Dear Rusty: You’ve said in the past that most people recoup their SS contributions within five years of starting benefits, thus Social Security “is an exceptionally good deal.” Your calculation is correct but misleading; if it were not, SS would have been insolvent long ago. I will, in fact, get “my” contributions back in about five years, but my employer’s contributions will take another five years, and that is money that my employer could have been paying me, so they are really “my” contributions. But even that ignores the time value of money. I did a calculation as if my contributions, along with those of my employer, were invested in an account earning 5% per year. That would provide me the equivalent of SS income for 24 years, approximately what my life expectancy was when I retired. So, it’s not a bad deal, but it is hardly exceptional. It is roughly the equivalent of me investing that money throughout my career and using the total to buy an annuity.
Of course, Social Security does have the advantage of certainty, at least until it goes broke. My portfolio would not earn a steady 5% every year, though that is at the low end of what financial managers would expect over a long period. And it does force people to save, many of whom would otherwise make no provision for retirement. Signed: Realistic Senior
Dear Realistic: Thanks very much for your feedback on my previous article. I think it’s important to draw a distinction for SS contributions made by an employer, because that is not money the individual personally pays, but rather an obligation for employers to help fund the Social Security program. Without that federal obligation, it is doubtful that employers would, instead, provide employees with equivalent additional compensation, so the thought that these are really your contributions is not a fair assessment. Indeed, they are contributions which happen to be tied to your earnings level (to a cap), for which employers receive relief on their corporate income tax, and likely would not make if not required by law.
As you have noted, Social Security has the advantage of certainty, something which is lacking when it comes to investing the equivalent amounts in the financial markets. And, as you have hinted, there exists a substantial failure by future American retirees to save adequately for their retirement, a problem well known in most financial circles. Thus, the certainty of Social Security makes it a crucial part of everyone’s retirement planning – and it will be there! Despite all the angst attributed to the current financial issues facing the program, there is little doubt that Social Security is here to stay. The question is – what reform is needed to make the program fully solvent for generations of future Americans? The Association of Mature American Citizens (AMAC) has developed a proposal to sensibly reform Social Security and avoid the currently projected 2033 date that the SS Trust Funds are expected to be depleted (which will necessitate an across-the-board cut for everyone). We have little doubt that the reform needed will happen (it would be political suicide for Congress if it did not), and hopefully soon. You can read about AMAC’s proposed solution at this link: www.amac.us/social-security-guarantee.
Again, thank you for your feedback and commentary. Please know that we very much appreciate your thoughts and are always willing to discuss these issues.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org.
