Social Security Broke Even For Him

Bill is 65 and drawing Social Security. Bill asks Dave why Social Security is such a bad investment. Dave has an interesting discussion with Bill about it.

QUESTION: Bill in Huntsville is 65 and drawing Social Security. Bill asks Dave why Social Security is such a bad investment since according to his math, he’s going to get all of his money back from Social Security within 38 months. Dave has an interesting discussion with Bill about it.

ANSWER: All the money you’ve paid into Social Security through your whole life, you need to double that because your employer has matched you. That’s a very unusual formula. That’s a very unusual result because the actual national statistics are it has a -2% rate of return, which means that you never get returned your money even in the scope of your life. That’s the average. I guess 38 months times two would then be bumping up close to eight years. At 65, the average death age is 74 for a male. Maybe people don’t live through it. I don’t know, but the articles and the research that I’ve done—I’ve never backed it out the way you did individually. If you made $10,000 a year and you’re getting that back out, yeah, it starts to at least break even on it potentially.

Certainly if you had invested the exact same amount of money over those numbers of years, you’d have a bazillion more dollars. You didn’t lose half of your investments in 2008 unless you sold it at the bottom. The bottom line is the actual rate of return on the dollars you’ve put in is minimal at best, but the studies I’ve read are all -2%. That’s the number that I’ve seen. And I guess that’s based on actuarial tables based on death—that you die before you recoup it. The other part of the problem is in your case when you die, the $1,600 goes away. Had you paid that same money into an investment in a privatized situation, that money would be passed to your heirs instead of into “the system.” In that sense, it really doesn’t work out, but I wasn’t even referring to that part of it. I was just referring to the rate of return. In your case, you got me, dude. I’ll take it. I appreciate the call.

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