Monday, March 28, 2005
Want a Bigger Retirement Check? Invest FICA Taxes In Your Own Account
I posted earlier ( Another Social Security Strawman ) on the Schiller paper, as reported in the Washington Post, being a strawman that badly misrepresented relative investment returns for individual accounts vs. standard social security. This 27 March article by economist Alan Reynolds compares investment returns and finds standard social security vs. stock returns: no contest. He looks at several aspects and sees the advantage is strongly for individual accounts over standard social security in terms of getting a bigger retirement check for the same dollar amounts in FICA taxes. I like his version of the last word:
"In the Federal Reserve Bank of St. Louis Review, Thomas Garret and Russell Rhine earned the last word on this topic. They calculate what the return would have been to those who retired in 2003 if they had been allowed to invest the money they "contributed" to Social Security in an S&P 500 index fund or six-month CDs. Then, they compare what retirees' amortized monthly income would have been were payroll taxes invested with what it actually is under Social Security. They found: "Over 99 percent of the U.S. population would have earned a greater return by investing in the S&P 500, and over 95 percent would have earned a greater return by investing in six-month CDs relative to the current Social Security system.
A person retiring at age 65 will only benefit more from Social Security relative to a private investment in the S&P 500 if he is a low earner and lives to be at least 96 years old. For those retiring at age 70, the only individuals that benefit more from Social Security are low earners who live to be at least 94 years old and average earners who live to be at least 108 years old." "
Indeed! How lucky do you feel about living that long just to break even? Not to mention how much more use you could have had for the extra money before reaching those advanced ages. Oh yes, he also shows why the comparison gets worse for those who retire in the future instead of 2003.
"In the Federal Reserve Bank of St. Louis Review, Thomas Garret and Russell Rhine earned the last word on this topic. They calculate what the return would have been to those who retired in 2003 if they had been allowed to invest the money they "contributed" to Social Security in an S&P 500 index fund or six-month CDs. Then, they compare what retirees' amortized monthly income would have been were payroll taxes invested with what it actually is under Social Security. They found: "Over 99 percent of the U.S. population would have earned a greater return by investing in the S&P 500, and over 95 percent would have earned a greater return by investing in six-month CDs relative to the current Social Security system.
A person retiring at age 65 will only benefit more from Social Security relative to a private investment in the S&P 500 if he is a low earner and lives to be at least 96 years old. For those retiring at age 70, the only individuals that benefit more from Social Security are low earners who live to be at least 94 years old and average earners who live to be at least 108 years old." "
Indeed! How lucky do you feel about living that long just to break even? Not to mention how much more use you could have had for the extra money before reaching those advanced ages. Oh yes, he also shows why the comparison gets worse for those who retire in the future instead of 2003.
