With the AP reporting that the current generation of retirees will be the first to collect less in Social Security benefits than it will pay in taxes, there’s been a lot of talk about whether Social Security remains a “good deal.”
The AARP pushes back, noting that Social Security offers some things that many private investments don’t: it’s protected against inflation, it pays benefits that last as long as you live, and so forth.
This is true, although someone wishing to replicated Social Security’s benefits could largely do so on their own: make low-risk investments, then at retirement convert them to an inflation-adjusted annuity (yes, they are available).
Moreover, while it’s hard to say whether Social Security is currently a good deal – that’s in the eye of the beholder – we can say pretty clearly that it’s not as good a deal today as it was in the past. The benefits haven’t changed much, it’s the taxes that have.
A person who retired in 1950 paid around 0.75 percent of his lifetime earnings into the program – a 2 percent tax rate, but accounting for only 15 years of taxes from 1935 through 1950. A person retiring in 1970 paid an average lifetime rate of 3.6 percent.
But a person retiring today paid an average of 10.7 percent of their lifetime earnings into Social Security, even though the benefits offered by Social Security today are roughly the same as in 1970. So you’re paying roughly three times as much in to get the same out.
Now, this may still be a good deal – who can say? But I would have been surprised to hear AARP argue in 1970 that Social Security would still be a good deal at three times the price. Yet that’s more or less what we’re looking at today.