The “truth” about investing in Social Security. 

For those of you confused about the value of Social Security, take a look at this letter to the editor in response to a previous article about getting back what you pay into the system. If you look at your own figures you will find that you will get back all your contributions and your employer contributions within a relatively few years of receiving a benefit plus you get survivor benefits and a COLA (sometimes). 

However, that is a limited way of looking at the return. A way favored by higher income analysts is to determine what you would accumulate with interest over your working life if you had the 12.4% Social Security tax to invest for yourself. Here is a simple example. A person earns a steady $60,000 a year and monthly invests 12.4% of income which is equal to the SS payroll tax and earns an average 7.5% annually. (yes, they can afford that because they are already paying that amount in taxes). 

$2.7 million is a lot of money and would generate an annual income of about $111,520; far better than any Social Security benefit. It’s hard to argue with the math … but there are caveats.

  • What if you are not disciplined and don’t regularly save?
  • What if you are a poor investor and don’t make the 7.5% goal or worse lose money?
  • What if you become disable long before your normal retirement age?
  • What if you lose your job and must retire early at say 60?
  • How will you keep up with inflation?
  • What if you are faced with a financial emergency (or are tempted by a desired luxury) and recklessly use a big chunk of your retirement fund?
  • How will you plan for survivor benefits?

Yes, if everything goes right and according to plan, the experts are right, you can beat Social Security … If

Are you in the “let me do it myself” camp?

I doubt Social Security was intended to be a good investment, but rather as Roosevelt said, “some measure of protection to the average citizen and to his family.”



11 replies »

  1. You have some number problems. Social Security in total is 12.4%, but only 10.6% goes to the old-age retirement system. You are ignoring the disability benefits then you should exclude the cost.

    The biggest factor in whether you do well or not is how long you live. If you invest auto premiums in a private car-wreck account, you will do much better – well provided that you don’t have an accident.

    People are not steady earners. The problem which your scenario is that is highly unlikely. People do not start-out at peak earnings. You don’t have peak tax compounding for 45 years.

    The biggest problem with Siegel’s piece is that he is comparing insurance which is an expense to savings which is an investment.


    • I did say it was a simple example, I also didn’t count potential other earnings such as OT and used only 7.5% return, plus I assumed the start point at age 25 when for most it would be sooner, but you are right that I missed the payroll tax going to Medicare.


      • I do not have your formulas, but I am coming close enough to get to 2.6 million. The compounding is a serious part of that figure. If at 22, you only earn $30,000 rather than $60,000, you lose a $100,000 of the 2.6 million. People on average do not make $60,000 now in a mature career.

        Another problem is that you are forgetting that markets and wages are correlated such that you will buy peaks and be unemployed at market bottoms.

        According to the Urban Institute, a typical worker loses about $400,000 in savings over a career at 2% real. SSA is pretty close to the same thing.


      • But even if you use $50,000 isn’t the concept valid if not the actual numbers? Even if you assume only $500,000 accumulated aren’t you theoretically better than Social Security? If you are unemployed then you are not getting SS credit either.


      • Social Security is a terrible deal, one that gets worse with the passage of time. The reason that Social Security is a bad deal is that we have to pay for the under-funding of the system in the past. Switching to a personal account does not change the past. You will need to pay that price in the form of a different tax.

        If you were to use apple-to-apple, your cost figures would be 21.2% rather than 10.6%. If you want SS to be a personal account, you will need to have incremental taxes else where which equate to 10.6% of wages. Those taxes go to SS and you get nothing back. If we create personal accounts, the honest thing to do would be to raise payroll taxes from 15.3% to 26.5%, and you get to keep 10.6% in a personal account. The mistakes of the past will not pay for themselves, unless you tell existing retirees to pound sand.

        I do not believe that savings is a good substitute for insurance. Insurance provides a hedge against the cost of realized risk. No one plans to live to 100. Social Security is suppose to inject a little liquidity into your income stream to offset the cost of living a additional month. It isn’t something where you are making money.

        This isn’t to say that private accounts are bad. I have more than one retirement account. Saving for retirement is a good thing. Insurance can make up for a lack of savings. Incremental savings isn’t a good replacement for insurance.


      • You can plug in any numbers, but for low income workers, say under $25,000 per year. You cannot beat the SS system.
        I have 30 years of income taxed by SS, many of the years were part time. I will have everything I and my employers paid in, back in 48 months. Not counting the 35 % of my benefit, my spouse will receive.
        Granted, this is in inflated dollars, without figuring interest the $38,000 paid in may have earned, since I started working in 1976. I know even if I would of had the employer part of the SS tax in my pay check, I would not have saved it.
        In 1976 my income was $6,000, so only $600 was paid into the SS retirement for the year. Excellent return on my $300 tax payment.


      • Absolutely agree – great example of the “Social” in “Social Security”. And, as someone on the other side of that equation, someone who will have caused much more to be paid in than I can possibly hope to receive in benefits, I don’t have a problem – so long as you don’t worsen the return for me. So long as you don’t add new penalties, new costs, and take away the modest benefit the system provided in terms of Social Security and Medicare.

        Fact is, however, with Medicare Part B income based surcharges and Medicare Part D income based surcharges, as well as Social Security taxation where the exclusion is not indexed for inflation, it is only a short period of time and only a small step to take my benefits to a “means tested” basis, and end my social security benefit (as I don’t need it to survive) and to charge me more than 100% of the estimated cost of my Medicare Coverage – Part A, B and D (because I don’t need taxpayer subsidies) – even though I paid through the nose, far in excess of the benefits I will receive, for what will be more than 50 years of employment before I actually stop working.


  2. Sorry, social security is an entitlement, a promise to pay, not a contract. Don’t skip that.

    Similarly, those who say social security is a good buy tend to use averages – and conclude crap like, on average, people get more benefits than they pay in as taxes. Simply, averages can be deceiving. And, projecting out current benefits and current taxes conveniently forgets (or severely discounts) the benefit curtailment that will be needed in just over 20 years.

    In terms of “rates of returns”, ignoring inter-generational transfers, fact is, higher paid Americans are being targeted for significant benefit reductions – as evidenced by the income based surcharges for Medicare Part A and Part B, and the 22 year old change in Medicare Part A funding to remove the cap on wages subject to FICA-Med contributions. Go back 32 years, to 1983, and you have the changes to the COLA, and the taxation of benefits – also targeted to those individuals who financially prepare for retirement.

    It isn’t even a “small step”, let alone a “giant leap” to see a change to make SS AND Medicare means tested. So, many, perhaps including baby boomers, will pay all their lives, and see their benefits eliminated because they were responsible savers and worked for an employer who lowered wages, in exchange for a pension plan.

    Someday soon, once Boomers become a smaller percentage of the voting population than Millenials, expect to see younger voters recognize the swindle, the Ponzi-scheme that Social Security already is, and demand a change. Expect it to become a function of welfare qualification – like Supplemental Security Income … restructured that way to ensure it now buys votes from the Millenials (76+MM) ” … and expect it to be bipartisan, leaving Boomers no voting options to voice their displeasure.

    So, while there are reasonable solutions to the funding challenge out there, solutions that would leave the current “social” provisions in place, without exacerbating the funding shortfall, such solutions won’t hold hostage significant blocks of voters. Not a snowball’s chance in hell we will see a reasonable resolution of this issue.


  3. One of the best explanations of the SS tax. I would like to point out that we pay taxes all the time and may or may not see a direct benefit. I pay property tax that funds schools, but no longer have school age children. My 30 year old son who makes about $60,000 per year, puts $870 per month in his 401 K retirement account. He says he wants to retire at 65, a millionaire, he is on his way. He buys only used cars, Just had a house built 1600 sq ft. 3 bdrm 2 bath,2 car garage for $160,000 Worked with the builder and got the house built $30,000 under market price. Planning and sacrifice, He has never had cable TV and pinches every penny.


    • Social Security will be there in 75 years. The system will be fixed. But it will not be painless. Raising the tax the same as the COLA, until the tax reaches 20 percent, this will take about 20 years, that will be more in line with what people receive in benefits. Increasing the full retirement age to 70, 2 months per year over the next 18 years, with reduced benefits adjusted for people taking benefits from 62 to 70. No benefit increase for waiting beyond age 70.Lifting the income cap so all wages will be subject to the tax. Yes high income earners will pay more and get less, but they are in a much better position than the average worker. I do believe high earners should pay zero income tax on the reduced benefits they will receive in the future, that is something Congress will have to address.


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