Is Social Security a good deal?

2013

A reader recently complained he wasn’t getting his fare share under Social Security based on all the years he worked and contributed … what happens to my money if I die after only a few years of collected benefits?

Another point of view says you would be much better not paying the taxes based on the lost value on the money because it could be invested over a working life and assuming a 5% annual return on investments you would be better off.

Today the FICA tax is 6.2% up to the social security wage base limit of $113,700. Employers contribute another 6.2%.

I maintain Social Security is a good deal, in fact too good a deal.

First, let’s consider the issue of dying before collecting much in the way of benefits or any benefits for that matter. Assuming the person has no surviving spouse or children, no benefits are paid and that’s called an actuarial gain. It’s no different than having a private pension or buying an annuity and dying before or shortly after receiving benefits. On the other hand, what if you live to age 90 or 95, that’s longer than the normal life expectancy so you get extra benefits and you are then an actuarial loss. Think of this as insurance in a way. If you have no claims your premiums go to pay other people. If you have high claims exceeding your premiums, somebody else is paying for you.

Now let’s think about this time value of money thing. Could you do better investing those payroll taxes and potential earnings than what you receive from Social Security? I would say that’s a very big maybe and you would have to also be lucky.

To equal the protection of Social Security you have to invest every penny you would have paid in taxes with a steady earning rate over forty years so you can provide for all the following risks:

Disability (including family benefits) before Social Security age
Early death benefits for young children and perhaps a spouse
Your own monthly benefit you can never outlive
Spousal benefits equal to one-half your monthly benefit the spouse cannot outlive
Surviving spousal benefits equal to 100% of your monthly benefit the spouse cannot outlive
Spousal benefits and survivor benefits the spouse cannot outlive to ex-spouses you were married to for at least ten years
Assorted other goodies … and

You must assure all the above are adjusted upward annual for inflation … and … you must time all these benefits to avoid needing them when the market crashes (even temporarily) and your investments that were supposed to earn a steady average 5% have just lost 20% of their value.

All of this is a tall order for an individual to handle. I suggest that very, very few American have the discipline or knowledge to manage all the risks covered by Social Security. While a single person astute at investing who has a good idea at what age he or she is going to die and the inflation rate during his entire retirement has a shot at winning this game, for most of us mortals Social Security remains quite a deal indeed … if you look at the state of the Trust, too good of a deal.