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The Social Security question everyone should be asking

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Social Security is not only the largest asset of most retirees, it is the largest expense in retirement planning for the vast majority of workers. Between the two, someone should be asking the question: What do I get for my contributions?

To answer that question, you have to compare the expected value of the benefits from Social Security against how much money your client would have had if he or she had invested contributions in an interest bearing account. The Urban Institute, a nonpartisan policy think tank in Washington, D.C., provides insight into that question. Their research includes both employee and the employer matching contribution in total cost, and looks at the value of expected future benefits discounted to the present. In the net you see how much savings that you lose in order to get a dollar of benefits.

The return of Social Security varies widely by person. For example, a single man earning an average wage ($44,800 2013) and retiring at 67 in 2030 expects to receive roughly $341,000 in lifetime benefits. Those benefits will cost the worker $411,000 in lost savings. In this case, the average worker traded roughly $1 of savings for $0.83 of expected benefits. A single woman in the case above expects to collect about $0.90 per dollar of lost savings because women expect to live longer than men. Social Security compensates people who are married; increasing the expected return by a few cents to as much as $0.55 per dollar of lost savings depending upon how much the spouse contributes to Social Security.

Keep in mind, the data shows an average return in a world where few people are actually average. Within Social Security, high-wage workers subsidize lower-wage workers, single people subsidize married ones, and long-careers subsidize shorter careers. For example, the average worker in the research is never unemployed, where as many Americans are unemployed. So the research is more of general guide than a specific figure.

The research does not indicate whether Social Security is a good investment or a poor one. The data speaks to whether Social Security is better than a specific benchmark. In the case of this research, the benchmark is 2 percent real. Critics of Social Security consistently point to the low return of the system. But, Eugene Steuerle, who authored the study, indicated that 2 percent real is a bit better than private annuity companies offer but not far out of line with very long-term returns from Treasury bonds.

Before you encourage clients to increase their payroll tax withholdings, understand that the research somewhat overstates the actual returns of Social Security. The figures assume that the worker survives to the age at which he can collect benefits despite the fact that roughly 19 percent of men who reach the age of 21 die before they attain eligibility for Social Security. In that case, the benefits of Social Security are zero for the single worker. The research ignores the fact that outside savings can trigger a means test within Social Security that reduces your benefits by as much as 19 percent.

Moreover, the data also is based on current law, which promises scheduled benefits well in excess of projected revenue. So the report tends to either overstate lifetime benefits or understate lifetime Social Security contributions by workers. The Social Security Administration provides insight into the effect of balancing revenue and expense on economic returns in its Moneys-Worth studies. In general, these changes affect people born after 1955, and cause the value of expected benefits to fall by 15–30 percent. If taxes are raised, then the declines hit future workers more. If benefits are reduced to the level of payroll tax revenue, then future retirees get less.

At a high level, the data suggests that you are unlikely to earn more than 2 percent above inflation, with a risk of earning much less as the politicians in Washington tweak the system. Most workers today will not get a positive return from the system. The only thing that you can do to improve your prospects is to live longer.


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