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Social Security vs. Private Investment Accounts – RCC runs some numbers.

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AUTHOR: Rick Connor on 2/02/2025

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 Investment10.0%198%
150 % Spousal Benefit9.0%150%
Equivalent Benefit7.6%100%
Risk Free Return4.3%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.

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R Quinn
4 days ago

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.

Randall Averill
6 days ago

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.

R Quinn
4 days ago

The federal government spending and debt is not a problem for the Social Security Trust (for us, yes). When the Trust is depleted all the Treasury bonds owned by the Trust will have been redeemed. There is no excess revenue to invest more.

The most frustrating part is that minor changes in funding and a bit of creativity could make the Trust sustainable for the next 75 years.

Dan Smith
6 days ago
Reply to  Rick Connor

Rick, your post was well written and a great extension of the subject. At the end of the day it’s clear that neither you nor I are in favor of individual accounts, but those with other opinions deserve the benefit of a respectful conversation. Isn’t that at least part of the HumbleDollar mission.
Now for something totally different. Today is my first day as an AARP tax volunteer. Hope you have a good season Rick. 

Jeff Bond
7 days ago

Rick, It still all boils down to “what if they did this instead of that?”. No one has the political will to make any substantive changes, be they good or bad, to the status quo. For once I’d like to hear a politician say out loud “I plan to kick the can down the road as far as Social Security is concerned” because at least he would be honest about it.

Jonathan Clements
Admin
7 days ago

I hate to sound like a broken record, but we can’t fix a demographic problem with an investment solution. Sure, we can all imagine scenarios where our privatized Social Security accounts earn great returns. But why use our imagination? Let’s just promise all retirees $1 million at age 62. The question is, what happens when folks go to spend those dollars? Where will the goods and services demanded by society come from? What we need is a strategy to encourage folks to stay in the workforce for longer. Absent that, we’re just rearranging the deckchairs on the Titanic.

Randy Dobkin
4 days ago

Maybe jobs need to be made more likeable, employees less subject to burnout. I think we Americans work too hard.

S Phillips
7 days ago

But if more goods were mass produced more cheaply, it seems to me the supply of goods would be available without the demand increasing the price.

On the other hand, if government just mailed everybody $1 million tomorrow then what you say would seem correct to me.

stelea99
7 days ago

Alternatively, it could also be more workers via immigration…..

Jonathan Clements
Admin
7 days ago
Reply to  stelea99

Agreed. Rather than reciting which taxes you’d raise or which benefits you’d cut to shore up Social Security, what I’d love to hear are the policies that readers would favor to encourage labor force participation. That’s the solution to Social Security funding and so much else. More folks working means more taxes collected. But more fundamentally, you have more people producing the goods and services that society needs and wants.

R Quinn
7 days ago

A valid point Jonathan, but it’s quite amazing that workforce participation needs to be encouraged. Could it be encouraged to the extent offsetting the demographic changes and birth rates? I don’t know.

Change SS ER to 63 perhaps but I can’t see that going over well. Increase to SS bend point percentages for work past age 65?

i favor adjusting (up or down) all funding aspects annually based on the actuarial projections to meet the solvency goal. If demographics improve, such as from immigration, rates might go down.

The problem may be that funding is a separate tax low and Congress controls taxes. Could it approve auto tax adjustments? I don’t know.

Jonathan Clements
Admin
7 days ago
Reply to  R Quinn

Forget sticks, like raising the age to claim Social Security. Instead, think of the tax carrots that could be used to encourage folks to stay in the workforce for longer and to encourage employers to retain older workers. Whatever the tax cost incurred with these policies would be more than offset by the additional tax revenue collected.

S Phillips
7 days ago

Publishing, the social security benefits of staying in the workforce until age 70 helps.
I understand some jobs would be difficult to do as we get older though.

Dan Smith
7 days ago

True that JC, more workers working longer is paramount. Sadly, in the industrial blue collar circles that I run in, no one wants to keep working.

Ben Rodriguez
7 days ago

My take: the employer’s portion should be added to fairly make the comparison.

The analysis also fails to mention that after a lifetime of withdrawals at 4% you’d also have $2-4MM to leave to your heirs instead of $0.

Any sensible person would take the money instead of SS, but that’s not the deal that’s on offer. It never was offered and there is no indication that it ever will be. One can go mad theorizing about what could have been.

stelea99
7 days ago

I’d like you to imagine a different scenario. Suppose that in 1983, when SS was “fixed” with increases in the retirement age and increases in the SS tax so that SS Trust Fund generated a surplus every year until 2021, that the surplus funds were invested in the US stock market instead of special non-negotiable treasury notes?

I am not going to run the numbers, but a typical 7% average equity return is better than 4%. And, the US government would not have had those funds to spend forcing different choices about taxation and other spending.

Given a capitalistic economic system and human proclivities, left to themselves, a large chunk of the population will never end up with enough funds saved to pay for their retirement and certain other needs of the elderly. Therefore, more funds have to be committed to the goal. The easiest way to do this is to gradually increase the employer payroll tax and over time let the cost of this ripple through the economy. Some of these funds might be invested in the US stock market making everyone a capitalist.

R Quinn
7 days ago

Such analysis is an interesting exercise, but theoretical only.

Even if it were 100% certain of the outcome, not only is SS much more than retirement income after a lifetime of work, the assumption that a person would exercise the discipline to consistently invest wisely is highly suspect.

SS is insurance against early death, disability, retirement, various spousal benefits and even individuals who never were able to work from birth.

I see no value in isolating a retirement benefit to compare taxes paid with individual investing, something which most Americans not only don’t do very well, but don’t even understand.

fleeb
7 days ago

Thanks Rick, for making the comparison. Would adding the employee match change the investment returns? Also, with the current income tax load on Social Security, for most of us, the calculations might swing to Roth investments early in our employment years.

Dan Smith
8 days ago

Great post Rick, I considered using treasury bonds and a SPIA. Honestly, I didn’t even think about the spousal benefit, but that must be considered as well. Instead I decided to stay with the anti-SSers argument that they could easily best the system. David Lancaster asked what would happen if a near retiree suffered a decade similar to 2000 to 2009. Let’s call that question rhetorical.
A few people have made the “I could do better” claim to me. I simply asked them how much money have they managed to save on their own so far. They didn’t answer; apparently that question was rhetorical as well. 

Last edited 8 days ago by Dan Smith
Dan Smith
7 days ago
Reply to  Rick Connor

Yes, what happens to current beneficiaries when current workers cease their support.

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