A Good or Bad Investment?

Over the years there has been the debate on whether privatizing Social Security is a good idea. Back in 2005, former President George W. Bush was presenting the idea of partially privatizing Social Security on the basis that people could earn a better investment return in the market thereby solidifying their retirement portfolio. This change would put individuals more in line with people who were investing in 401Ks and IRAs.

There are many pros and cons to this idea. My focus is on the possibility of whether privatization would lead to a better investment return.

Please note, this article does not speak about the current issues relating to the future funding of Social Security and what will happen in 2035 when the current reserves are exhausted.

So, let’s get into this.

Here are my assumptions:

• Single individual (“she/her”), retires on January 1, 2023
• Retires at full retirement age of 67
• Lives to 85
• Has earnings from 1988 through 2022 – which gives her 35 years of earnings
• Employee contributions only, no employer match
• No cost-of-living adjustments
• Without Social Security, she deposits money that would have been withheld every year on January 1
• Studies have shown that over a long period of time, the market has averaged a 7% return

Case #1

• She contributes maximum amount for 35 years
• Total taxable Social Security earnings amounts to $3,214,000
• Total employee contribution amounts to $199,268
• She receives the maximum benefit amount at full retirement age in 2023 in the amount of $3,627

Results-Case #1

• Total benefits received over life expectancy of 18 years amounts to $783,432
• She recovers total investment of $199,268 in 55 months or 4 years and 7 months
• In order for her to equal the payout from Social Security, she would have to average 7.75% market return for the 35-year period

Case #2

• She contributes 75% of maximum amount for 35 years
• Total taxable Social Security earnings amounts to $2,410,500
• Total employee contribution amounts to $149,451
• She receives the benefit amount at full retirement age in 2023 in the amount of $3,185

Results-Case #2

• Total benefits received over life expectancy of 18 years amounts to $687,960
• She recovers total investment of $149,451 in 47 months or 3 years and 11 months
• In order for her to equal the payout from Social Security, she would have to average 8.50% market return for the 35-year period

Case #3

• She contributes 50% of maximum amount for 35 years
• Total taxable Social Security earnings amounts to $1,607,000
• Total employee contribution amounts to $99,634
• She receives the benefit amount at full retirement age in 2023 in the amount of $2,631

Results-Case #3

• Total benefits received over life expectancy of 18 years amounts to $568,296
• She recovers total investment of $99,634 in 38 months or 3 years and 2 months
• In order for her to equal the payout from Social Security, she would have to average 9.50% market return for the 35-year period

As you work through the analysis, you also need to keep in mind that Social Security benefits provide advantages that investing in the market does not:

• Benefits are inflation adjusted yearly
• Benefits provide a lifetime annuity
• Benefits are not 100% taxed
• Benefits are guaranteed by the federal government
• Benefits provide low risk

So, what do you think?

Does Social Security appear to be a good or bad investment?