Social Security's rate of return is tough to beat

[exboyfil]

6. Whenever anyone talks about opting out of the

system to get a higher rate of return, they do not understand that the higher earners subsidize the lower earners (at least those making up to $106,800). By inflation adjusted income levels the formula works like this:

Up to $9,204/yr. benefits are calculuated at 90% of the highest 35 years of earnings. So maximum amount is $8284/yr.

Between $9,204/yr and $55,488 is 32% (or $14,811/yr for this portion)

Between $55,488/yr and $106,800 is 15% (or $7697/yr for this portion)

Using the 6.2%/6.2% and assuming 35 years of contributions. The total contributions for the three pay scales are as follows:


So the max earners get about $30,792/yr (assuming a 4% interest rate they and their employer have contributed $975,391)

So middle earners ($55,488) get about $23,095/yr (after contributions at 4% interest of $506,765)

So low earners ($9,204) get about $8284/yr (after contributions at 4% interest of $84,059)

An inflation adjusted annuity with 50% spousal payment and 100% survivor for spouse is very valuable. Nothing in the market quite duplicates it. Social Security also has the Survivor's benefit and Disability benefit. The one feature of S.S. that is not typical of market conditions is that if you die one day before retirement (purchasing your annuity in the market so to speak) and have no spouse, your family gets nothing except a small payment under $1,000. Of course the day after you buy your annuity both cases are now the same. A recent article in USAToday states a 65 year old man can get an inflation adjusted annuity at 65 of $4548/yr/$100,000. This has no survivor feature though. 100% at 67% survivor for a non-inflation adjusted annuity is 87% of the no survivor option. So the actual number should be $3957/yr/$100,000.

So a comparison of payments and value as follows:

Earner Invested S.S. Return
Lowest $3,326/yr. $8,284/yr. 2.49x
Middle $20,053/yr. $23,095/yr. 1.15x
Highest $38,596/yr. $30,792/yr. 0.80x


I would like to see the cap lifted and income over $106,800 taxed at 4.3%/4.3% with no subsequent increase in benefits. This would put the highest earners at about the same Return on Investment on those lowest contribution dollars as those currently taxed at the highest rate.


You could price in a term policy for someone on S.S. to better characterize actually how S.S. works, but you would also have to price Disability insurance and what a term policy would cost for your survivors.

A higher rate of return than 4% could be brought into calculations, but a long term Treasury should be used for comparison - not the stock market. You can use your 401(k) for balance in equities if this is a concern. This is your floor investment in an ultra secure asset.