Every year the Social Security Administration sends me a statement with my estimated Social Security retirement benefits. If I feel like being depressed, I do some analysis on those numbers.
A few years ago I computed the effective rate of return for money I pay into Social Security. You can find the results here. At that point, my money entrusted to the "Social Security Trust Fund" produced the equivalent of a 1% annual rate of return over my lifetime. By comparison, a diversified investment portfolio should be expected to return eight or ten percent over the long term.
This year I compared a dollar paid into Social Security to a dollar invested in my 401(k). In both cases I started with a dollar paid in 1994, when I was fresh out of college. The dollar in my 401(k) has had a rough ride, with some big gains and stomach-wrenching drops. Today it has grown to $3.93.
If I went to the government and asked about my dollar, they couldn't give it to me, or even tell me how much it is worth. They don't have it any more. They spent it in 1994. All they have is a Treasury Bill indicating that the government owes itself $1 plus interest. To understand how this works, get a piece of paper and write "I owe myself $1 million." Then sign it. Congratulations! You are a millionaire! At the effective rate of 1% my dollar would be worth $1.21.
Assuming typical results for both the 401(k) and Social Security, if I retire at age 65, the dollar in my 401(k) will have grown to $54.34. The dollar I paid into Social Security will produce $1.52 in benefits for me. The 401(k) investment will be worth 35 times more than the Social Security benefit.
"But wait," you might say, "The 401(k) is invested in stocks and those are risky. Social Security is safe, there is no market risk. It is sure to be there for you." A big hole was shot in that argument by the report issued by the Congressional Budget Office which states that Social Security will operate at a deficit until the money runs out entirely in 2037.
How can this be? In 1984 Congress overhauled Social Security, increasing the payroll tax and putting the surplus into the "Social Security Trust Fund" where it would be available to cover the surge in benefit payments caused by the baby boomers retiring. We were assured that Social Security would be solvent until 2060.
But putting Congress in charge of safeguarding a pool of trillions of dollars was clearly not a good idea. You know the fox and the hen house. Congress, which depends on spending more and taxing less in order to secure their re-election, spent the money. Bernie Madoff was small time by comparison. With interest, the Social Security Trust Fund should be worth $2.6 trillion today. This should anger you. That was not their money to spend, it was your money, entrusted for safekeeping, promised to be there for you when you retire. Roosevelt called it "A sacred trust".
Millions of Americans depended on the government for a secure retirement. For more than half of America's retired people, Social Security provides the majority of their income. According to the recent report, in the near future, benefits will have to be cut, payroll taxes will be increased, and still the Treasury will have to borrow or print more money to meet its obligations.
Even the measly 1% return will not be there for me when I retire.
People who depended on government for their retirement are learning that government is not dependable to deliver on its promises. Now, who wants to sign up to depend on government for health care? Have they earned that level of trust?