine until you don’t have enough money coming in to pay the earlier investors.  This happened in the past, which is why the rates have risen so dramatically over the years.  Even still, the fund is running out of money, so benefits have been cut – by raising the retirement age – and there is talk about raising taxes yet again.  Of course, taxes were raised in the 1980’s to “save Social Security” with the goal to pile up more money for the retirement of the babyboom generation now retiring,  but the extra money was just spent leaving the solvency of the program in doubt.  There is absolutely no reason to believe this would not just happen again.

There is a much better option and that is to return to the private accounts.  I was wondering how long it would take and how difficult it would be to transition today’s workers to such a plan.  I found out the answer was: not that hard.  Here’s some of the math:

1.  I estimated the average amount an individual living in retirement from age 65 to 85 would collect in Social Security payments, assuming a monthly payment of $1500.  They would receive about $179,331.  Assuming a 5% interest rate over that period ( Social Security would actually be closer to 1 or 2%, so I’m being generous here), the total benefit would be about $230,000.

2.  I assumed an 8% rate of return for money invested in private accounts.  This would be a good estimate for the after-inflation rate of return for a mix of index mutual funds held for a period of ten or more years.

3.  I assumed a steady paycheck of $60,000 per year and then assumed different savings rates (paycheck deductions) and determined how long it would take to amass $230,000 at the different savings rates.  The results are as follows:

Savings Rate Monthly Payment Years to $230,000
5.00% $250.00 24.5
10.00% $500.00 17.4
13.00% $650.00 15
15.00% $750.00 13.9
20.00% $1,000.00 11.6

So, if you were making $60,000 per year started putting away 5% of your paycheck in a private account, you would amass enough money to replace your Social Security payments in just 24.5 years.  That would only be a payment of $250 per month.  If you contributed 13% – close to the 12.4% rate you pay now – it would take just 15 years.  We could phase out Social Security right now for everyone 50 or younger without paying any more just by directing payments to private accounts instead of the public system.   Today’s 56 year-olds could contribute 20% of their paycheck, which they would probably be able to do with the kids gone and the mortgage paid, they would be able to replace Social Security by the time they reached 65.

No what about the young people?  I wanted to find out how much a person starting today at age 20 would need to put away each month to replace Social Security payments by the time they were 65.  This is how much people should be paying today for the benefit they receive, instead of the 12.4%, or almost $650 per month for someone earning $60,000 per year.  And the answer (drum roll please): $45 per month!  Yes, that’s right.  You’re paying $600, $700, or even $800 per month for a benefit that is worth at most $45 per month.  And that is assuming that you retire at age 65.  Today’s workers actually won’t be eligible for full Social Security benefits until they reach age 70, so it is even worse.

It is possible to unroll the system we have and stop paying $650 per month for something worth $45 per month.  In fact, if we had private accounts instead of the public system, there would be no need to fund an IRA or a 401K because you’re contributing enough to fully take care of your retirement already through Social Security.  The problem is just that the trustees – Congress – are spending the money instead of investing it.  If this doesn’t sound like a good plan to you, perhaps your Congressman needs to hear about it.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. Remember that about 20% of social security money goes to disabled people – yes, the program is bloated, but going entirely to a private account system would cut these most vulnerable people out of a major benefit that helps them to survive.

    • Thanks for the comment, and yes, I remembered that fact. Look at the numbers, however. We’re paying $650 per month for something that is worth $45 per month if invested properly. We could have a $45 per month Social Security contribution to a private account, a $100 tax for a disability account, and still have $500 more in our pockets each month, or $6000 per year. That’s enough to send a kid to college. Furthermore, given that the Social Security disability rolls swelled right at the time the never-ending unemployment payments ran out, I would guess we could cover everyone who couldn’t work for $50 per month – about half of what we pay if 20% goes to disability. Anyway you look at it, Social Security is a terrible deal.

  2. What happens if your 8% return (after inflation) ends being a negative return instead? That has a low probability of happening but it’s certainly possible. That would an epic disaster for elderly who can no longer work and have no other savings. Millions of people would struggle to survive.

    90% of my retirement is already subject to the whims of the market. I’ll gladly give up some potential market gains on my SS tax to get the government guarantee. I look at it as diversification of my retirement asset mix. It puts a floor on my retirement income.

    I also don’t believe that if the employer portion of the SS tax was eliminated, employers would give that savings to the employee in the form of a raise. More likely they would keep the savings and increase their profit.

    • Thanks for the comment – you bring up some commonly made points. For short periods of time, like five years or less, returns are very unpredictable and you might even see a negative return. For periods of ten years or longer, and certainly for periods of fifteen years or longer, returns converge on the 12-15% range. Take a look at the returns of the S&P500, Dow Jones Industrial Average, and other market measures if you don’t believe me. Also, look at the returns of stock mutual funds that have been around for twenty years or longer. Note also that because you’re investing consistently over time, things like the crash during the Great Depression won’t really matter. You’ll just get more shares at low prices and be in great shape when the markets recover.

      Another thing to look at is just how terrible the return on Social Security is. I could get the same money in retirement investing about $43 per month as I get from Social Security investing $650 per month. Even if returns half of what they were in the past, I would still be better off investing privately than I would with Social Security.

      Finally, consider if you actually did get negative returns over a 45 year career, what would be the state of the government, which gets its money from the private sector? If the entire economy collapsed and never recovered, which is what would need to happen for the scenario you describe to unfold, the government wouldn’t have enough money to even properly fund the military, let alone send a check out to retirees. They probably wouldn’t even have enough money to pay for the electricity to run the machines that make the checks. You’re talking Mad-Max, digging in the woods for roots to eat kind of times at that point. Also note that the actuaries for Social Security are warning that the system is running out of money and benefits will need to be cut in the near future. You’re floor is sinking.

      As far as employers paying out the savings, so long as you have a competitive economy where people are competing for workers, wages will rise to the level that balances prices charged, wages paid, and a reasonable profit. Some of the savings might go to lowering prices rather than higher wages, which would benefit workers as well since they buy stuff, but I’m sure we would see higher wages as well. Businesses that tried to just increase their profits would see their sales lost to competitors who we cutting their prices and their best workers switch to companies that paid them more. Keeping the higher profits wouldn’t last long.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.