Not an Investment – HumbleDollar – What you should know about Social Security

Not an Investment Richard Quinn  |  Nov 16, 2021

IN A RECENT TWITTER post, a man claimed that if all the Social Security taxes he and his employers pay were invested instead, he’d accumulate $1.9 million by age 67. That sum could then generate $95,000 in annual income, he added, which is more than his anticipated Social Security benefit. He concluded that Social Security was “theft.”

Claims like these bother me greatly because they’re often widely read and believed—and they’re nonsense. Social Security is an insurance program, not an investment plan. It provides much more than retirement income to the worker alone.

The Twitter commenter’s claim is like me saying that the $196,124 I paid in Medicare taxes was theft because I haven’t collected that much in health care benefits. I hope I never do.

Of the 65 million Americans collecting Social Security, only 47 million are retired workers. The rest are spouses, ex-spouses, survivors and children of contributing workers, plus disabled individuals.

Looking at my own Social Security records, my wife and I have received in benefits every penny paid in taxes—both by me and my employers. In fact, we got it all back within the first seven years. Since then, we’ve collected $200,000 more. Someone less fortunate may collect for a short period or not at all.

That’s why Social Security is insurance that, in some respects, acts like a pension. For each individual, the goal is to be an actuarial loss—but, no, not everybody can live longer than average.

Social Security benefits are based on your earnings and the program’s benefit formula, not on the payroll taxes paid. Many individuals collect benefits without ever paying a penny in taxes, either directly or by an employer on their behalf.

The investment gurus are going to run the numbers and easily prove the $1.9 million claim, or something like that, is accurate.

Yup—if everything works out perfectly from day one. Namely, that the individual has the discipline to save every equivalent penny. That the money is invested wisely. And that he or she doesn’t suffer any major vicissitudes of life, as President Franklin Roosevelt called them. If all these conditions are met, sure, then they’re correct.

Call me cynical, but not many Americans have demonstrated that sort of discipline for long-term saving and investing. That may be why there are always calls for higher Social Security benefits and larger cost-of-living adjustments.

The Social Security trust fund is often misrepresented. The U.S. government has almost $29 trillion of outstanding debt. Of that, $6 trillion is held by intragovernmental trusts, including some $3 trillion in Social Security reserves. Those trusts are effectively accounting items within government agencies.

The Treasury does issue special bonds to the Social Security trust fund. It also credits those bonds with interest—$76 billion in 2020. In addition, the trust receives income from the taxation of Social Security benefits—$41 billion more.

Social Security will redeem those bonds when the income from payroll taxes is inadequate to fully meet its obligations. Where will the government get the cash? Probably with more debt, charged to another account.

Some people are convinced Congress stole the trust money. They say the trust would have plenty of money if it hadn’t. That’s simply not true.

Your payroll taxes, on average, pay for only about 15% of your total benefits. That’s why it was decided that a maximum 85% of our Social Security benefits would be taxed.

Representing Social Security as theft, a rip-off or a Ponzi scheme is reprehensible, in my opinion. That’s like saying term life insurance is a rip-off if you don’t die within the insured period.

No, the real failure is that Congress has ignored for decades the need to shore up Social Security’s finances. Adjustments are necessary as demographics and other factors change. These could have been gradual and relatively minor—if the costs had been spread over generations of workers. Now, we’re in a bind.

Current and future workers must carry the burden of balancing the books. Either that or Social Security must receive an influx of cash from general tax revenue. That would change forever the very idea of a worker-funded insurance program. It would place Social Security among the many programs competing for their share of the federal budget—something Roosevelt greatly feared.

Source: Not an Investment – HumbleDollar

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  1. Sorry, have to disagree. There are many forms of “investment”. No, Social Security is not a retirement savings plan. But, neither is a single premium individual annuity with survivor benefits and a long term care rider. But, generally speaking, a 401k, Social Security and such an annuity are all investments – in the sense that you pay today, and you receive what the plan, entitlement, product or policy provides per its terms. The fact that Social Security is not limited to retirement income doesn’t mean it isn’t an investment. The fact that Social Security is a mandatory tax doesn’t mean it isn’t an investment. Investments are not limited to stocks and bonds. These terms are not mutually exclusive.

    However, it is a fact that a significant minority of Americans won’t receive a return on their “investment” – the combined employee and employer (remember, employer paid taxes are part of rewards, dampening down wages). And, that doesn’t even consider the foregone earnings that could have been accumulated.

    It is a fact that a significant minority of Americans would have been better served without the income/wealth transfer that result from Social Security’s structure, the flat tax rate coupled with the formula bend points, taxation provisions, spousal benefit provisions, taxation provisions, etc. As many Americans see their taxes wasted on government “investment” boondoggles like Solyndra, or more recently, tax credits on electric vehicles (where Cox Automotive reports that the cost of a new EV in May 2020 was $64,300, more than the median annual household income, so as to make folks like Elon Musk billionaires), no wonder they look at their own situation and wonder “what if”.

    Listen to the idiot Democrats who today call taxes to fund pre-k, childcare, paid leave and other caregiving “investments in infrastructure”.

    So, call it whatever you want. Most Americans think their taxes paid for (or made them entitled to) the promised Social Security benefit – even though most did not contribute enough to adequately fund their own benefit.

    For me, it was a very poorly performing “investment”, foregoing/transferring wealth from me, through taxation, to prior generations – where the total burden, including foregone earnings, is one that I (and my spouse) have no hope of recovering from future taxpayers.


  2. “Your payroll taxes, on average, pay for only about 15% of your total benefits.”
    With your numbers and my family benefits collected vs taxes paid, it proves that SS is not really just worker funded. Without income taxes on SS benefits, interest on SS bonds and many people dying before reaching the age of benefits, SS would be in major trouble. I believe in the future all SS benefits will be taxable for people with incomes above $32,000, or whatever number Congress decides. This will be done so the FICA tax will not have to be raised as much on current workers and business to cover the shortage.
    I believe this is the right thing to do, since no one paid enough in FICA taxes to come close to what they will receive in life time SS benefits. What would be wrong with using general tax revenue to cover the shortage in SS benefits??? The Congress has added money to Medicare several times when there was a shortage in the trust funds. SS is not a perfect system and there will be changes coming, and if Congress acts sooner rather than later it will be less painful for everyone.


  3. I don’t always agree with you but I must say thank you when you spend the time you do to explain what SS is and how people just don’t get it. Your frustration is rightly based. Too bad the politicians don’t pay heed to what you have been writing about for years but even if they had none have the backbone to speak and write the legislation needed to insure the funds proper stability. All they want to do is string people along that SS should pay more, good political jargon but bad policy unless it is funded. Again thanks for sharing truth.


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