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They’re Right, I’m Wrong, Sort Of

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AUTHOR: Dan Smith on 2/02/2025

I was fed up with the people who claim we’d all be better off if an equivalent sum of money was deposited into private accounts instead of Social Security, so I set out to prove them wrong.

I deserve a slap on the back from my spreadsheet loving engineer friends. From my first year working in 1969 to retirement in 2022 I listed wages by year, SS payroll tax by year, and the growth after 54 years if invested in the S&P500, assuming 10% per year.

Guess what. They’re right and I’m wrong. Sort of. That first $96 I paid into SS in 1969 would have been worth $17 grand on my 70th birthday. At retirement I would have had over 2 million bucks. A 4% withdrawal would have provided over $80K per year. That’s nearly 38% greater than my current SS benefit.

Theoretically you could double this amounts if you also calculated the employer contribution. But if you actually think your boss would have passed those savings on to you, I have a bridge for sale.

I could stop right here and let RQ try to tell me I’m wrong, but where’s the fun in that?

How many age 16 kids are going to open a brokerage account? What happens if they don’t get around to saving until age 26? For me, that would have reduced my amount by $521K. That’s still not bad, my distribution would still be about $10K per year better than SS.

In reality I didn’t start to save until 1984, when I was age 32. In this scenario I would have accumulated a measly $1.1 million, allowing me about $6K less per year than SS currently provides.

What if I would have blown out my back while delivering one of those 165 pound beer kegs at age 32, and ended up permanently disabled? Without SS disability insurance I would have had nothing.

I had two young kids and a stay at home wife. What if that keg instead fell on my head and killed me? How would my widow put food on the table without the SS survivor benefits?

Also consider the fact that most investors don’t do as well as funds they invest in… that’s if they bother to invest at all.

I’m sure that those who advocate for the elimination of Social Security would be just fine without it, but for us mere mortals I believe the insurance provided is worth the cost.

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Scott Dichter
6 days ago

Today with the preponderance of low cost index vehicles, no transaction cost brokerages, it’s remotely possible. That’s a relatively recent event.

Also, SS is part social policy so that we don’t go back to seeing senior citizens dumpster diving and eating pet food.

S Phillips
7 days ago

Thanks for going through those calculations. I really appreciate that.

I don’t think Social Security should go away, but the obvious answer your question is simply that we would all pay a Social Security tax, but it would be much lower-only enough to cover those beer keg type of accidents you mentioned.

people without the beer keg accident would then have the return you described, all other the variables being equal (which, of course they wouldn’t be).

Norman Retzke
7 days ago

SS is a tax and younger people who say they’ll never get a dime view it as such. In fact, the Clinton administration sought and obtained a legal ruling that as a tax the government could spend the monies collected in any manner it chose; roads or whatever. Such a decision could have grave political consequences. However, it is an essential part of most retirees’ income. I am suspect of the complaints about it, particularly from anyone who has significant school debt. I’m not sure they have the financial acumen to make good financial decisions including saving 30 years for retirement. Those seeking a school bailout will possibly need one in retirement, too.

However, we all face the same SS dilemma. Unless politicians do something dramatic, SS taxes must increase, and benefits may decrease. Some financial experts recommend including a benefit decrease in one’s financial plans. I wonder how many retirees could deal with a 20-25% benefit decrease? This could pose grave difficulty for many; the average SS benefit could decrease from $1,862 to $1,397 per month. Increasing taxes on workers to make up shortfalls to those on benefits will not be received well. While benefit reduction is of no consequence to anyone who is not receiving SS benefits, increasing taxes will continue to be a source of enmity.

Of course, if one views SS as a “tax” then one can choose to save more and work longer. Any benefit, no matter how slight, then becomes a “bonus” and may be a source for discretionary spending in retirement.

parkslope
7 days ago
Reply to  Norman Retzke

I think it is safe to say that any changes to SS will not affect those who are currently receiving benefits. SS has been described as a “third rail” politically and I doubt policians will be willing to risk the ire of the increasingly large number of those receiving benefits.

The 1983 legislation that phased in an increase in the FRA resulted in a reduction in benefits but this change didn’t affect anyone who was over 45 when it was passed. Taxing benefits also reduced net SS income for many retirees. Reductions of this nature are more likely than a reduction in the SS income that beneficiaries currently receive.

David Lancaster
7 days ago
Reply to  parkslope

Your second paragraph correctly states that all of us who were younger than 46 received an effective 13% cut in our benefits by increasing the full retirement age. If benefits are reduced on those retirees (projected to be 18% if the trust fund runs dry) then we will have been subject to two benefit cuts totaling 31% reduction in benefits from the time we began working through retirement.

Norman Retzke
7 days ago
Reply to  parkslope

While future changes may not affect those currently in retirement and receiving benefits or those approaching retirement, no one really knows what the congress will eventually pass. It may be comforting to think that any changes will only affect others and will not affect me. It is true that there are several approaches, which if combined will reduce the financial pain and spread it around. It also remains unclear if any changes will be part of a means to control deficits; that could result in more draconian measures. It will be interesting if politicians decide to favor younger voters.

Last edited 7 days ago by Norman Retzke
R Quinn
7 days ago

I am fed up with those people too.

It is never a valid comparison, because SS is not just a retirement plan for a single worker who makes it to retirement age. it’s insurance as you say.

If a single person made the consistent proper investments for 40 years and nothing went wrong like disability at age 50, I bet they could do better.

The entire argument one could do better than SS is silly.

Emilie Babcox
7 days ago

I never thought much about SS for retirement because my father died when my brother and I were six and eight years old. He had no life insurance. My mother picked up jobs cleaning houses and taking in laundry. SS supported all three of us until my brother and I were through college. (Both of us also had scholarship money and he had ROTC benefits for college – not saying that SS covered everything.) The idea of saving and investing in the stock market during those years is laughable. I have two relatives who receive SS disability benefits. The fact that SS is now an important part of my retirement income seems like a nice and unexpected bonus.

fleeb
7 days ago

Thanks Dan, for a stimulating and good discussion. Someone commented that Social Security was insurance and isn’t that what may we really desire? We should insure to decrease the high risk, low probability events and not to make money to provide retirement income. May Social Security be improved to actually focus on the high risks events that have been mentioned? Leave income generation to the open markets that would gradually give investors better alternatives to what they need at better returns. I’ve read articles that citizens behave better if they have a piece of the pie to risk. They have a stake in the future and not just complain about the ever present need for increased government payments. I do feel sometimes that retiree’s social security payments are characterized as an expense to the national budget or the reason for our national debt.

mytimetotravel
7 days ago
Reply to  fleeb

The Old-Age, Survivors, and Disabilities Insurance Program, aka Social Security, includes old age to keep from having seniors wind up destitute. With the off-shoring of manufacturing jobs, the rise of single parent families and single occupancy households, not to mention the likely coming loss of white collar and professional jobs to AI, that insurance is more needed than ever.

If you really think that a large majority of the US population is able (in multiple senses) to save and invest well enough over their work lives to support themselves in old age I have a very nice bridge to sell you. Those who do try are subject to lost decades and sequence of return risks, not to mention unexpected job loss, medical bankruptcy etc. etc. Even successful savers may rely on SS as a key part of their financial plan.

David Lancaster
7 days ago
Reply to  fleeb

The reason that Social Security and Medicare are at risk is simply a lack of political courage from congress to do what is necessary. The actuaries has been telling congress that changes such as were made in 1983 (yes, fourty years ago) when I was a few years into my career were necessary. They also were told that the earlier changes were made the less drastic they would have to be. Changes such as requiring all income be taxed, and a small increase in the tax rate even now would make a difference in the stability of the system. It is continuing political cowardice that is digging us a deeper hole.

R Quinn
7 days ago

Exactly. There is no excuse. Modest changes over the years would have gone unnoticed as well. Now Congress is even in a worse divided position.

I disagree with all income being taxed unless all taxed income is counted in the benefit calculation even if a new lower percentage bend point is created.

Taxing all wages alone does not solve the problem though.

i have written many times on my blog the combination modest changes that would make SS sustainable. That includes raising the payroll tax percentage on employers alone or at least in a greater proportion.

Edmund Marsh
8 days ago

Great analysis, And the comments are on target–Social Security is not the same as an investment and should not be thought of as such.

Rick Connor
8 days ago

Dan,
Nice analysis. I had started a similar analysis and this has encouraged me to finish it. I’m proud of you for embracing your inner engineer and rocking a spreadsheet.

Patrick Brennan
8 days ago

This idea that we can just invest, from early adulthood, some amount of discretionary income, until age 65 or whatever, and live on that in retirement is naive and suffers from recency bias. As I’ve mentioned before, my father grew up in the depression, served all four years of WWII in the Navy, used the GI Bill, worked hard, was a great father to six children, but without SS he would not have had a decent retirement. SS comprised about 60% of his income in retirement. He didn’t have much discretionary income, and certainly wouldn’t have invested it in the stock market, the same stock market that crashed in his childhood and ruined so many. Medicare and the VA provided him with affordable and good health care. For him, SS was indeed a form of insurance to provide for his needs later in life. I’m so glad he could benefit from it and he was very content with the life it provided.

Last edited 8 days ago by Patrick Brennan
mytimetotravel
8 days ago

What percentage of people are realistically going to start saving at 16? I’m sure it’s more than zero, but not a lot more.

What percentage of people, if and when they do start saving, will put it all in an S&P index fund? Again, more than zero, but probably not much more. I certainly didn’t.

Social Security is not an investment vehicle, it is insurance.

Winston Smith
8 days ago
Reply to  mytimetotravel

Isn’t Social Security part of the Old-Age, Survivors, and Disabilities Insurance Program.

mytimetotravel
8 days ago
Reply to  Winston Smith

Yes. Actually, a little internet searching says it actually is that program.

David Lancaster
8 days ago
Reply to  Dan Smith

What if the market dropped 50% just before you were going to retire and then you experienced a lost decade like the one from 2000-09?

Do people know that general investing advice is to start to decrease their equity position and increase the percentage of their assets into bonds as they get older to better protect their portfolio as they get closer to retirement age?

What would be the balance at retirement if the funds were required to be placed in a target retirement fund?

Last edited 8 days ago by David Lancaster
Sal Collora
8 days ago

I would be OK with giving up all my SS benefits if I could stop paying into the system right now. I’m 52. Both my kids have brokerage accounts and save and invest every month. I am sure they would opt for the same thing. A simple compounding investment in SPY will beat anything the government can possibly do over a 40 year time horizon. Even a simple investment in basic blue chips with dividend re-investment enabled will do the trick. It’s not complicated if you start early.

Michael1
7 days ago
Reply to  Sal Collora

Maybe it’s not complicated if you start early, stay the course through think and thin, and markets cooperate. I’ll keep SS, thank you.

Last edited 7 days ago by Michael1
Jonathan Clements
Admin
8 days ago
Reply to  Sal Collora

Something to ponder: Suppose all workers redirected their Social Security contributions to the stock market. All earned fabulous returns, leaving them with handsome seven- or even eight-figure investment balances. What happens when they go to spend those dollars?

Stocks, bonds, bitcoin, dollar bills and such are all just instruments of exchange. We use them to buy goods and services from others. But what if everybody had far greater wealth to spend, but the goods and services on offer remain the same? We’d get massive inflation. Allowing folks to invest their Social Security contributions in the stock market does nothing to solve our economic problems — and, indeed, could make them worse — unless it’s accompanied by policies that encourage folks to stay in the workforce for longer and hence produce the goods and services that society is demanding.

William Housley
8 days ago

My father was disabled when I was in high school. I received SS and that is what put me through college. SS is not just about what we receive in retirement.

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