Social Security: Investment, Welfare, Ponzi Scheme or JPN?

Today while watching Fox News Sunday, Sen. Dick Durbin (D-IL) was on with Sen. John Kyl (R-AZ). Durbin is one of my least favorite politicians because of his pathological refusal to give a straight answer to any question. Chris Wallace was asking the two senators about deficit reduction and the debt ceiling.

I don't even remember what was said, but something sparked an idea in my head to see how much money I could have/would have made if I had invested all of my Social Security money in the market using the S&P 500 average for each year.

To figure this out I would need two groups of information: How much money I had 'contributed' (along with my employer) and what was the annual return for the S&P 500 for each year I have been employed. Well, it turns out I actually needed three pieces of info.

I had recently scanned my latest Social Security Statement, so it was readily available. All of you US workers get an annual statement that shows what your retirement and disability benefits would be and it also shows your annual earnings record, but what it doesn't show is how much you contributed. So, to figure this out, I needed to find out what the annual FICA tax was over the years.

My first "real" job was in 1971 and according to my statement I was taxed on $150 in eligible FICA earnings. Now, I needed to know the rate. Google helped me find a pdf on the SSA.gov website that gave me those figures. That year the rate was 5.2% (OASDI), but 0.6% of it was Medicare (HI).

Next, I needed to know how much the S&P 500 had returned. I found this website which shows the CAGR, or compound annual growth rate, of the S&P. I could have looked for a Fidelity fund or such, but I chose to use this table. Also, a no-load fund would have charged a small percentage management fee and would also have had capital gains to report as stocks went into and out of the fund, but for sake of illustration, I pretended it was in an IRA and I did not consider the fee.

So, how did it work out? I created a spreadsheet and pulled the amount of taxable wage off of my SSA statement into the first column. I then looked at the SSA pdf file and pulled the FICA rates from 1971 through 2010. These varied from 5.2%/0.6% in 1971 up to 7.65%/1.45% in 1990 which surprisingly is the rate it remains today. I put these two numbers in the next two columns. I then subtracted the Medicare from the Old Age number and then doubled that to include the employer match as my multiplier to get my total dollar contribution.

Finally, I pulled the S&P CAGR number for the next column. This number varied between -37.22% in 2008 to +38.02% in 1995.

My calculation went like this: (EOLY+TY+((EOLY+TY)/100*SP)) where EOLY = balance at end of last year, TY = total contributions this year (which is taxable wages/100*FICA rate*2) and SP =  S&P 500 CAGR. All percentages were normalized by dividing by 100.

So, not including Medicare, my employer and I have contributed $211,920 to the fund in the past 40 years (have I been working that long??????) That is a lot of money, but if I had invested every penny of it in the S&P 500, I would have $845,405 in my account. And if we could forget that 2008 happened, I would have way over $1,000,000 saved up. (The 37.22% market loss in 2008 caused my balance to drop from $876K in 2007 to $558K in 2008... a $318,000 dollar loss in one year!)

I am not going to debate the whole Social Security vs. privitized investment argument.I am not even going to discuss the "lockbox" or the fact that the federal government buys its own securities with this money as an "investment". Looking at the GM buyout as an example of what happens when the government invests in a private company, there is no practical way for the US to grow this money other than to create a sovereign investment fund and put the money overseas. Or they could just stash it in a very, very large mattress in Ft. Knox.

All I will say is that my choice from the options in the title of this blog post is JPN.

Just Plain Nuts.

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