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Social Security’s ROI

By Jennie L. Phipps · Bankrate.com
Tuesday, August 7, 2012
Posted: 9 am ET

Monday was my 61st birthday -- one year away from retirement, or least one year away from the right to collect a small amount of Social Security.

I was thinking about this retirement planning milestone when I stumbled on an Associated Press story published Monday that said: "A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank."

The piece continued, quoting people both defending and reviling the program, but I couldn't get past those initial numbers. They looked wrong. So I called Richard Johnson, who is the director of retirement policy for the Urban Institute, and asked him to explain how it worked.

Johnson said that the AP story leaves out some key parameters. In order for a couple to be getting back less than they put in, they'd both have to have earned the average income on which Social Security is based over the last 40 years -- no breaks. If during those 40 years, they had put the money they'd paid in Social Security payroll taxes into an account returning a steady 2 percent interest, then they would have accumulated more than they would be eligible to receive -- unless they live to be older than 82 and 85.

Johnson said, "These numbers are based on prototypical people, and those people aren't common. In fact, they are very rare. We have numbers that look at the entire population's experience and in general, most people are doing much better."

The typical worker born between 1951 and 1955 at full retirement age will get back at least 17 percent more in benefits than he contributed in taxes. A worker born after 1956 will get back at least 15 percent more than he contributed.

"Social Security remains a good deal for most people approaching retirement," Johnson says.

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3 Comments
Joe The Economist
August 09, 2012 at 9:17 am

@Joanne,

If you feel it is inaccurate, you should say where.

You complain that they quote someone from AEI, but you mention the fact that all of the data comes from the Urban Institute. The man who produced it is a fellow at the Brookings Institute which is a liberal think-tank. The reporing is surprisingly balanced.

Here is what Mr. Johnson isn't telling you. The returns do not include benefit reductions from the exhaustion of the Trust FUnd. Someone born in 1951 expects to live long enough that their benefits will be forcibly cut by the exhaustion of the Trust Fund. Someone born in 1955 will have reduced benefits for about 1/2 of their retirement.

So tell me what is the lie that you see?

Joanne Ratcliff
August 08, 2012 at 10:24 pm

I am SO glad to read this! I saw the same AP article in a newspaper and was dismayed by it; also thought much of it not accurate. And, the person they quoted is at American Enterprise Institute, a neo-conservative think tank, so what else could we expect but a trashing of Social Security? The lies being spread about the worthlessness of Social Security make me incredibly angry, going back to when Geo W. Bush in 2005 said it was
"broke with only I.O.U.'s in it's $2-3 trillion dollar Trust Fund." Only the safest investment in the world, U.S. Treasuries which are still earning interest for the SS Trust Fund! He wanted to privatize it, hand it over to Wall St.! Kill it. Sickening.

Joe The Economist
August 07, 2012 at 9:23 pm

"If during those 40 years, they had put the money they'd paid in Social Security payroll taxes into an account returning a steady 2 percent interest"

Yes but who puts their retirement money in assets that return 2 percent. If you look at the stock market, it has returned 5% real. That is a better gauge.