May 19, 2008

What if we invested our money instead of Social Security? recently posted an article How Much Could You Have If Social Security Were Your money? I found out about the article over at Free Money Finance.

First some points on the article from It calculates the value of a social security account using the maximum possible withholding tax which only a small % of us actually pay. Most of us just don't gross $97,500 a year in W2 wages. The article also assumes a 10% return. To get a 10% return you are going to have to accept risk in your investments. If comparing SS to conventional retirement savings it would be a more apples to apples to compare SS to an safer investment vehicle such as municipal or treasury bonds rather than the higher risk stock markets. Finally the analysis does not consider the value of social security disability which does have considerable value.

Note I am not disagreeing with their general point that if you had privately invested your SS taxes over your working career that it would add up to a lot of money. That is certainly true.

But how do you get from our current SS system to private accounts? Social security is not structured like a retirement account. Many people do not realize this (I didn't for a long while), but my money and your money is NOT sitting in a big bank account anywhere accumulating interest. Our taxes pay the benefits of current retired people and thats how it has worked since day one. When SS was started in the 1930's there wasn't a giant bank full of money that people had been saving for decades, it started with nothing and paid out full benefits to retirees from day 1. So you are not investing your own money nor 'wasting' your money, but instead directly funding the retirement of the current senior citizens with the understanding that when you retire the next generation will pay your benefit. Given this system, opting out of it would simply short change the current system and make the baby boomer problem that much worse by reducing funding. Because of this privatizing the system or allowing us to opt out is not something they can easily do without hurting the current benefits and tax level for those who stay in it.

For what it is, social security is not that bad and it does provide a very good service to the nation.

Don't get me wrong, I would love to be able to take the money that goes into SS and put it into a private IRA or 401k. But if we all did that then 54 million Americans currently receiving SS wouldn't have their checks funded. Unfortunately theres no easy way to transition from the virtual ponzi scheme we've got now to a private individual retirement investment system. SS is also a giant political hot button issue and anytime a politician talks about it they risk very big voter backlash and the elderly do vote.

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