Just got my social security update in the mail today. It tells me that if I keep working and “contributing” like I am now until age 70, my monthly payment would be $2,922 per month, or $35,000 per year. That of course would be taxable income to me, so it would be like getting something less than $30,000 in “pension.”
How much is this “pension” worth? If it were infinitely lived – in other words, if my children could inherit it like they could a private defined contribution account, it would have its maximum value. Of course, when I die, social security payments stop with it. But let’s be generous. Further, let’s assume a really generous risk-free rate of interest. And let’s be even more generous and assume that the “income” is not taxable. In that case, an asset that pays me an income stream of $35,000 per year, forever, would be worth about $1.17 million. In reality, the stream is taxable, and it only lasts for my expected length of life (hopefully long, but let’s say 15 years). How much is a $30,000 cash flow stream worth over 15 years (ignore inflation)? About $360,000 under the assumptions above. Let’s call it a cool half-million for argument’s sake.
Now, I am a person that likes to plan ahead for my life. I fully expect to have to pay lots of money for medical care in my older age – it is not someone else’s responsibility to do it. I do not take extravagant vacations or spend much money on new clothes and other things like that, because I know I want to have a comfortable retirement and be able to save for our children’s college. I am not exactly someone that would not have money left in retirement if the government did not “set it aside” for me because I am too short-sighted or irrational. That said, let’s see what I would have been able to accumulate by age 70 if instead of the government taking my income to pay off elderly voters, they let me keep what I earned.
I’ve already “contributed” $96,000 over my working life to this program. And if nothing changes in the next 35 years, I probably would “contribute” about $525,000 more into that program. Here is how much money I would have accumulated in savings at various interest rates by age 70:
So, even taking the worst case investment return, and no increase in salary for the next 35 years, I would have a nest egg (on top of what I am already saving privately) of $942,000. My likely outcome would be something higher, so let’s say it was $1.5 million. If I took that $1.5 million and bought tax free instruments with it, such as US government debt, paying 4% per year, that $1.5 million would generate tax-free income to me of $60,000 every single year as long as I live. And when I die, I would still have that $1.5 million (assume the bond market does not collapse) and my children and grandchildren would have those funds when I passed on.
Under the most favorable conditions one could imagine for Socialist Security, I would “earn” $35,000 per year for 15 years or so as compared to earning $60,000 per year forever. How that deal ever got made is a wondrous thing. But I am not expecting to see a single penny from social security. So in my mind, I am losing a perpetuity paying $60,000 by participating in this wonderful piece of Progressive legislation. And I would continue to note, that our household income does not put us anywhere near what one could consider “rich” – although with the budget deficits at the state and federal levels continuing to explode, we may soon be deemed rich.
Have a nice day.