Tuesday, August 26, 2008

Does Social Security Increase Poverty?

One of the real dangers of writing a blog is becoming political. I do not want to at all. In fact I have purposely not said anything about Social Security for that reason. It is the proverbial third rail. That said, it came up in class yesterday when we were talking about the importance of compounding on future values, plus it has been a hot issue for years with friends and is covered in quite a bit of detail in Real Change (one of the books I am ristening (risten= Read and listen).), so I will at least point this article out that deals with some of the issues you generally do not hear from politicians who are trying to scare up every vote possible.

Social Security Increases Poverty: Newsroom: The Independent Institute:
"Social Security affects poverty among the elderly in two offsetting ways. While it reduces poverty by providing income to retired persons, it discourages private saving during the working years....The net effect of this is increased poverty among the retired population.

To understand this conclusion, it is important to compare the rate of return on taxes paid that is generated by Social Security to the rate of return people could receive on their private saving. For those retiring in 2008, the average implicit real (inflation-adjusted) rate of return on Social Security taxes paid was slightly below 3 percent—and it is scheduled to decline to under 2 percent in the next forty years. In contrast, if people retiring in 2008 had invested the taxes they paid into Social Security in a balanced portfolio (60 percent stocks and 40 percent bonds), they would have received a return of 5.5 percent."
One problem with this of course is that the past is not likely to repeat itself and market returns may be much lower (see for instance Paul Krugman's piece from NY Times in 2005). That said, returns that are less than two percent and in many cases negative (even before being concerned with the solvency of the Social Security System) makes it likely (although not certain), that you could earn more elsewhere than through social security.

While I can not vouch for its accuracy, here is an interesting calculator that estimates how much you will earn on your "investment".

1 comment:

Lord said...

Social Security is only intended as a part, 25-40%, of income in retirement corresponding to the fixed portion of the portfolio though allowing for greater equity investment in personal portfolios. The real difference though, is not return but how many would save anything during early years allowing it to compound. Sadly, the experience with private retirement accounts has not been promising on this regard, so it seems highly likely it does reduce poverty.