Social security.... return on your investment

Factual Questions
1

I know it isn’t an investment…but if it was, does each person who pays in get the same return as a percentage of their “investment”?

I’m interested in those who are paying in now… or more recent history anyway. I think it is understood that older folks who paid in at lower rates and are collecting now are likely to get more back than current workers are projected to get back.

Is there a minimum benefit such that workers who pay in the least get the same in return as those who pay in more than they do?

Conversely, is there a maximum benefit such that, at some point, dollars “invested” do not increase the return at all.

I don’t think the “earned income credit” which is often justified as a refund of social security taxes impacts benefits at all does it?

2

I am not sure that there is any sensible answer to this. Surely (quite apart from anything else) what you get back is going to very much depend on how long you live after retirement.

That is why (as you say) it is not an investment: it is more like insurance.

3

Yes, it’s easier (and more accurate) to think of it as both an income tax and a loosely-coupled insurance policy.

4

Couldn’t you compare it to an annuity? I.e. when you retire you’ve paid in X dollars (adjusted for inflation or hypothetical interest that money could have been earning) and you use it to buy an annuity at market rates. Does that annuity pay more less than social security?

5

I think this is close to accurate. Legally, it’s sui generis – a plan underwritten by a dedicated tax which provides benefits to those meeting certain criteria. You cannot calculate a ROI on it any more than you can calculate your ROI on gasoline tax and highway usage. But it functions most like an annuity, in that you need to be of a particular age or disabled and have worked with earnings above a specified amount for a particular number of quarters, or be the dependant of someone who has so worked. All those generalizations are spelled out in law, and of course it’s a rather complex bit of law, with different minima for being the dependant of a deceased taxpayer, a disabled person, or a retired person.

6

That might be an alternative way of having people provide for their retirement (a terrible way, in my opinion, but that is another matter, and more a Great Debates topic). But it isn’t the way we have, so it is not really relevant to the OP.

I do not know the figures, but I should guess would be that if you were not spending down the capital on you “annuity” but just living on the interest, it would generally be a lot less than SS would give you (given plausible assumptions about market conditions), whereas if you did spend down the capital, it might eventually run out leaving you destitute, which is precisely what SS is insurance against. With SS you are, effectively, spending down the capital, but the idea is that enough people will die before theirs is all spent to allow for the people who live longer. Thus, no-one dies without SS, but likewise, no-one dies with a big pot of SS derived capital left over for their heirs to inherit (this removes some of the incentive to murder your aging parents!).

7

Suffice it to say that if any private retirement plan were set up like Social Security, the government would immediately shut them down for fraud.

8

Of course you can calculate a rate of return for a given individual’s Social Security contributions and benefits. You can calculate a rate of return for any series of cash inflows and outflows.

However, you won’t get a definitive answer for any given individual until that person is dead. Until then, you don’t know for sure how much benefit they’ll collect. And of course, until a person retires, you don’t know for sure how much they’ll contribute.

For a living, working person, you can only calculate an expected rate of return based on various assumptions–how long the person will work, how much they’ll earn, whether Congress will raise taxes (eventually, they’ll have to), how long the person will collect benefits in retirement, and how much those benefits will be (benefits vary with inflation, and Congress can change the law at any time).

A given individual’s expected rate of return varies based on longevity, income, and family status. Longer-lived groups (women, white people) enjoy higher (not high, but higher) expected rates of return. Shorter-lived groups (men, African Americans, smokers) enjoy lower rates of return.

Lower-income individuals enjoy higher rates of return, because there are redistributive elements to the benefit formulas. Higher-income individuals enjoy lower rates of return.

Persons with non-working spouses enjoy higher rates of return, if you count the survivor benefit as part of their benefit. Persons born earlier in time enjoy higher rates of return, because they paid SS taxes at a lower rate while they were working. For very young people, the rate of return is especially uncertain because their benefits may one day be drastically reduced (with fewer working-age people, the taxes won’t be there to pay them).

In general, averaging out for the above variation, SS rates of return for people born after 1950 are poor relative to other investments, because it’s structured as a pay-as-you-go program where a diminishing number of working people needs to support a growing number of retirees. Here are some figures.

9

That doesn’t even make sense, much less answer the question. A private company couldn’t set up a plan like Social Security because a private company doesn’t have the taxing authority of the United States of America.

Social Security isn’t a retirement plan. It isn’t a pension. It isn’t an annuity. It’s just Social Security - social insurance that covers disability, old age, and a few other things. It’s “return on investment” is that we don’t have a bunch of destitute old and disabled people in this country, and that every working person has at least a basic safety net against destitution in retirement or after a disability.

Am I reading those figured incorrectly? The SS ROI tables actually look pretty damn strong - and much better than any of the other “risk free” options (like T-Bills).

From the article:

It is true, of course, that without changes the ROI for younger people will not match those of the earlier generations. In the end, however, I wouldn’t really expect SS to out-perform T-Bills, since they are both backed by essential the same guarantee - the solvency of the US Govt.

10

Don’t forget it in all forms. My dad died when I was 11 and my mum when I was 16. I received social security payments until I was 18 and I got my first job (part time) when I was 16. So I was receiving money without ever really paying into it.

So my father who got nothing in return but my mother and I got the money he put into it. Well some of it anyway

11

Really? Please provide a documented example of one aspect of SS that meets the legal definition of fraud.

Honestly, when you start a comment with “Suffice it to say…” or end it with “…'nuff said!” you have ipso facto exposed your argument as worthless.

12

FatBaldGuy is providing yet another example of the fallacy that says the government is or should act like a business. It isn’t, and shouldn’t. Businesses get to choose their clients. Governments do not. That changes the ground rules so spectacularly that nothing can be the same. (A few businesses do try to serve literally everybody. What happens then? The government has to step in and regulate them. See regulated monopolies.)

Social security is like Medicare or the military or the court system. There is no private equivalent. They are functions of government and work under the special rules of government, the ones that require theoretic equality to all. Once “equal” and “all” are part of the equation, we’re in the realm of government and talk of business has to stop.

13

I think the comment may have been somewhat tongue-in-cheek. In one way, Social Security is a big pyramid scheme but only because the age demographics in the U.S. change over time, particularly with the Baby Boomers starting to retire. There are now fewer people entering the scheme to pay benefits for a larger number of retirees. I do not intend this to be a real analysis, because I honestly don’t understand all the complexities of SS funding and how it interacts with U.S. economics, but I’m trying to show one way this might be considered fraud if a private company were doing something similar. However, it would more likely be considered a losing business model; for example, GM dug itself into a hole with the sweet retirement packages it provided for its employees during the boom decades, then that obligation became a huge drain on the company as the auto business faltered.

14

IOW, I really don’t know what I’m talking about, but I’m not going to let that stop me from talking. :smack:

15

Sadly, there have been many GD threads where people claim that SS is a Ponzi scheme. You and FatBaldGuy can search for them and spare us the trouble of going through it all again. Suffice to say your average pyramid scheme does not put money in reserve to pay later claims, does not publish its balance sheet, and does not start off with nearly 100% participation. Otherwise they are exactly identical.

16

It really depends on which very young people you mean. The generation of Americans born between 1980 and 2000 is the largest since the babyboomers, so people still decades away from retirement and currently in their mid-20s-40s ought to benefit from them simply because the younger folks outnumber them by several million, and some estimates claim that their population is fully double that of the generation just before them (those born between 1960-1980 are the fewest in number since the generation born around the great depression). It’s hard to tell what will happen when these currently 10-30 year olds retire given that the generation that follows them’s eldest members are still no older than ten years of age.

17

Sure there is. Not everybody pays into social security as part of their forced retirement deduction. Municipalities and government workers have a variety of retirement programs independent of social security. If you compare them there is a difference of return for dollars “invested”.

18

Instead of smacking your head why don’t you address what I said that is incorrect. :rolleyes:

19

Social Security is not in any way a pyramid scheme. That makes the rest of what you said wrong. Fraud is not an applicable word.

We can change everything about SS anytime we have the political will to do so. We have in the past. We will in the future.

20

When calculating the return on SSI, you must consider that it is not only for retirement, but also for disability and survivor benefits. The way to to this would be to separate each payment into three parts, one buying disability insurance, a second buying term life insurance (if you have eligible beneficiaries) and a third for retirement. At retirement age determine the cost of an annuity with the same payoff (including again survivor benefits). Then you could determine the rate of return that equates the annuity cost to the future value of the payments.

Note in doing the calculation, the annuity is inflation adjusted. Also note this can only be done on average. With private retirement, you can generally choose a type of survivorship benefit (like full or partial payment to a surviving spouse). With SSI, you cannot (other than by having the law changed)