So What If Social Security Was Privatized?
If you had the ability to take a refund of your Social Security tax withholding and invest the money yourself, would you do it? What about if the system changed and you were required to contribute your equivalent current withholding to a tax-deferred investment account from the beginning?
Let’s review question number one first:
Pretend for a moment that you are 22, new to the workforce, and earning $35,000 annually. The Social Security Administration continues as is during your first 10 years of work, but then a legislative event changes the system entirely.
Assume the government gave you an option to take the total value of your withholding for your first ten years of employment. This bucket would contain 12.4% of your annual wages over this ten year time period (6.2% from your paycheck and 6.2% from employer). Assuming normal wage inflation of 3%, this equates to approximately $49,753.
The government promised you no future benefits, but did require you to continue tax withholding to fund older generations. Having no other choice, and less promised retirement income, hopefully you would stow this away for your own retirement.
$49,753 invested on your 32nd birthday, earning 7.5% return annually, would equal $672,243 by the time you reach age 67. If Social Security actually exists (by today’s standards) at that time, age 67 would be considered your “normal retirement age.”
Based on the earnings history of someone starting out at $35,000 per year at 22 years old, an estimated Social Security benefit at 67 could equal $1,500 per month at today’s value. Forty-five years down the line, this would be the equivalent to $3,657 monthly if cost of living adjustments are, on average, 2% annually for Social Security benefits.
Let’s now assume you use the $672,243 tax-deferred investment account to fund the equivalent monthly Social Security benefit of $3,657 throughout retirement. Using the same 7.5% return and a 2% cost of living adjustment on the withdrawals, this pot of money would last until your 90th birthday – not bad for much less political and legislative risk!
Stay tuned for next time when we consider question number two – making contributions to a privatized account from the beginning of your working career.
For informational purposes only and should not be considered as investment advice. Consult your investment professional for assistance with your particular situation.