The Social Security Toilet
The Coyote Blog adds some math to back up what we already knew:
Read this too.
This allowed me to answer a question: If I had been able to take these social security taxes and instead put them in a savings plan, and then took the accumulated balance out at age 67 and bought an annuity (at current rates), what would be my monthly payment? Well, assuming a very conservative after-tax rate of return of 5%, I would have $1,077,790 at age 67 to buy an annuity, which at current rates quoted on the Vanguard site, would give me $7,789 a month until I die. This return is just about four times the amount I get from having the Social Security Administration manage the money for me instead. Ugh. Also note that I did not assume "risky" equity investments or whatever straw man anti-reformers are using nowadays. If I assume a higher return of 8% (the stock market in the 90's returned something like 18%) then my annuity will be $17,860 per month, or 9 times the Social Security payout. Double ugh.
In fact, this all opens up the obvious question, what actual rate of return is Social Security paying out on your "premiums?" Well, in fact we can calculate this with the same spreadsheet. I plugged in 2% for the interest rate. No go -- resulting annuity is to high. Then I plugged in 1%. Still too high. Could the government be paying you 0% on your money? I plugged that in. Still too high. In fact, the implied rate of return on my money in the Social Security system is -0.8% a year. In other words, not only is the government not paying me any interest, they are charging me to hold my money.
Read this too.