Over the years of researching Social Security, I have heard a non-ending chorus from those who lament losing the right to invest their Social Security contributions. It is the refrain: “I’d be a millionaire if not for Social Security.”
I Could Have Been a Millionaire
I never gave this claim much thought because most frequently the supporting figures were based on bad math and inaccurate facts. Many of us have seen the email alleging that someone making “just $30,000” would be a millionaire by now if left to his own devices. The results are based on the wrong rates, wrong timelines, not inflation adjusted, and the wrong benefits. Unfortunately, the author of the email spent more time typing the answer than considering the question.
Good Question Even If It Is A Poor Answer
The issue is lost savings, which is the cost of participating in Social Security. If the government can require someone to buy old-age insurance, it could equally well require someone to invest said amounts in the market. Further, it could require the workers to transfer this savings to old-age insurance upon retirement to make the discussion apple to apple. In my own case, Social Security has been an exercise of spending quarters to buy dimes. Going through the figures to arrive at that conclusion taught me a couple of things. The timing of when you earn your wages is important. My best wage years occurred early in my career. Separately, “index returns” tend to be higher than actual returns if only because of fees. For your consideration, here is amount of savings average workers have lost to Social Security by their year of birth.
||Lost Savings At Retirement|
||$1,956 (1952) / $15,629 (1994)
||1940||65||$2,824 (1962) / $23,456(2004)||$164,193
||66||$4,694 (1972) / $31,648 (2014)||$330,078|
||67||$9,561 (1982) / $32,849 (2017)||$584,846|
see Author's Note on Calculation
But What Does It All Mean?
First, average people looking back would not be a millionaire now without Social Security. At this point, investing Social Security contributions would generate a lot of money – much of which would be spent on providing care for a parent or two.
Second, these costs are rising at a staggering pace. If the system continues on its present course, average people will at some point lose a million dollars of savings to the system. For example, if we extend the experience of those in our 50s to those in their 40s, the cost in lost savings of this system will approach $900,000 for someone born in 1970.
Third, the rise in the cost of the program is primarily a matter of tax increases. Since inception, the program has increased tax rates 22 times. As a consequence, the worker at this level in 2016 contributes ($4,073.30), nearly 75 times what the amount paid by this type of worker in 1951 ($55.26). You should keep that in mind when you hear that the program is struggling because of a falling worker to retiree ratio.
Fourth, the loss of savings exposes serious policy considerations with increasing the retirement age. Typically the wonks see this proposal solely as a benefit cut. The fact is that people have to work an additional year. In terms of the year over year analysis, increasing the retirement age by 1 year increases the lost savings between 10 and 20 percent because of the additional investment time. Moreover, the incremental contributions generate almost nothing in terms of benefits.
Social Security isn't an investment, but that doesn't mean that citizens could not be forced to buy an annuity in the private sector instead of an annuity from a government run system.
These measures are fairly sensible figures to consider because they approximate a citizen saving over the course of a working career in order to buy a financial product comparable with Social Security. I am not going to say that we have reached a point where citizens would be better off saving for their pension. It is fairly evident that at some point on the current course younger voters are going to ask questions about the effectiveness of this program.
At some point, the program will be spending quarters to buy dimes for everyone, where the only way that you get the dime is to convince your kids that they should spend a quarter to buy a nickel. Spending quarters to buy dimes is no way to prepare for retirement.
Author Notes Author calculation:
- Assumes worker earns 70% of the SSA’s average wage index wage, and 6% unemployment and nominal market returns of 7% which is about 2/3rds of the actual nominal returns of the S&P 500 since 1951 of 11.1%.
- Actual returns will not match an “index” return, such as the S&P 500, because of fees. Separately, wages move with the economy. In my case, about 1/3rd of my wages occurred within 18 months of a market top. Likewise, many of us were unemployed in 2009 which presented a very good buying opportunity.