Social Security: Is it that bad of an investment?

[countryphysician]

I was curious about what the future value of social security would be for myself. Considering I am 30 years old and I will be paying the maximum in SS taxes a year, that is ~$7886 currently. Using the future value function on excel with a 5% real return and 35 years to retirement (age 65):

FV (5%,35,-7886,0,1) =$747,879.24

Now assuming a 4% withdrawal rate, that comes to $29,915 per year....... which is really close to what I would be guaranteed from Social Security at age 65 (assuming no changes in social security).

In my opinion, that is not too shabby.

[Donnie]

It will be pretty shabby when it’s $0 rather than whatever SS says is guaranteed.

You also typically die with a positive net worth using the 4% rule if you keep the capital invested, so you and your heirs lose that value by contributing to SS. For example, disregarding sequence of return risk, if you can earn 4% annually on your investments, you will die with the same net worth you started with.

[q-school]

your social security $ are not for you.  they are for me. 

 

[ENT Doc]

countryphysician wrote:

I was curious about what the future value of social security would be for myself. Considering I am 30 years old and I will be paying the maximum in SS taxes a year, that is ~$7886 currently. Using the future value function on excel with a 5% real return and 35 years to retirement (age 65):

FV (5%,35,-7886,0,1) =$747,879.24

Now assuming a 4% withdrawal rate, that comes to $29,915 per year……. which is really close to what I would be guaranteed from Social Security at age 65 (assuming no changes in social security).

In my opinion, that is not too shabby.

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You are assuming your social security payment (based on the wage base) is stable for 35 years with your calculation.  This defies historical precedent, as it has gone from $76,200 in 2000 to $128,700 now.  The effect of a rising wage base, the high likelihood of this being eliminated to where no caps are present given our current fiscal condition, and the fact that you don't get to actually do what you want with your money makes social security a bad deal.

[Lithium]

Now imagine you develop Stage III melanoma at age 60.  What do you think the chances are that you can withdraw any of that $750k you contributed to SS and go on a cruise in the Mediterranean?  If you die 12 months later, how much of that are your children going to receive?

[Lithium]

Rex wrote:

thats the way all longevity insurance goes.  SS is still the best one you can purchase.  If i unfortunately die prematurely i wont be mad about SS.

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I'm sure there's a whole life insurance policy and pet insurance policy out there that's the best among the available options.  That doesn't make it a good investment.

[countryphysician]

Many believe SS won't be around by the time I retire. That is its greatest risk, yet it is back by the US government. I believe it is one of the most popular programs created by the US government and without it, our economy would be much worse off. I still stand by 5% real return (even if it functions like a deferred annuity) is not too shabby. I do think ENT Doc's statement is a good point though that caps may be increased or eliminated which would decrease the real return for some higher end earners.

[jfoxcpacfp]

Lithium wrote:

Now imagine you develop Stage III melanoma at age 60.  What do you think the chances are that you can withdraw any of that $750k you contributed to SS and go on a cruise in the Mediterranean?  If you die 12 months later, how much of that are your children going to receive?

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Well, to be fair, his/her surviving spouse will get the benefits.

While I’m not a cheerleader for SS, it is similar to a joint and survivor pension benefit at same payout for survivor as for the annuitant. 4% is comparable to the returns of many pensions. I realize this is not a popular opinion, but i happen to believe SS will be around for those on this board and that the reports of its death have been greatly exaggerated. Not in its current form, but it will be the last entitlement to go. It may be the Rodney Dangerfield of entitlements but it is a significant component of a retirement portfolio.

[Hatton]

I think ss will be tinkered with but will remain.

[FIREshrink]

It's great to the first bend point and ok to the second. After that it's crap, and then zero after 35 years. Secret is to quit paying into it at the second bend point. 4 more years to go.

[The White Coat Investor]

It's a great investment for low earners, i.e. up to the first bend point and not a bad one up to the second one. Beyond that? Mostly a tax.

[MPMD]

one has to look at what "retirement" looked like for the elderly poor prior to medicare/SS.

this talk of it going away is crazy. it's literally the most popular thing the federal gov't does. it's so popular that, like medicare, many of it's largest beneficiaries refuse to even acknowledge that it's a gov't program b/c to do so would cause them to have to re-examine their cherished opinions of themselves.

[Lithium]

My fear with the long-term solvency of Social Security is that people are just going to keep living longer and that birth rates are just going to keep dropping.  How would Social Security have survived in Japan?  Yeah, extreme scenario, different country and different culture, but even a minor version of that has to give people pause.

[G]

Lithium wrote:

My fear with the long-term solvency of Social Security is that people are just going to keep living longer and that birth rates are just going to keep dropping.  How would Social Security have survived in Japan?  Yeah, extreme scenario, different country and different culture, but even a minor version of that has to give people pause.

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Completely agree, Lithium.  I just checked to see if this thread was in the Lounge, since it's not, I'll try to be non-controversial.  Social security isn't going anywhere.  It will still be around when I retire; heck, I might even get back a portion of what I paid into it.  The key issue is that the law about how it is managed (funded or paid out) can change over night.  I can think of several ways to keep it solvent.  Unfortunately, all of those ways will be a net detriment to me and my family.  Just like this whole debate on what is "fair" with taxes, really all it takes is a majority vote (at worst a 2/3 majority) to screw me.

So if it is a good investment for me and my family remains to be seen.

For now, I value the disability coverage.

[ENT Doc]

Lithium wrote:

My fear with the long-term solvency of Social Security is that people are just going to keep living longer and that birth rates are just going to keep dropping.  How would Social Security have survived in Japan?  Yeah, extreme scenario, different country and different culture, but even a minor version of that has to give people pause.

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No doubt.  The ratio of workers to retirees has declined since the inception of social security.  And since it's a Ponzi scheme rather than an investment of your money any disruption to either end of that balance will destroy the system.  It's already insolvent.  Now imagine people not just living longer but having workers replaced by automation.  It's nice to take care of people, but the solvency issue needs to be addressed in a dynamic fashion.