Today I received my Social Security statement in the mail. If this thing is supposed to give me warm fuzzies about Social Security, it failed miserably. I got curious, you see, and decided to run a few numbers.

According to the statement, if I retire at age 62, my monthly benefits will be $1431. Retire at age 67, they’re $2069. At 70, $2566. Sounds pretty good. But what are the opportunity costs?

The Social Security payroll tax rate is 12.4% of earnings up to $87000 annually (as of 2003). In 2003 my income was over that. Let’s assume my income, the tax rate and the tax cap don’t change. (Unlikely, but the ways they probably will change all make Social Security an even worse deal.) So Social Security is taking 12.4% of $87000 from me annually. That’s $10788 a year.

Currently, I’m 33. So if I retire at age 62, those taxes will come to a total of $312852. If I retire at 67, the tax bite is $366792. And if I hang on until 70 before I quit working, $399156.

But wait! I forgot the miracle of compound interest. If I were free to take that money and invest it in, say, my 401k, it would be earning interest over the next 30+ years, and that adds up. How much does it add up to?

Assuming I can make 4% annually (not an unreasonable average rate over a period of decades), my nest egg on retirement at age 62 would actually be $594256. At age 67 it would be up to $783772. And at 70 it would have climbed to $916659.

If after I retire I start living off that 4% income stream instead of reinvesting it, my monthly income at age 62 would be $1980. At age 67, it would be $2612; at age 70 it would be $3055. That’s more than $500 extra per month from interest income alone. If I also decided to draw down the principal those monthly income numbers would be even higher. And if I didn’t draw down the principal I would be able to pass it on to my heirs when I die — something I can’t really do with my Social Security benefits.

And these calculations are ignoring the taxes I paid into Social Security over the past 14 years, and the money I could have earned from investing them as well, while including those payments for purposes of computing my Social Security benefits!

So, summarizing: Social Security in its present form is robbing my future self of $500 a month in retirement income, robbing my future heirs of between roughly half a million to a million dollars in inheritance after I die, and claims while doing so that it is helping me provide for my future.

Bah. Privatization can’t happen fast enough.

8 Responses to “Social Security And Why I Hate It”
  1. Tom says:

    Even at 4% rate of return you’re accepting some risk. In theory, Social Security, underwritten by the US, is a lower-risk investment and should have a lower return, right?

    Personally, I’m against social security privatization. Payroll tax takes 12% of my income, and I put another 18% or so into 401ks and the like. Diversification.

    (Most people don’t diversify adequately, and IMHO large numbers of elderly poor has significant negative externalities, so I accept the friction that accrues in socializing that particular decision. This is one of those places where you probably have more reasoned arguments than I do, though, and I’d love to hear them.)


    (Isn’t it 6% of my paycheck and a 6% match from the employer? We can argue over whether in the absence of social security that money would be paid to the worker or used elsewhere by the employer – hard to tell.)

  2. Kyle Haight says:

    There are also risks involved in Social Security. You are depending on politicians to keep their word, which over a time span of decades is a pretty big gamble. At one point Social Security income was not taxable — now it is. The retirement age keeps creeping up over time. There are rumbles about means-testing benefits. And so on. The Social Security statement itself says on its front page that “Without changes, by 2042 the Social Security Trust Fund will be exhausted… There won’t be enough younger people working to pay all of the benefits owed to those who are retiring.” Frankly, for the system to survive to my projected retirement dates some kind of major change will *have* to happen, and barring privatization that change is likely to take the form of either substantially reduced benefit payments or a substantially higher payroll tax. Either of those changes would allow me to match the returns on Social Security with even lower-risk investments.

    If the government wants to force people to diversify, it could address the problem by requiring certain minimal levels of asset class diversity inside the various tax-deferred retirement saving vehicles as a condition of preserving their tax-deferred status. There’s no need to create a massive federal bureaucracy and an intergenerational wealth transfer to achieve your desired goal. Personally I think people do better at taking responsibility when you actually give them some, but your milage may vary.

    You are correct that the payroll tax is technically 6.2% paid by the employee and 6.2% paid by the employer. I think it is quite likely that the employer’s 6.2% would be reflected in an increase in employee salaries, but even if it isn’t there would still be positive economic effects that employees could use. If all companies kept the 6.2%, for example, it would increase average corporate P/E ratios by a small percentage annually, which would drive an increase in their stock prices similar to an equivalent increase in corporate profits from some other source. That increase in stock prices would result in better investment returns on employee’s investments. Whether the net effect was positive or negative relative to giving the money directly to the employees would depend on whether the money wound up better invested by the companies or the employees. (I think this question is similar to the debate over whether lowering capital gains tax rates or corporate tax rates provides a better economic stimulus.)

  3. Sigivald says:


    Social Security is not about keeping you secure in retirement.

    It’s about you keeping today’s old people in their payments, and the chance that the Ponzi scheme won’t collapse before you get your turn.

    Call a spade a spade, I say.

  4. Kyle Haight says:

    Well, if you want to take that approach, why not just describe it as my parents planning their retirement on the assumption they can steal my money, thus forcing me to plan my retirement on the assumption I can steal money from my children?

  5. Kyle Haight says:

    One other thought for Tom.

    Your argument from negative externalities seems to me to be based on a fundamental economic distrust of the average person, which I think is deeply rooted in liberal thinking in general. I get the sense that liberals basically don’t think that the average person is capable of making sound decisions regarding their actions in the material world. Consequently, liberals advocate letting an elite make the decisions ‘correctly’ and impose them on everybody else by force.

    Conservatives suffer from a similar problem in a different area — they don’t trust the average person to make sound decisions in *spiritual* matters. Consequently they advocate forcing ‘correct’ spiritual conclusions on people by force.

    I believe in the ability of average people to make generally sound decisions on both material and spiritual issues; consequently I think the government should get out of the way and let them do so.

  6. Sigivald says:

    Kyle: That’d be correct, except, of course, that your parents didn’t have a choice about it (the stealing, if not the planning) and neither do you, under the current law.

  7. Kyle Haight says:

    True. Although my parents did have the same opportunity I have, to argue for and support privatization of the system and thus break the cycle of violence. As far as I know, they didn’t take advantage of that opportunity. (Neither personally, nor collectively in their generation.) I have, and many others in my generation have done the same. Even if we lose the fight to restructure the system, our rejection of its premises will be clearly and publically stated.

  8. John S Bolton says:

    It is right to protest this supposedly benevolent program. It is falsely claimed not to be a kind of welfare. The reason your return would be so low, is that there are redistribution features in the program. The wastrel Robin hood state is currently generating ss#’s for illegal aliens to get disability payments from this program, and trying to extend it further into Mexico. A new frontier in treacherous aggression on the net taxpayer is being opened up, while an insensate citizenry scarcely responds.

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