Friday, June 21, 2013
Guest Post by Crabby Old Man
There has been commentary about what a great deal Social Security recipients are getting for the Social Security Taxes they and their employers contributed.
I will use my own case as an example and let the readers decide for themselves.
I started to receive $2,103.00 per month in January 2010 at age 66. My life expectancy was age 83, or another 17 years at the time.
I paid a total of $99,366.00 in Social Security Taxes over the 50 year period from 1959 through 2009. My employers had to match that same amount, so the total interest free loan to the government was twice what I paid or $198,732.00. If we continue to ignore the time value of money (interest), that pays for about eight years of my pension payments.
WHAT IF MINE AND MY EMPLOYER’S MONEY HAD BEEN PAID INTO A 401K PLAN OR SOMETHING SIMILAR INSTEAD?
I used the return rates for the Dow (an average rate of 7.12%) and applied them to what I and my employers had paid and came up with $757, 572.19!!!!
Some comparisons to my $2,103.00 per month:
$757,572.19 divided by $2,103.00 = 360 months or 30 years.
7.12% of $757,572.19 is $53, 939.14 annually or $4,494.43 per month leaving my estate with the original $757,572.19
4.42% (7.12% less 2.7% inflation rate) of $757,572.19 is $33,484.69 annually or $2,790.39 per month leaving my estate with the original $757,572.19 plus growth at the assumed inflation rate.
$757,572.19 amortized at 7.12% over 17 years = $6,413.50 per month.
$757,572.19 amortized at 7.12% over 50 years = $4,627.93 per month.
I think that it should be pretty clear that Social Security has been a bad deal. The differences are so great that it is not worth the time to factor in the nickel/dime cost of living adjustments.
Here are my sources:
My personal information is from the information I received from the Social Security administration.
The interest calculations come from Microsoft Excel interest functions and my HP12C Financial Calculator.
Source Dow Returns --- http://www.forecast-chart.com/historical-dow-industrial.html
Mortality tables --- http://www.ssa.gov/oact/STATS/table4c6.html
Inflation rate: http://www.usinflationcalculator.com/inflation/current-inflation-rates/
2.7 average rate 1999-2012
The details of my interest calculations are in the following table: