Thursday, February 14, 2008

Social Security - An Investment Strategy

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.

-- Robert


le35 said...

I like Mr. Dave's option of letting people partially opt out. We could let people partially opt out and get the percentages higher and higher. If the government lets me invest it myself then I won't need my social security when I get old. Therefore, my vote is that we have a progressive opt out. The senior citizens now who have paid in their whole lives and therefore have no other options need it, so the system cannot afford to have people just opt out all at once. So, if the government let us take out 2 percent now, and then later 3 percent and then later 4 percent an so on, then by the time a person who makes 40,000 a year is sixty at 4 percent would be more than twice as much as the 2.6M because the interest can accrue on more money.

Robert said...

My comments in reply to the first comment are now added to the initial post. I felt they were too relevant to the overall post to subjugate them here.

Julie Pippert said...

My question is: WHAT JOB PAYS $40,000 TO A TWENTY-SOMETHING?

I wish I coulda had me some of that action!!!!

I'd happily take $20,000/year right now.

With ten years of experience I about worked myself up to $40,000.

No kidding.

I'll be honest, I'd rather save my own, thanks. I might cost me my liberal seat, but probably not. ;)

I have four different savings plans, but of course no longer contribute to any kind of retirement plan or even SS. And will probably have to work until I drop dead as my field doesn't lend itself well to the "live home free after age 62."

I save all the SS statements I get though. And I will be expecting that balance to be there when I'm eligible. *snort*

Robert said...

Yes, Julie, I'll grant that the example was a little oversimplified, but he was examining the sum of $800 more than anything else. Focusing on the inputs ignores that the person never gets a raise, so if he went from $20,000-30,000 entry at 25 and worked up to $75,000 in his life, that would probably be even more favorable. I point out the illustration to make it clear how ridiculous Social Security is for someone "investing" in it. If it were optional, I'm sure plenty of people might still pay in because they don't bother to get educated, but a lot of people know how much better off they would be without such a program. Self-employed individuals who presently have to pay both parts of the payroll tax out of their earnings could eliminate that cost all together. No one in Washington would come within a mile of this idea, but at some point, someone has to face facts about how flawed Social Security is.

Crisanja said...

I missed this post. But I agree with you and Dave, and I think Dave said it best "Social INsecurity" there's nothing great about it. To me it feels like the government is taking away my rights to manage and donate my money the way I see fit. I'd like to have all of my income available to me to use the way I see fit. I'm saving for my own retirement, and its kind of hard to save for someone else's too. Especially knowing that its not going to be enough.