President Obama has proposed a reduction in the level of Social Security benefits through the use of something called Chained CPI. Despite bipartisan agreement that Social Security needs to be reformed, Obama’s proposal has gone over like a lead balloon (especially on the left). See the chart below for an illustration on the scope of the fiscal problem with Social Security:
What nobody is really talking about is just how crappy Social Security really is. According to Michael Tanner of the Cato Institute (writing in October 2008 when the stock market was in a deep decline):
Assume you had invested a hypothetical $100 in 1965. The redline shows what would have happened if that money had annually earned Social Security’s imputed rate of return (about 2.2 percent for someone retiring today). The blue line represents what would have happened if you earned the actual market return. If you invested $100 in 1965 at Social Security’s rate of return, today you would have $254.91. But if you invested that $100 in the market, today, even with the current down market, you would have $4,135.92.
See the image below for details.
Private accounts are STILL the best option for America’s retirement system.
4 Replies to “The real problem with Social Security is the lousy return”
Among the many difficulties with an alternative to Social Security is a simple one: safe is better than sorry for those who cannot afford the risks of losses. While the general trend of the market is up, its valleys are a concern to those who must rely on the peaks.
I’m not saying that people should (or even should be able to) invest 100% of their retirement dollars in the stock market. I’m just pointing out that even after one of the largest declines in any of our lifetimes, the market still outpaces Social Security.
People will say what if you die or become disabled early in your life. Answer, even taking a fraction for an insurance policy and investing the rest, would still be better than social security.
And the reason is because the insurance company will invest it at an aggregate level even though you cannot at the individual level. What a sham that we believe in lotteries and pyramid schemes over just plain saving money and letting compound interest work. Everyone knows what Einstein said about the force of compound interest. The man was a genius, and yet we refuse to leverage compound interest for social security…due to the entitlement culture of getting something that someone else pays you. That only worked for the early social security beneficiaries, as is common with pyramid schemes. The sad thing is everyone since has essentially voted to rob themselves of a better retirement that they could have gotten from compound interest on the amounts they were already being forced to pay in taxes…