Social Security Rate of Return

Did you take into account the employers' contributions? (Easiest way to approximate this is to use the Self Employment tax rates rather than SS payroll tax rates.)

Best regards, Bob

I don't think "rate of return" applies to Social Security. The Social Security system is a "transfer payment", not an investment. A transfer payment is where party A pays money into the government, usually as taxes, and party B gets a check from that money. An investment is where you set aside an identifiable sum of money, and it has a rate of return over time. With social security, there is no investment pot, and you cannot identify your chunk of money in that pot.

-john-

Yes it does, in the context of the individual.

The individual experiences a series a cash flows -- a bunch out of his pocket while he's working, and then a bunch into his pocket when he starts collecting. You can compute the internal rate of return of those cash flows and that IRR *is* the return that person experienced.

It's no different -- for the individual -- than if the money taken out of his check went into some investment portfolio and then when he started collecting, the money came out of the portfolio.

Return doesn't care how or even if the money was invested. All it cares about is what the cash flows are. How the cash flows are created is irrelevant to computing return.

Well, the rate of return of people who live long after turning 65 will be larger than the rate of return of people who die shortly after that, or before.

The rate of return of people below the median income will be larger than the rate of return of those above median income.

It is basically impossible to figure out a rate of return of an individual before hand.

I don't think rate of return applies to Social Security either, but if you are willing to make certain assumptions (like that you know on what day you'll die, that you know your exact income over the course of your entire career, that you know how the US Congress will change the laws, etc.), it can be compared to an investment. In the context of the right set of assumptions, Social Security becomes comparable to an investment, in that you pay certain sums of money in at certain times and that entitles you to take certain sums of money out at other times.

And to get a little bit philosophical, Social Security is somewhat like an investment. It is a transfer payment, but there is an implicit social contract in the US that says it would be unfair for someone to receive nothing when they paid a bunch of money into the system. Therefore, you can regard every dollar you put into the system as buying a share in the "Me and the Rest of the AARP Will Vote You Right Out of Office If You Take Away Our Benefits, Sonny Boy" Fund.

- Logan

Well, none of that is particularly specific to SS (well, aside from the median income one). A private life annuity has exactly the same "problems" with respect to return calculations. Still doesn't mean the concept of one's return is meaningless,

I used a Social Security tax rate of 9.66%. I know that seems like a funny number, but it actually comes from somewhere. It's 12.4% (employee + employer contributions) minus 2.74% for disability insurance. The 2.74% is based on a sample quote from MetLife that's often cited. I have no idea if it's realistic or not.

--Bill

I've looked at social secuirty as an annuity. The payout formula has three segments: 90% of your 35 year average income up to about $600, then 32% up to about $4000, and 15% up to about $8000. Therefore for each segment:

SEGMENT 35-year income SS Tax Annuity annual rate(*) per monthly per monthly dollar pay out dollar pay out(*)

90% $466 $36 33% 32% $1312 $100 12% 15% $2800 $214 5.6% 0% (35 year income over $3.4 million)

(*) If self-employed, double the tax and half the annuity.

About two years ago my lifetime income was enough to move(**) into the 15% bracket, so there is less of an incentive to work for social security, but 5.6% isnt that bad of a return. These days a 65 year can get 7% non-inflation annuity or a

5% inflation annuity in the open market.

(**) The formula is inflated by the national wage index each year until retire, which has averaged about a 5% increase the the past two decades. So if one stops working several years before social security, they can sink back into the sweet spot. (**) You can also observe the 32% -> 15% transistion in your annual social security statement. I was getting monthly increases of $60 each statement, which have dropped to $25. Is working another year the bestr way to increase your monthly pension $25?

P.S. These generous formulas are likely to be pared by Congress in the next few years to improve the health of SS.

With a private annuity, there is generally a well known cost to it, I talk to the salescritter, plunk down a certain amount of money, and I'm the proud owner of an annuity. Social Security doesn't have a nice easily calculable figure for the cost of the annuity. And since Social Security does other things than provide an annuity for old age (such as care for those under 18 or disabled) the concept of rate of return for social security is moot.

I can not attest to the mechanics, rate of return, but I can give you a personal view.

My parents lived to 87 & 90. They WITHREW more money (even at the lowest rate) than I ever put in during my social security paying lifetime.

I retired at age 62, and my wife and I have already withdrawn (in addition to my parents) more money than either of us contributed to the system. (ages 87 & 88)

Cal Lester CLU

I hereby renounce, dismiss, and waive all claims to future Social Security payouts to my pocket ... forever and for all time ... If you just let me out of the program RightNow(tm) and promise me I don't have to pay in any more.

You can keep it all. I've been working for 21 years now (ages

16 to 37) and you can keep it all. Do with it what you will. I don't want your payments -- just let me out and quit taking the money from my pocket.

"Unfair" ? I'm on public record now as *volunteering* to receive nothing ... and I've already "paid a bunch of money into the system" -- I just want to quit throwing good money after bad.

.

Have you no compassion for your fellow man. The S.S.System is designed for current workers to support those who can no longer work. At age 37, it is true that you have a long way to go, but please take into consideration the fact that YOUR contributions are helping to support MANY people who can no longer work.

THEN when you reach that ripe old age of 70, with a potential for at least

30 years of non-income producing years ahead of you, you will reap the benefit of your children & grandchildren's contributions..............

Cal Lester CLU

I think the best way to view it is an insurance scheme. Insurance in particular for certain groups who do relatively well (relative to their premiums):

- married women who don't work

- those who retire early on disability

- those on low average pay throughout their careers, who don't have much personal savings or opportunity to build it up

- those who lose personal assets in life due to illness or divorce

- those who live much longer (or whose spouses live much longer) than expected, thus exhausting their financial savings

As an insurance scheme, it has a low cost of premium collection (about

0.5% of total benefits disbursed), and it is universal (so none of the adverse selection problems which bedevil private medical insurance).