Why Social Security is a Terrible “Investment”

Jeremy Siegel, a Professor at the University of Pennsylvania’s Wharton School recently submitted an opinion piece to the Wall Street Journal regarding the true return on investment that Social Security pays out to its ‘investors’, the individual taxpayers of the United States…   :::Spoiler Alert::: it is absolutely pathetic:

One commonly held belief about the Social Security system is that baby boomers and the generation that preceded them are making out like bandits, draining both the Social Security and Medicare trust funds and leaving little for younger generations.

(Editor’s Note: This “commonly held belief” is a fact.  One that I have discussed on multiple occasions in this forum.)

It is also widely believed—fervently so in some quarters—that the rich don’t pay their “fair share” of Social Security, since the earnings subject to the program’s taxes are capped each year. (The maximum amount of taxable earnings this year is $118,500.)

Do these notions—particularly the latter—stand up? Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits.

Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640.

Keep in mind that the contributions paid by employers amount to lost wages over the course of a worker’s career.

This sounds like a good deal—the benefits I would collect over the next 20 years are more than twice what I put in. But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund.

Moreover, the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. This number is particularly important, because the Social Security Administration bought government bonds with my (and others’) taxes to build up its trust funds. In effect, the government made almost one-half million dollars more on my Social Security taxes than they will pay me if I live another 20 years.

What about Medicare? Over the past half century, my Medicare taxes exceeded $1 million, more than three times my Social Security taxes. That’s because since 1994 there has been no cap on the income subject to Medicare taxes. I have calculated that these taxes, invested in Treasury bonds, would now have accumulated to almost $1.75 million.

I do not know the most expensive health-care coverage that I could buy at my age, but the so-called “Cadillac” coverage, upon which the government will apply a stiff surtax, is $10,200 a year. Even if I purchased super-premium, all-inclusive medical coverage that cost $20,000 or even $30,000 a year, I will never begin to make back the money that I paid the government to take care of my medical needs.

There’s another issue. As I continue to work, I will pay both Social Security and Medicare additional tens of thousands of dollars. I won’t get any extra benefits from these taxes.

So are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own.

While I appreciate that this topic has gained some national press from Terry Savage in the Chicago Tribune as a result, Siegel is a bit late to the party.   Siegel makes the exact same point as this handosme guy right here discussed in Chapter 2.3 of How Are You Not Angry Yet.  While the Journal does not allow for a thorough breakdown of exactly how the numbers play out, my e-book does in a simplified form that virtually anyone can easily understand.  You can check out the e-book right here.

The bottom line here is that Social Security as a mandatory investment vehicle is a raw deal for every taxpayer in the United States.  That it pays you a tiny portion of what you would have made through alternative investment options that virtually anyone can access is a sad joke for all working Americans.  As young Americans dawn on this realization, they will shut out the cries to strengthen Social Security and raise their own voices to shut it down.

-R.J. Renza, Jr.

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