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February 08, 2005
A Bad Deal?
According to Jim Wooten in today's AJC, Social Security is a bad deal for young workers like myself.
Oh really? I went to the handy Social Security webpage and plugged in some data about someone exactly like me. Let's assume that when Jim Wooten is talking about the average young worker, he's talking literally about the average young worker, and not the average young Republican investment banker he talks to at Republican training seminars.
Say someone is born in 1980 and more or less gets into a serious job that pays $30,000 / year starting in the year 2004. Obviously, many people will make more than that later in life, but for assumptions sake lets keep it simple. If I follow this career path and then retire at age 65, my monthly social security benefit would be $1,008.
Ok, now compared to putting away 12.5% of my salary every year and getting an average return of 4% per year (and then purchasing an annuity based on the lump sum amount I'll have when I retire) I am looking at a benefit about $250 less per month with social security.
But, and this is a big but that people tend to overlook, what about disability and survivor benefits? Obviously when people are dreaming about retiring millionaires and thinking about the benefits of a private system where the money is all yours, they are usually plugging optimistic return numbers into a calculator and not worrying about getting disabled or dying and leaving behind a spouse and kids.
What else could I or my heirs conceivably get from the Social Security administration in the above scenario? Glad you asked. If I become disabled tomorrow, or any other time between now and 65, I would be entitled to receive $785 / month. Not bad. But if I were to die, my child and wife could each receive $872 / month, up to $2,177 / month depending on how many children we have.
Upon retirement, my spouse would be entitled to a pension of $1,163 / month. Now, I've done some calculations, and in order to get a return of $1,008 a month under the private system getting 4% returns per year, I'd need to only set aside about 9.7% of my salary. So, with the extra 2.8% ($70/month) I'd be responsible for purchasing some sort of life insurance/disability insurance benefit that will not only take care of myself and my children if I become disabled but also take care of my spouse if I die.
Obviously, I can't vouch for Jim Wooten. But when you see what all you get (and hopefully your heirs won't ever need to get your survivor's benefits) from Social Security, it seems like a pretty good deal for a risk-free retirement benefit. Another huge benefit of Social Security -- it's work and trouble free. For a decent return, there is no portfolio to manage and there is also no need to understand complicated life and disability insurance premiums in order to be able to purchase them separately.
Additionally, Social Security is free of human errors. Your accountant or life insurance agent is able to figure our how to account for something terrible happening to you, but most people would rather not think about that. That's something I'm personally comfortable with letting Social Security handle (at least while I only make $30K/year) and I'd bet many people who once *thought* private accounts/dismantling the system is a good idea are retroactively happy that Social Security exists in its exact form when something does happen that disrupts their lives.
Posted by Chris at February 8, 2005 12:49 PM
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