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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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Silvio Renzulli
February 18, 2011 at 6:48 pm

Thats just it conservatives don't care about anyone else except themselves! Its the culture of greed!

Ron Gonyea
February 17, 2011 at 8:11 am

I see the SS problem in three parts:

1. We have the greatest generation that has been sucking benefits for years while having contributed virtually nothing using the big war as justification.

2. As one of the more learned posters here pointed out the SS program involves a whole lot more than just a retirement benefit. If the participants had to buy disability and survivor benefits the program would look like a welfare program that it is.

3. The government has been spending "surplus" funds as part of the national budget not accumulating these funds for a rainy day.

So get with the program folks. We must raise SS taxes, reduce benefits, raise retirement age and more if we want these benefits to continue. Time for tough love thanks to the greatest generation who have bankrupted our social programs with little to no MONEY contributions.

February 16, 2011 at 3:34 pm

Just remember, social security isn't just the 3.32 to what is now 6.2% of income taken from HIS check, it's also the now 6.2% taken from his employer, which means had SS never existed, he might have gotten twice as much money as previously calculated, which would give him higher monthly returns, which would have been undeniably better than the social security.

February 15, 2011 at 6:29 pm

The majority of people are unable to save and/or lack the discipline and knowledge to pursue an investing strategy. If we got rid of Social Security we would end with millions of destitute seniors that eventually would have to be rescued by the Big Bad Governmen.

February 14, 2011 at 6:19 pm

All of the comments are quite amusing because none seem to point to the real problem built into to the system. About 1/3 of the payout goes for non pension related causes. Some people would call those payments welfare and they would be mostly correct. For an example, what annuity would pay benefits to ex spouses or pay 50% of the workers' pension to a spouse even if that spouse did not put in a penny or that spouse would continue to collect the full amount of the workers' pension after his/her death?

Bottom line is in the present form SS is not viable. Current beneficiaries should take the money and live it up.

Bob Havel
February 10, 2011 at 3:28 pm

Jennie, Social Security is going bankrupt - a massive inter-generational Ponzi scheme. Everybody who didn't know this several years ago should know this now. Again, not enough money is coming in to support what's (currently) being paid out. There is no question that what we and our kids will receive back will be lower than what we put in. What's the solution? More taxes, of course, which will only reduce incentive to work. The vicious self-consuming circle has begun...

February 05, 2011 at 7:41 pm

The Social Security Actuaries have calculated the
"Internal Real Rates of Return for Various Earning Level Scaled Workers OASDI Program—Payable Benefits Scenario".

in Table 3

A 1943 baby with "high" income has returns of
1.28% (Single male),
1.75% (Single female),
3.76% (Married, 1 income),
1.71% (Married, 2 incomes)

However, the same male born in 1973 would have returns of
0.77% (Single male),
1.12% (Single female),
2.99% (Married, 1 income),
1.19% (Married, 2 incomes)

In general, younger people will get lower returns than the older ones.

February 05, 2011 at 2:43 pm

Your husband isn't a very good accountant. First, Social Security doesn't invest your contributions. Instead it pays them out to current retirees. Second, what you get back when you retire is determined by a formula, and is only indirectly related to what you pay in. And no, what you pay in does not accumulate interest for you.

Instead if your husband calculated the present value of your lifetime contributions, and compared them to the present value of your lifetime retirement benefits (which can be found on your annual statement from the Social Security Administration) assuming a normal life expectancy, you/he would discover that the present value of benefits less contributions is a negative number. This means that the rate of return on your contributions is negative. If you were able to keep your contributions and put them under your mattress, you would do better.

Jim Tomes
February 05, 2011 at 4:25 am

The cost of a COLA adjusted annuity would probably mean you would get 25% less income per month, it is a very big deal.

February 04, 2011 at 9:40 am

The difference is that I take the risk on the investment choices I make. The government does not touch the money and "invest" (i.e. spend) it for other things. The problem with SS is that there is not enough money going IN for the people that are/soon will be taking it out. When the governement took the money out of somebody's paycheck it was strictly supposed to go into a "lockbox" to support this program. They didn't do usual, they spent it (democrats and republicans both!) with an IOU to SS. Where there used to be 13 workers for every person collecting, now there are TWO.

I don't think anybody is really concerned that SS doesn't have a good payout, it's that the money is almost running out.

You hubby needs to find something more fun to do with his time off of work!! :0)