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Are Your Social Security Taxes a Good Investment?

Society & Culture  (tags: americans, children, culture, dishonesty, education, Facts, investment, Social Security, taxes )

- 1911 days ago -
This comprehensive analysis should help dispel cynicism regarding the value of the Social Security program. It's a very important part of the retirement security of the majority of Americans and it deserves our continued support.

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Kit B (276)
Tuesday November 27, 2012, 11:56 am
(Image: Stock Photo)

(MoneyWatch) Will you get your money's worth from paying your Social Security taxes? If I received a dollar every time I heard a "no" answer to this question, I could retire right now! Unfortunately, many of these "no" answers are based on opinion, not facts and figures.

One authoritative answer comes from the actuaries at Social Security, who recently released a report in which they estimated the real rates of return that various hypothetical workers might receive from the contributions they and their employers pay into Social Security. This comprehensive analysis suggests that the answer to the question is "yes" for the vast majority of workers. Let's take a look.

First, the report is quick to point out that unlike your contributions to a 401(k) plan, the taxes you and your employer pay into Social Security aren't invested and accumulated in an account in your name to be paid to you during your retirement. Instead, the taxes you pay entitle you and your beneficiaries to monthly income amounts that are paid upon your retirement, disability, and/or death. The amount of the benefits you and your beneficiaries receive are defined by Social Security's benefit formulas and provisions, not by the accumulated taxes paid by you and your employer.

Nevertheless, it's possible to estimate the real rate of return, after inflation, for your contributions so you can see that if this rate of return were credited to the taxes paid by a worker and his or her employer over the course of a working career, the accumulated amount would pay for the estimated benefits that would be received over the expected lifetime of the worker and his or her beneficiaries. And that describes the calculations prepared by the actuaries at Social Security in their report for a very large number of hypothetical workers and scenarios in a thorough attempt to cover all the bases.

The actuaries looked at hypothetical workers who had very low, low, medium, high, and maximum covered wages, for years of birth ranging from 1920 to 2004. Within each wage and birth group, they looked at single men, single women, a one-earner couple, and a two-earner couple. They included additional hypothetical couples by assuming various combinations of spouses who had very low, low, medium, and high wages for a total of 297 hypothetical situations in all.

In order to reflect that it's inevitable that some adjustments to either benefits or taxes would be made to Social Security due to projected shortfalls in the program's funding, for each of these 297 hypothetical workers and couples, the actuaries looked at three benefit and tax scenarios:

No changes to the current law regarding benefits or taxes
In the year 2035, when the trust fund is projected to be exhausted, payroll tax rates increase to the level needed to pay for the current level of benefits
Benefits are reduced in the year 2035 to amounts that can be supported by the current tax schedule

In order to consider all the combinations of 297 hypothetical workers under the three benefit and tax scenarios, the Social Security actuaries prepared 891 "money's worth" calculations. Whew!

Now for a summary of some key results. First, in none of the 891 calculations did the hypothetical worker receive an estimated real rate of return that was negative. In other words, all hypothetical workers in all scenarios were estimated to receive a rate of return that at least equaled the projected rates of inflation. The estimated real rates of return ranged from an annual rate of 0.04 percent to 9.19 percent per year. It's instructive to look at the circumstances of the highest and lowest estimated rates of return.

The highest estimated rate of return under the current law was for a very low wage, single-earner couple, both born in 1920. This result reflects that the current generation of elderly retirees are receiving higher benefits relative to the taxes they paid compared to the current generation of workers. This result also reflects some social goals that are built into the program:

Social Security favors very low wage earners by "front loading" the benefits formula to provide a higher level of benefits on the lowest amount of wages.
It also favors the traditional household where one spouse works and the other spouse is a homemaker by paying a spousal benefit to spouses who didn't earn wages.

The lowest estimated rate of return under the current law was for a maximum wage-earner, single male, born in 1964. This result reflects the fact that men don't live as long as women as well as the front-loading feature described above, working in reverse.

Now let's take a look at the results for a group that represents a large number of current workers. For medium wage earners who are currently age 63 or younger, under the current law, the estimated real rates of return ranged from 2.13 percent to 4.66 percent per year. For the scenario that increased taxes to close the funding deficit, the real rates of return ranged from 1.92 percent to 6.52 percent per year. For the scenario that decreased benefits to close the funding deficit, the real rates of return ranged from 1.63 percent to 4.52 percent per year.

Looking at all the various combinations, large numbers of hypothetical workers received estimated real rates of returns of 2, 3 or 4 percent per year. This suggests that for the vast majority of workers, Social Security taxes are a good investment when you consider that you don't need to assume any investment risk in order to receive the benefits. A real, risk-free rate of return in these ranges is pretty darned good.

One explanation for these results is that the analyses prepared by the Social Security actuaries reflected survivor and disability benefits in addition to retirement benefits; these ancillary benefits are often overlooked in other "money's worth" calculations.

How to maximize your Social Security payouts
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Social Security strategies: How to get $90,000 more for your spouse

Of course, it's possible to find scenarios not included in these analyses where the worker receives a poor rate of return. For example, single people who die while working and before retirement will receive nothing in return for the taxes they paid.

And you could make other assumptions on a variety of factors that could produce different results. For this money's worth analysis, the Social Security actuaries used the intermediate set of actuarial assumptions that are used to prepare their annual report on Social Security's financial status to Social Security's Board of Trustees. These assumptions are their best estimate of future experience on a variety of factors such as economic growth and demographic trends. For the annual Trustees Report, they also prepare forecasts using low cost and high cost assumptions; use of these assumptions for the money's worth analyses would have produced either more optimistic or less optimistic results compared to the best estimates.

Nevertheless, this comprehensive analysis should help dispel cynicism regarding the value of the Social Security program. It's a very important part of the retirement security of the majority of Americans and it deserves our continued support.

By Steve Vernon | Money Watch |

Nancy M (197)
Tuesday November 27, 2012, 1:12 pm
Very interesting article. And it gets to a point that I realized a few years ago. While I have been hearing since I was a teenager that SS is going broke and that I shouldn't expect to get anything, that I should take care of myself, my yearly report has been telling me something else. Despite having been putting money into 401ks, 403bs, and IRA, and oh yeah, a government TSP at one point, I will get more money from the Social security than from my other accounts. They do indeed go up and down on a delightful Merry-go-round.

My Dad always said to never invest any money that you need in the stock market.

Barbara K (60)
Tuesday November 27, 2012, 1:28 pm
Social Security is a program that works for those who need it and those who retire. It is a program that works and will keep on working if we can keep the hands of the greedy and the GOP off it. They've been trying to pillage it for decades. We cannot allow that to happen. There is no reason to damage it so that the seniors of this country end up living and dying in the streets, just to make the rich richer. Thanks for the post, my friend.

Kit B (276)
Tuesday November 27, 2012, 2:00 pm

Your Dad has been proven correct, Nancy. One might do as well in a casino. If all other investments fail, and they just might, we have (most of us) put money into Social Security, and that will help us. Though most will still have work part time jobs.

Nancy M (197)
Tuesday November 27, 2012, 2:12 pm
And BTW, it's not like he didn't invest. Made tons of money in the stock market. Made 5% during the crash of 2000-2001. (Just in case any one thinks he didn't know what he was talking about)

Past Member (0)
Tuesday November 27, 2012, 4:03 pm

Judy ComputerDownC (97)
Tuesday November 27, 2012, 4:28 pm
Social security is very well-designed, and I'd hate to see what would happen if we didn't have it.

Lin Penrose (92)
Tuesday November 27, 2012, 4:50 pm
Thanks Kit for the post and info. Whew is right! The calculations alone (without calculators) is (my) mind boggling! Considering that I have been in several different categories through out my wage earning life (age of about 9 - unreported until 13). Gee, I'm glad that I get anything monetary back from all the sweat, tears, frustrations, etc. , I and my employers invested. I did gain quite a bit of education about life in those years. Not monetary, but very valuable.


Yvonne White (229)
Tuesday November 27, 2012, 4:54 pm
Social Security is the only "sure bet"! (Green star on its way to Nancy M.!:) Why is it that supposedly intelligent people won't gamble outright at casinos, or friendly poker games, or even a Lotto ticket (which at least some proceeds go to Education, hopefully Math!;) but they will play the Stock Market????? I view the Stock Market as a giant casino where the House always wins, where billionaires launder their money, & the entire Middle Class gets fleeced...but I'm "gambling" on Social Security because it won't take the shirt off my back.

Kit B (276)
Tuesday November 27, 2012, 5:16 pm

That may be a "bet" some people's head but not a losing bet, Yvonne. Keep your shirt, let others play on the Wall Street casino floor.

Susanne R (237)
Tuesday November 27, 2012, 8:25 pm
I agree with the author: Social Security is a very important part of the retirement security of the majority of Americans and it deserves our continued support.

JL A (282)
Tuesday November 27, 2012, 10:01 pm
I've read reports that the impetus to dismantle it began when Bush authorized IRAs and 401K plans designed to move middle class earnings onto Wall St. and to push towards all retirement become an individual responsibility instead of one shared with an employer so that SS funds would eventually also move to Wall St. There have been a couple of historical fixes in response to actuarial updates--the only insolvency issue is if Congress fails to do its duties and act soon enough to address the problem prior to 2035.

Gloria picchetti (304)
Wednesday November 28, 2012, 6:09 am
Without Social Security many of us would be in the streets.

Roseann d (178)
Wednesday November 28, 2012, 12:19 pm
From what I've seen of the lousy performance/returns of 401Ks on Wall St....all of our retirement investing should be in SS. Besides...Wall St. investing is Monsanto, Big Ag, Big Oil, Big Coal, Big Crap in general...Investing in that crap is investing in our own demise.

James Maynard (84)
Wednesday November 28, 2012, 1:50 pm
It was because I never expected there to be any Social
Security left by the time I would be eligible to collect, that
I made certain to have a defined pension and solid
investments and insurance to grow old on. Today, it
would be a simple fix to salvage by simply eliminating
the wage cap. I have about five years to see if I will get
any of my SSI investment back. Just have to keep the
GOP from destroying it.

Stephen B (23)
Wednesday November 28, 2012, 2:11 pm
Sorry if I was unclear: The "1.9%" was the annual rate of return in the example generic mutual fund before compounding or inflation.

Theodore Shayne (56)
Wednesday November 28, 2012, 4:31 pm
Great article. So if the answer is yes why do they want to scrap it?

Phil P (94)
Wednesday November 28, 2012, 5:13 pm
@ Steven Brian: "In short, investment in social security is not terrible, but there are more profitable investments out there for the same money. They may be somewhat riskier, but if the economy drops off then social security will not really be safe either."

Interesting analysis and alternative. However, do your really think, based on your statement I've quoted, that you "investments" will really be worth anything if social security, i.e. US Govt, is not really "safe"?

My wife work for 22 years in a well paid job in the former Yugoslavia and had a nice sized pension built up only to watch everything gone in a flash.

Jason S (50)
Wednesday November 28, 2012, 6:42 pm
good posting, thanks

Stephen B (23)
Wednesday November 28, 2012, 7:04 pm
Hi Phil :)

I'm sorry to hear about your wife's loss of financial security and, I'm guessing, many far worse losses in the former Yugoslavia. I hope things are okay now for both of you.

If the U.S. government is not safe, then I expect to see some serious global economic crisis so really no individual investment will be. It would be 2008 all over again, with a major hedge-tool, (the Treasury Bonds instead of real-estate), crashing at the same time as traditional investments (public service support-economies instead of financial institutions involved in mortgages), but a lot worse even before considering the impossibility of a bail-out. This is part of why I have long supported a controlled contraction of government, to avoid catastrophic uncontrolled contraction. (The other reason is because a centralized government is, almost by definition, a large collection of point-failure sources in the economy and society. I would like to see responsibilities moved to a setup with more redundancy.)

No individual investment would be safe in the event of a U.S. government-crash. This is why I like mutual funds so much: My account-manager maintains a diverse set of investments for me so while many would certainly crash, I don't expect it all to disappear from any individual event. My particular investments, being primarily in Canada where I am from, are partially protected from a crash in the U.S. An American would still hurt, but I expect the political upheaval and class-war or quantitative easing which would inevitably result to drive much of what wealth remains north. (Inflation from quantitative easing directly harms those with large U.S. bank-accounts most, and class-war would definitely drive out the rich.) I am strongly considering spreading my investments to other economies which are less dependent on the well-being of the U.S. Despite all of that, I expect that social security is still safer than the bulk of private investments, but less profitable as its interest goes to pay other recipients immediately rather than compound.

Kit B (276)
Thursday November 29, 2012, 6:30 pm

From the article:

First, the report is quick to point out that unlike your contributions to a 401(k) plan, the taxes you and your employer pay into Social Security aren't invested and accumulated in an account in your name to be paid to you during your retirement. Instead, the taxes you pay entitle you and your beneficiaries to monthly income amounts that are paid upon your retirement, disability, and/or death. The amount of the benefits you and your beneficiaries receive are defined by Social Security's benefit formulas and provisions, not by the accumulated taxes paid by you and your employer.

This is not a lottery, nor casino gambling. Sure if the entire US government goes down in flames, than we all lose not just Social Security. Those who have extra money to invest, do so, those who know from early on that Social Security will be their last line of defense from total loss and extreme poverty than it is a safe investment. The first thing always "lost" in bankruptcy is the pension funds.

Lloyd H (46)
Friday November 30, 2012, 10:07 am
Perhaps I am really old fashioned but I consider Investment in the USA to be a good investment. And that is regardless of whether you are talking about the investment in the "Life, Liberty and Pursuit of Happiness" of Older or Disabled Americans or the USA as a nation, the Social Security Trust Fund owns 17.9% of the US Debt. The PR event of the Fiscal Cliff does not actually effect SS as much as failure to raise the Debt Ceiling might. And I say might because regardless of how much in love with the power that the Repug/Tea Bagged think holding the Debt Ceiling hostage gives them; that is an Illusion. I give as reason for this the following; the Constitution of the United States of America, AMENDMENT XIV Section 4. " The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurections or rebellion, shall not be questioned.
Section 5. The Congress shall have the power to enforce, by appropriate legislation, the provissions of this article." In short whether or not the Repug/Tea Bagged like it or not the only laws that "Congress" ARE allowed to pass are those that DO NOT QUESTION THE PUBLIC DEBT OF THE UNITED STATES.

Stephen B (23)
Friday November 30, 2012, 10:33 pm
Hi Lloyd :)

Investment in the U.S. is generally good, but the government is, by design, wasteful. The system of checks and balances is meant to prevent tyranny and corruption, but it does so at the cost of efficiency.

The 14th Amendment does not mean that the U.S. cannot limit its debt. It means that the U.S. federal government cannot legally default on its own pensions (for former federal government-employees), nor on its debts to any private forces or individuals it employs to put down a rebellion. It doesn't say anything about treasury bonds, nor about laws setting a limit on total spending in excess of revenues.

Lloyd H (46)
Saturday December 1, 2012, 8:08 am
Stephen, sorry but perhaps you should read Section 4 of the 14th Amendment, It says, "validity of the public debt of the United States, authorized by law, INCLUDING DEBTS INCURRED FOR PAYMENT OF PENSIONS...". So your some what Tea Bagged assumptions about government and because of them I notice that you totally ignore the fact that most of our Debt problem is due entirely to several things the two biggest being the totally false assumption that Voodoo Economics that redistribute wealth upward actually works and the Norquistian law that Taxes can only be cut not increased is sound fiscal policy both of which are totally false. Refusal to grow revenue/taxes while the population grows in size, in age and infrastructure ages and falls apart is neither sane or good fiscal policy. Treasury bonds whether or not you like it are legal debt. Your approach also ignores the plain and simple fact that the US Debt is mostly comprised of the Bush Tax Cuts, that almost entirely benefit the upper 2% and the Corporations they own, and the Afghanistan and Iraq Wars, and their subsequent supplementals, were placed directly on the Credit Card of the US with absolutely no effort to raise the revenue required to pay for them or Medicare Part D or No Child left behind.

Kit B (276)
Saturday December 1, 2012, 8:54 am

That is sound thinking, Lloyd and substantiated by all non-partisan inquiries and examinations. Or if we must, go back to basic mathematics. This nation, as all nations do, has carried a deficit forward since it's inception. There is no magical theory that suddenly will erase the deficit. It is a ploy, one that has brought the public conversation from examining what needs to done, rebuilding or replacing current infrastructure; to false discussion of deficits. The tax increases currently being addressed are so small as to less than harmful to individuals, but will aid the waning revenue coming to the government. Once again, Social Security funding is not directly affected by these discussions, the funds are separate and must remain so.

Grover Norquist has a job, his job is to represent those clients that pay him (extremely well) for representing their private interests. The public good, the growth of nation are secondary to his task. The man is not elected by any group of citizens.

Vallee R (280)
Saturday December 1, 2012, 4:26 pm
Benefits reduced in 2035 - I can barely think about 2013.....we'll see - just say bread prices all went up this week - they guy told me that everything he put on the shelf toay went up = dust bowl stuff - we have had no rain!

g d c (0)
Sunday December 2, 2012, 8:48 am

Stephen B (23)
Sunday December 2, 2012, 3:12 pm
Hi Lloyd,

Despite modern terminology, the Social Security Trust Fund is not a pension, at least not in the sense referred to in the amendment. The pensions to which it referred were classic pension-plans of the federal government, not a trust fund which acts as a substitute or complement to both public and private pension-plans.

Also, there are two severely mistaken assumptions in your post: The problem with most fiscal projections is that the CBO cannot predict the impact of changing tax-rates and structures on economic growth, so they totally ignore it. It is known, however, that reducing taxes will increase private business-expansion. Some of the money stays with the wealthy, but the majority goes into increasing efficiency of production, wages, and jobs-creation. I am having trouble tracking down the report, but I saw a survey which asked Quebec business-owners what they did with the money they saved by reducing paperwork-burdens using software provided by the government. It reported that 20% went to profit while the rest went into increasing inventory, machinery, worker-training, wages, and new hires. Assuming that this holds roughly true in the U.S. and that the type of legally required cost makes no difference, tax-cuts should be about 80% efficient in economic stimulus. This efficiency rivals that of actual stimulus-programs (as administrative costs can easily take ~ 10%) and is completely free of political interference, making it, I think, a far more efficient method of stimulus than any government-controlled one. The result of this is two-fold:

First, lower tax-rates lead to such economic growth that over the long-term they can result in higher revenues as while the fraction of the GDP taken in taxes is lower, the growth of GDP leads to higher dollar-numbers. Second, economic growth spurred by lower taxes, or lower compliance-costs (which I actually think is a better target to go after than taxes themselves for a few reasons), produces new jobs, trains people for greater productivity so they can get better jobs, and goes into growth of the real economy. The measurable difference, in terms of government-revenues, between growing the real economy and going directly after the economic indicators with make-work jobs and assistance-programs, comes directly from the law of supply and demand: Increasing production, or lowering production-costs, lowers prices of goods, driving down the absolute poverty-line. If the poverty-thresholds are set according to the income needed to access specific goods and services needed to survive and achieve economic mobility, then lowering prices lowers that line and reduces the number of people in poverty. In dollars of government-deficit, a lot of assistance-programs are offered only to people below a certain multiple of their poverty-lines and in assistance is calibrated to those lines. This means that real economic growth, as long as we don't keep moving goal-posts on what constitutes "poverty", drives down the cost of welfare-programs.

Hi Kit :)

There were, apparently, a few months under Andrew Jackson in which the U.S. government was debt-free and ran a surplus. Then Jackson screwed up badly when trying to stop a real-estate bubble and the crash produced 6 years of recession and a large debt.

Anyways, the issue with Norquist is a little more complicated than it looks. As I have said in a few places, nothing is as dangerous as someone who is thoroughly convinced that he or she is doing the right thing, and there is nothing as implacable as a good person's conscience. Norquist believes that lower taxes would benefit the public, mostly for the reasons I have mentioned on this thread (in this comment and when I explained why I support smaller government, calling all governments collections of point-failure sources for the economy and society). People may understand underlying principles of economics, but nobody understands the state of the modern economy well enough to prove him right or wrong. I believe, for a few reasons, that while there are truly corrupt, selfish, greedy, and otherwise fundamentally villainous people involved in many of the world's problems, they are very rare and usually play a minor role.

Past Member (0)
Thursday December 20, 2012, 2:12 pm
The old republicans. The sane ones, loved SS!
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