Last night as I was driving home, I heard Dave Ramsey explain how Social Security looks as an investment of our wealth. If a person making $40,000 a year from age twenty to seventy with no pay increases were allowed to keep two percent of his paycheck out of the 7.65% held out now for Social Security, and he invested that $800 a year for that entire fifty years at the average market return of 12%, he could retired with over $2.6M in savings. If he lived off five percent of that and kept it invest at seven percent (for security), he would have three times the annual income he had made his entire life to live on, and he would still have the same money left when he died for his children to inherit. Instead, for the 7.65% he put in, he gets back about $1,200 a month to live on. Imagine how well off he would be if he had gotten to keep all his social security withholdings to invest. In other words, Social Security represents one of the worst investments in the history of the world. Our government withholds money, never invests it, and then gives it back at a faster pace than it was paid in, but the money never had a chance to even counteract inflation. Should we still continue to tinker with a system based on the hope that its investors die off before they ever collect, or should we let people opt out? I would love to hear input on this topic.
I am sure some government analysts (I will do my best not to sound condescending here) can determine what amount needs to still be paid in by employees to make sure everyone presently on Social Security can get it until they're 85 or so, and anyone who wishes to stay in will just be aware they will only get paid out of it up to the level of total contribution (which will give them an added incentive to opt out). Since it's so popular to burden the employers with this cost, they could continue to pay in on all employees who opt out for the first few years, with a phase out on any employees who have opted out. That will give employers a great incentive to offer employees who choose to opt out: they can use the 7.65% they're not longer paying to match retirement funds in a 401(k) plan. Let me explain that more clearly: presently, many employers match retirement funds for employees vested in their retirement plan (called a 401(k) when involving businesses). Since the employers are already matching those taxes, it will not cost them any more to give those funds to the employee in a matching situation, which will help even more people retire well. Those funds will be invested in the market in some fashion (stocks or bonds, most likely) which will help the economy. Social Security would be protected for anyone still paying in, but those who choose to opt out have a great opportunity to prepare themselves for the future in a way that unburdens the government and other taxpayers.