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Annuities vs. Social Security

By Jennie L. Phipps ·
Thursday, February 3, 2011
Posted: 4 pm ET

My right-brained, accountant husband stayed home yesterday because it snowed. We started talking about the number of people who attack Social Security as an inefficient retirement fund and insist they could do much better on their own.

Just for the heck of it -- because he loves math and me -- my hubby unearthed his most recent annual Social Security statement and plugged the numbers into a spreadsheet to test how his accumulated Social Security compares to a conservative investment of the same amount of money outside Social Security. He was surprised to learn that Social Security isn't such a bad deal after all.

Hubby listed his taxable wages beginning in 1963 on the spreadsheet. In the second column, he put the annual percentage of Social Security deducted from his wages -- it's changed over time, from 3.32 percent the first year he paid in to 6.2 percent last year. He calculated his annual contributions and his employers' annual contributions based on his wages. Then he totaled the contributions.

Next, he assumed that Uncle Sam would invest the money in 30-year Treasuries, and he plugged in interest on the accumulated money based on the Treasury rates, calculating a purchase every six months and reflecting the actual change in rates. Finally, he added up the annual totals and a grand total.

He took that grand total and plugged it into and got a monthly payout for a single male, age 66. He compared that number to what Social Security says he'd get at 66.

According to, he would be able to take his total accumulated savings and purchase an annuity worth $3,427 paid monthly beginning at age 66 for the rest of his life. If he wanted to share the money with me, he could get a joint-lives payout that would pay $2,828 until we both died. There are no inflation adjustments during that time, and when both of us die, the insurance company gets to keep what's left.

By comparison, Social Security will pay my husband $2,415 monthly beginning at age 66. If I didn't have my own Social Security, I could claim half of his -- $1,207 -- for a family total of $3,622. That's $794 more than the private annuity would pay us. Plus, the Social Security money is indexed for inflation. When one of us dies, the other gets the highest amount of the two payments. When both of us die, the government keeps anything that's left.

By my lights, Social Security is clearly the better deal.

The Bush administration wanted to partially dismantle Social Security and let people invest at least some of their contributions in the stock market. I haven't heard much about that plan since the market went south in 2008. But some regular posters here still suggest that they could do better on their own. And maybe they could. But Social Security is a program designed to protect all of us, including those of us who don't have what it takes to save and invest money on our own. I think that's a retirement planning blessing.

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March 29, 2011 at 6:28 pm

if fdr had stuck to what the original premise was--a partial retirement benefit for the elderly--the s.s.a. would be in great shape... it pays for a.f.d.c--the welfare queens with the super sized numbers of children and no visible fathers. it pays for disability and the rules have been drastically diminished.. alcoholism and drug addictions are now considered by the disability act to be covered and they just widened the parameters to include real borderline conditions. now we come to the real problem--treasuries and saved funds have been artificially held to some of the lowest rates in the history of the republic--manipulated by greenspan and bernake and his is a rigged game and the savers and ordinary working stiffs pay the price as the washington ruling class destroys the middle class and the lifetime savings of the elderly and the working class. all in the name of redistribution and marxism. the hyperinflation of pre-world war 2 in germany will resemble a walk in the park when it begins soon in the usa. our dollars are becoming so diluted and the buying power so diminished--thank you obama and czars.

March 27, 2011 at 8:43 am

Most people know that an annuity is a rather poor long term investment. I have calculated that if my SS funds had been invested in a NY index fund up to the age of 30 then stopped, I would have over $1,000,000 when I turned 66 three years ago.

March 16, 2011 at 8:21 am

Got back in time and hang Johnson and the dems that voted for a unitized buget that let the DC bandits use SS for their own piggy bank to pay off those who got them elected. Dems started it and then the other side did not want to be left out.

An Inquirer
March 08, 2011 at 12:31 pm

Terrible analysis. Not worthy of a passing grade. It reveals how shallow analytical abilities are -- is that due to failure of the edcuation system? Or due to slanted political desired answers?
First of all, Social Security has characteristics of a Ponzi scheme, and earlier participants are going to do better than later participants. The 3.32% paid in the early years is a godsend to your desired outcomes. For people today, the relevant number is 6.2% + 6.2% = 12.4%.
Second, annuitizing at today's low interest rates would not be a wise financial decision, but given your political persusion, I can see why you went with that option.
Third, you add on a spouse's Social Security $ as if that $ grew on trees. Somebody must produce that $. If the spouse had earned income, the private option becomes more attractive.
Fourth, you gleefully point out that SS is indexed for inflation, but Social Security does not have the $ to continue to pay for that index. Again, more $ is going to be needed to pay for the "promises" of Social Security, and that $ does not grow on trees.
Fifth, you bash the Bush proposal to let individuals choose to put some SS $ into the stock market. There would be no mandate that such money must be put into the stock market. It could be put into safe bonds -- and your calculations used the ultimate of safe bonds (which has lowest returns). Investing over the long term allows one to diversify into safe and higher-returning portfolios.
Sixth, you neglect to point out that Social Security stops when someone dies. If someone dies before 66 or 67 now, all the $ put into SS is gone with no benefit given to beneficiaries. If one dies at age 69, he or she gets only a couple years of SS benefits. The private account would enable my children to have a benefit even if I die early. With the life expectancy of blacks being shorter than whites, the Social Security is discriminatory to black workers.
Seventh, to maintain the payouts for SS recipients, taxes will need to be raised. Too many people have a poor understanding of the consequences of raising taxes.

February 24, 2011 at 10:35 pm

If nothing is done, Social Security will run out of money in 2037 - not exactly a crisis. Obviously something has to be done, but it can be done prudently. The so-called "trust fund" is invested in the equivalent of treasury bonds, which is obviously a lot better than putting them under a mattress where all those cheap Congressmen are sleeping in the Capitol.

By law, Social Security must be self-sustaining and cannot draw on the other sources of income like income tax money. When it was running a huge annual surplus, LBJ decided to pretend that surplus could count against the budget (deficit), and every president and Congress since has gone along with the gag.

Nevertheless, Social Security is not in much trouble. No one should think SS should run a big surplus to bail out the rest of the budget; it should just take care of itself. Expecting Social Security to generate funds for the defense budget, etc, is like telling China they should not be building power plants and bullet trains because they should be saving that money to loan to us! A compromise on SS featuring slightly later retirement ages, a higher cap on contributions and some means testing (all modest in scope) will solve the problem through our grandchildren's lifetimes.

Sam Murray
February 24, 2011 at 7:51 am

At today's very low interest rates, of course an annuity loses! Annuity income decreases with interest rates. If someone retired in 1981 at 16% interest rates, Social Security would lose in the comparison. Everyone runs a timing risk of low interest rates or of a big stock market crash near retirement. To avoid this timing risk, you should run the calculations using each years's Social Security taxes to purchase a deferred annuity the following year. For example, the Social Security he paid in 1980 would be used in 1981 (and therefore at 1981 interest rates) to purchase an annuity starting in 2011. Of course, you have to use higher math. My point is that every must have a plan to deal with the timing risk of interest rates and stock market and, for that matter, the value of the dollar (think Swiss annuities).

February 22, 2011 at 2:20 pm

The whole problem with Social Security (well the biggest in my opinion) is the poor interest it earns because the money is kept in the public sector and the government can steal from it. If the money had been in the private sector, earning competitive interest, we would all be a heck of a lot better. The article above doesn't take into affect how much more money you would have at retirement to invest in an annuity if the money had been invested in the private sector vs T Bills. Especially when you are talking about 40 years of compound interest!!

February 21, 2011 at 10:21 am

It was my understanding that the federal government has "borrowed" several times from the social security fund and hasn't paid it back (with interest). If it did, social security and medicare wouldn't be in the financial trouble it's in now. I've read that the federal government owes so much money to the social security fund from its "borrowing" that it would bankrupt the nation to pay it back. Isn't that just a long history of stealing from the elderly?