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A recent post by Dan Smith took a crack at evaluating at the often heard statement that we would all be better off if the FICA taxes we paid into the Social Security (SS) trust fund were instead invested in individual accounts. The idea is that by investing our payroll taxes in something like an S&P 500 fund, we would be better off at retirement. This strategy has the benefit of long-term compounding, since many of many us will work upwards of 50 years. My first FICA payroll taxes were collected in 1973, 51 years ago.
Dan performed a calculation using his actual SS earning record to calculate his yearly FICA taxes. He then calculated how much each year’s contribution would have grown if invested at an assumed rate of return, and then added them up to come up with a total amount he would have had at retirement. Assuming a 10% average yearly return (based on the S&P 500), he calculated he would have a tidy sum, over $2M dollars. Using a 4% withdrawal rate, he would have generated a monthly benefit about 40% greater than he was collecting from SS.
I had started a similar calculation a while ago, and Dan’s post encouraged me to complete the analysis. I built a spreadsheet using my actual SS earnings to calculate how much my payroll taxes would be worth today if they had been invested instead. At 10%, I also would have accumulated over $2M, which could produce over $90,000 per year at a 4% withdrawal rate.
While that sounds great, there are some real caveats. The first consideration is that by embracing this strategy, we are trading safe asset for a risky asset. It might be more reasonable to assume an investment return equivalent to what is often considered a risk-free return – a 10 Year Treasury. The long-term average return is about 4.25%. Using the 4.25% return, the accumulated amount drops to about $480,000. This would generate about $19,000 per year at a 4% withdrawal rate. This is about 41% of my 2025 SS benefit. I also looked at a few other scenarios, as show in the table below.
| Scenario | Assumed Return | % of Actual Benefit |
| S&P 500 Investment | 10.0% | 198% |
| 150 % Spousal Benefit | 9.0% | 150% |
| Equivalent Benefit | 7.6% | 100% |
| Risk Free Return | 4.3% | 41% |
The table shows that I would need to earn an average 7.6% yearly return to accumulate a sum able to generate a yearly withdrawal, at a 4% withdrawal rate, equivalent to my SS benefit. SS also provides a spousal benefit of up to 50% of the higher earning spouse’s benefit. Suppose my wife had not earned her own SS benefit? She would be eligible for 50% of my benefit. The table shows I would need a 9% return to generate the 150% combined benefit.
This analysis is obviously very idealized, assuming consistent average rates of return, and it’s hard to draw specific conclusions. The 4% rule is a good rule of thumb, but has no tie to how SS benefits are calculated. It might be better to look at what kind of annuity could be purchased with an accumulated sum. There are also other important considerations, such as disability and survivor benefits. But I think this demonstrates that SS retirement benefits are more valuable than many believe.
This is a fascinating discussion and one that really highlights the tradeoff between guaranteed security and market opportunity. Dan’s and Rick’s calculations are impressive and certainly demonstrate the power of compound growth, but I think it’s important to consider both the math and the behavioral side of things.
Yes, if every FICA dollar had gone into an S&P 500 fund since the ’70s, many of us would be sitting on seven-figure accounts. But the market isn’t a straight line. Would the average person stay the course through the crashes of 2000, 2008, or even 2020? Probably not. Behavioral risk panic selling, poor timing, or under-diversification can quietly erode long-term returns.
Also, we can’t ignore the insurance aspect of Social Security. It’s not just a retirement benefit, it’s also disability coverage and survivor insurance. Those protections are often overlooked in these comparisons but can be vital for families, especially in lower-income brackets.
That said, I do like seeing these “what-if” scenarios. They’re not just hypothetical, they push the conversation forward and help people understand where their money is going and what the opportunity costs are.
If you’re diving into retirement planning or simply trying to run your own numbers, tools like the End of Service Calculator can help model different payout or investment outcomes over time. It’s not SS-specific, but it’s flexible enough to help with general benefit comparisons or retirement forecasting.
At the end of the day, a diversified approach is likely the most prudent counting on SS for a base and using private accounts (like IRAs or 401(k)s) for growth and customization. I only wish we had the option back in the day to choose our path. But given where we are, transparency and education are the best tools we’ve got.
As I have said several times, fixing SS is not that difficult- if the issue is properly explained to people and we are honest about the cost and funding.
Many people still accept the myth Congress stole the money.
For example, taxing cafeteria plans for SS closes 10% of the funding gap. How many Americans benefit from Section 125 of the IRC?
You can try various scenarios using the Committee for a Responsible Federal Budgets modeling tool. Give it a try and see for yourself.
Proceed at your own risk when projecting SS benefits. For past SS recipients SS benefits were solid. In 8 years the SS reserve is depleted. Future benefits will be based on actual SS taxes collected resulting in a 21% or so reduction of benefits, $3,000/mo becomes $2,400/mo. Won’t happen?
My optimism is challenged considering the Federal government spends roughly $6.5 trillion, collects $4.5 trillion and borrows $2.0 trillion. Interest on the debt is the 3rd highest expense category after SS and Medicare. SS has been a “safe” asset but change appears to be on the horizon.
Would we be better off investing SS tax in a private account is an interesting hypothetical question. In the example Rick Conner outlined, 4% was spent from the $2.0 million account. Using the equivalent return of 7.9%, the income was greater and the principle was not touched. In fact it grew 3.9%/yr. doubling in 17 years. With a private account I’m better able to match my financial life with personal life. If only I could put that horse back in the barn…
JC commented that SS has a demographic problem. I concur. More people paying into the system will continue to float SS. In the meantime, SS benefit reduction is something I’m paying attention to, 8 years may/may not be a long time.