The big story in the news these days is President Bush’s attempt to reform our nation’s Social Security program. But is it really broken? You hear the horror stories about how it’ll be bankrupt in 20xx (insert years here) but will it really be?
According to government’s Social Security website quick calculator , for an individual born in 1980 who makes $40,000 this year who plans to retire in 2065, you will receive $1,239.00 in 2005 dollars each month starting in 2047 (67 years old). The $1,239.00 is projected to actually be $5,254.00 in 2042 dollars given inflation (CPI, etc). That assumes an orderly 3.75% raise each year until 2045. This is all just for retirement and not for disability or survivor benefits.
That sounds great right? Let’s get a second opinion…
Let’s use the The Heritage Foundation’s calculator  which will give us a comparison between Social Security’s piddly return and President Bush’s alternative. Of course, this calculator works a little differently, it asks only for your average annual salary (into which we will enter approximately $70,477 (average salary if you were paid $40,000 as a 24 year old and worked until 65 with annual raises of 3.75%, the same assumptions as the government site).
The Heritage Foundation says you will have paid $596,627.00 into Social Security your entire lifetime and you will be paid $3,203 a month in 2045 dollars with a rate of return at about 0.89%. If you were given the option of putting that money in a Personal Retirement Account and invested in conservative investments that netted you a mere 4.89% (the S&P has risen approximately 11% annually since forever and is the benchmark against which lots of funds are judged), you would instead be paid $13,246 a month, $10,044 difference. Even if you use the Social Security results as truth and Heritage as politically spun data, you’re still talking nearly an $8,000 difference in your monthly return.
What does this mean? This means that I don’t care if Social Security is broken or not. I don’t care if it goes bankrupt or not. All I know is that according to The Heritage Foundation I’m getting a 0.89% return on my Social Security money… inflation would be kicking my ass. Even if I took the government’s numbers, inflation would still be kicking my ass. A Treasury bond (SS funds are typically put in a special type of government bond) would be better than Social Security because I get that fatter percentage unless the United States government collapsed. If the US government collapsed, my social security would be the least of my problems.
Verdict: I don’t care if Social Security will be bankrupt, all I know is that even if it were 100% healthy, the return is weak. Forget politics, Democrat vs. Republican vs. Nader’s bank account, just straight dollars and cents: Social Security is a ripoff because I get a piddly return (not even guaranteed because SS isn’t guaranteed) and I’m forced to pay into the system.