BeAChooser
Banned
- Joined
- Jun 20, 2007
- Messages
- 11,716
Let's consider a specific example from the SSA website (http://www.ssa.gov/pubs/10070.html ) ... that of a person who was born in 1946 and now has reached the age 62 and wants to retire. The website shows how to calculate what one would get on a monthly basis now based on earnings each year since 1951 (assuming they started work at age 15). Let's enter the maximum SS earnings that were allowed into the calculation in each year (those are indicated on that webpage). If one does that, and follows the steps laid out on that web page, one can find the estimated monthly retirement benefit at age 62 (the first year one can retire) and at age 66 (the full retirement age). It turns out that the SS system will pay $1713 per month starting at age 62 if this person retires at 62 (now) and $2284 per month starting at age 66, if he/she retires at age 66 (4 years from now).
Now, what if that person had taken his and his employer's contribution to SS over those years and instead put it to work in the stock market instead? Let's assume they invest each years contributions into the S&P 500 stock index ... a relatively conservative investment. In otherwords, one isn't allowed to put the money into individual stocks but must spread the risk out over all the companies in the S&P 500.
The SS tax rates have varied over the years (http://www.ssa.gov/OACT/ProgData/taxRates.html ). In 1951, the percent of earnings that one (plus one's employer) had to contribute to the SS system was only 3%. Which means a contribution of $108 in 1951 given the maximum SS earnings at that time of $3600. In 1967 it was 7.8% which meant a contribution of $515 on a maximum SS earnings of $6600. And so forth.
I built a spreadsheet to find the contribution each year from 1951 to 2007. Then multiplied each of those contributions by the ratio of the current stock market index (about 1400) over the stock market index in the year of contribution. That's how much that investment would have grown if left in the S&P 500 index the whole time. Then I added up the amounts to find out what the dollar value of the account would be today.
Let's start by taking that $108 dollar contribution in 1951 as an example. In 1951, the S&P500 had a value of perhaps 25 (see http://en.wikipedia.org/wiki/S&P_500 and http://en.wikipedia.org/wiki/Image:SP500FF.svg ). The S&P 500, even during the huge dip in 2001 and 2002, never fell below 750. In other words, $108 dollars invested in 1951 in that fund and just allowed to sit there would have had a value of $108 * 750/25 = $3240 at the low of the 2001/2002 stock market crash. Currently, the value would be about $108*1358/25 = $5866.
If I now put that $3240 (at the low of the market you seem to so fear the effect of) in just a 3% CD (very safe), I could draw off $8/month without touching the capital at all. Now for comparison, suppose that $108 dollars was all I'd ever contributed to receiving SS. Using the methodology provide by the SS office at http://www.ssa.gov/pubs/10070.html , I would receive 108*13.81/420*0.9*0.75 = $2.25 per month. In other words, putting that $108 dollars in the stock market back in 1951 would yield more than 3 times the return that I'd get from Social Security, even at the lowest the stock market fell in 2001/2002 ... PLUS, I'd still retain the full amount of capital ($3240) in my name which I could pass on to anyone I liked at my death or, if I wished to spite relatives and the world, blow it all in one big party near the end.
Obviously, SS is not a good deal to someone retiring at this time for that particular year of contribution.Now doing the same computation for each of the 55 years in the example but using todays S&P index value (about 1400) ... because after all you seem to think it's not doing very well right now ..., one finds that the total account value today would be on the order of $822,000. If I then withdrew that money and put it in a lowly CD yielding 3 percent, it would produce $24664 per year or $2055 PER MONTH ... without drawing down the principal. In other words, I would receive 20% more each month to live on PLUS I would be able to gift whoever I wanted all that capital when I died.
And that's assuming just 3% return (CD rates) on the assets from that point on. If I left even half of the total amount (say $410,000 of the $822,000) in an S&P index fund and let it grow at historical average S&P rates (over 8.5%) while I lived on the rest assuming no further growth on that portion of the total amount, I could withdraw $2230 per month (about the same as retiring at 66 under the SS system) and my total assets in 15 years would now be over $1,400,000! And then I could nearly double the amount of my yearly withdrawals and let the other half grow even more!
How anyone can think that Social Security is a good thing ... a wise investment ... is beyond me. And of course, I haven't even mentioned the fact that the system is in trouble and there is no guarantee that anyone putting money into it now for retirement in 20 or 30 years will see a dime. That's because it's a transfer payment ... WELFARE ... not an investment vehicle. And I haven't even mentioned the 2.9% they are siphoning off for Medicare.
http://www.cato.org/pubs/ssps/ssp2.html "Retiring with Dignity: Social Security vs. Private Markets ... snip ... For example, assuming historical rates of return, if individuals born in 1970 were allowed to invest in stocks the amount they currently pay in Social Security taxes, those individuals could receive nearly six times the benefits that they are scheduled to receive under Social Security, as much as $11,729 per month. Even a low-wage earner would receive nearly three times the return on Social Security."
http://www.trippet.net/word/letters/20041021lvrv.htm "The average, year-over-year return of the stock market as a whole (meaning index funds like the S&P 500 that mimic the overall market) is 11% per year - that’s the average, including all the ups and downs that the market has seen over its lifetime. One great example of this long-term growth is that an investment of $1,000 on October 23 1929, right before the crash, would have resulted in a value of over one million dollars 40 years later."
http://www.cato.org/pub_display.php?pub_id=4237 "Social Security vs. Stock Returns: No Contest" The contents of that article are summed up nicely by the last sentence in it: "Whenever economists or journalists pretend that Social Security offers a better or safer return than the stock market, just remember Don Luskin's apt phrase about "the conspiracy to keep you poor and stupid."
See post #201. And once you read that, answer this question. Why do you hate the suckers that are putting money into Social Security? That would be most Americans. I (and most Americans) don't object to paying for welfare for those who really need it. But don't lie to us about the true nature of Social Security. It isn't an investment in our future. If you insist on taking our money and giving it in transfer payments to others then at least have the DECENCY to call it what it really is .... welfare. 
: out of it. The general welfare is what we have a country for. Deal.
