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Welcome to STop, the Seattle Times Opinion blog where our editorial writers and editors share their evolving thoughts on a variety of issues. STop is a place where opinion writers and readers can exchange views and readers can learn more about how editorial positions are formed.

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March 08, 2005

Social Security Quick Calculations

A defender of Social Security who keeps emailing me (and everyone else on the editorial page here) argues here that the retirement income is a good deal:

The average salary in the US is $30,000 per year. At 6.2%, the average person pays $1,900 per year in Social Security taxes. Let's say this is your average salary for 45 working years. 45 years X $1,900 = $85,500. I know, I'm not adding compound interest… When you retire at 65 years old, you will get roughly $1,200 per month. 12 months X $1,200 = $14,440 per year.

- If you live to 75 you get $144,400
- If you live to 85 you get $288,800
- If you live to 95 you get $433,200
- If you live to 105 you get $577,600

Even if you only live ten years into retirement, you do pretty darn well on your $1,900 per year investment….

What to say of this? First, the average salary, according to the Bureau of Labor Statistics, is more like $37,000. In adding the tax rate, you have to include the other 6.2% the employer pays, because it is part of his cost of employing you. So the tax is really 12.4%, or $206,460 over 45 years, or five and a half years' of income. On the other hand, the tax pays disability benefits in addition to retirement income.

According to the quick calculator on the official Social Security web page, the expected benefit of a worker born in June 1965 earning $37,000 and planning to retire at age 67, in 2032, is $1,318 a month in today’s dollars. That’s $15,816 a year—but it’s an amount that is not sustainable, because when that worker is 75 years old, Social Security is going to run about one-quarter short of money, and his benefits will be cut.

A according to the quick calculator at the pro-privatization Cato Institute, if that worker were allowed to invest his half of the Social Security tax in a portfolio that was 60% stock, 20% corporate bonds and 20% Treasury bonds, and his returns were 6.5% on the stock, 3.5% on the corporates and 3% on the Treasuries, minus transaction costs of 0.25% a year, he would retire in 2032 with a nest egg of $264,455, which at today’s interest rates would buy him a lifetime annuity of $21,551 a year.

How good these numbers are I don't know. What persuades me is simply this: The government's system is mostly pay-as-you go: taxes in one pocket and out the other. A bit is put in a "trust fund" but the interest is from the taxpayers, and so that is a hustle also. The private system, in contrast, puts your money to work. Over 45 years, it's bound to be a better deal.

Respond to Bruce.

 
Posted by Bruce Ramsey at March 8, 2005 07:06 PM



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