Why Social Security Is a Losing Deal

Article excerpt

The answer to this question can be found on the Heritage Foundation's new online Social Security benefits calculator. It lets you compare the trickle-down benefits that the government will pay you after a lifetime of payroll taxes with what you can earn if you could invest that money in a very conservative portfolio of blue-chip stocks and bonds.

What the calculations show is "what a bad a deal Social Security is for both current and future retirees," says the conservative think tank, which has been a leader in the movement to let workers decide how they want to invest their payroll taxes.

The difference between the return on your investments and what the feds will pay you is stunning, especially for younger workers.

"A man retiring today, at age 65, for example, gets only 1.75 percent back on the hundreds of thousands in payroll taxes he paid. But he's lucky, compared to a 21-year-old man who has a negative .9 percent return," the foundation says.

A 33-year-old woman who lives in Ann Arbor, Mich., who earns $44,000 and intends to retire at 67, pays $267,599 in Social Security payroll taxes over her working life and can expect to get $369,984 in benefits over her retirement. Her rate of return is a measly 1.12 percent.

If the same amount was evenly invested 50-50 in blue-chip stocks and rock-solid, safe U.S. Treasury bonds, it would yield her a return of nearly $1.5 million - more than $1 million more than Social Security would give her in benefits. That's a return of nearly 7 percent.

"At least the Ann Arbor woman can look forward to getting back more from Social Security than she paid in," the foundation says. But consider the plight of a 33-year-old D.C. man (same income, same retirement age). He will pay out $295,119 in payroll taxes, but will receive only $163,935 in benefits, giving him a minus 2.85-percent rate of return.

If that man were allowed to invest his payroll taxes in a balanced, blue-chip stock and Treasury-bond fund, it would earn him a retirement nest egg of $1.449 million that he would own and could leave to his heirs.

A 32-year-old women living in Newport Beach, Calif., earning $44,000 and living to 84.3 years of age, would build up a nest egg of more than $1 million over her working career - a 6.7-percent rate of return on her hard-earned money. Compare this with her rate of return under Social Security: a mere 1.55 percent, producing only $429,722 in retirement benefits.

Heritage's new Web site - which is based on Social Security data -calculates how much you can expect to pay into Social Security over your working life, the benefits you will receive from the government, and the amount you could earn if you were allowed to invest the same amount in safe, IRA-type mutual funds. …