#3 - Social Security is a Bad "Investment" for Many Americans


Investment performance is measured by the "rate of return" -- that is, the average annual percentage increase in the value of the investment.1 For comparisons, economists have calculated two benchmarks; the long-term rate of return on a portfolio of U.S. government bonds, which is 3%, and the long-term rate of return on a broad U.S. stock fund, which is 7%.

Social Security taxes are like a retirement "investment," and thus rates of return can be calculated based on each individual or couple's expected lifetime Social Security benefits, versus the taxes they paid into the system. In the case of Social Security the rate of return varies among individuals not by the performance of specific investments, but rather by the year the individual was born, and his or her lifetime earnings, marital status and length of retirement.

For many Americans, particularly those born after 1960, Social Security offers a very low rate of return, making it a bad "investment."

For example, for an average income family of four with a single breadwinner born in 1950 Social Security's rate of return is 3.28%. If the breadwinner was born in 1960 the rate of return is just 2.85% and if the breadwinner was born in 1970, the couple can expect a rate of return of only 2.71%

Furthermore, if the families in these examples have two earners instead of one, then the rates of return are even lower - 1.88% for the first couple, 1.39% for the second and 1.20% for the third.

In all but the first example, the couples would be better off if they could instead invest their Social Security taxes in ultra-safe government bonds, and all of them would more than double the rate of return on their retirement savings if they instead invested their Social Security taxes in broad stock index funds.


1 For more information see: Beach, William W. and Davis, Gareth G., Social Security's Rate of Return, Heritage Foundation Center for Data Analysis Report no. 98-01, January 15, 1998. This paper can be found at: http://www.heritage.org/Research/SocialSecurity/CDA98-01.cfm


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