Writing for Reuters, Mark Miller runs through a SSA Office of the Actuary analysis of rates of return paid to different types of people from Social Security. You can check out the SSA study directly here.
Miller states “[The SSA analysis] showed that some workers might beat Social Security's returns in some years if they took risks in the stock market. But over a lifetime, Social Security's consistent, risk-free and inflation-adjusted returns would be very tough to beat.”
I’m not so sure.
One mistake Miller makes is to look at “current law” benefits, which assumes that Social Security can pay full benefits forever without raising taxes. In other words, it overlooks the multi-trillion dollar funding shortfalls that are the main reason we think about Social Security reform.
A more accurate analysis, and one that is truly reflective of current law, assumes that full benefits will be paid through the early 2030s, when the trust fund is projected to run out. Following that, benefits are reduced to the level that can be paid through payroll tax receipts alone, a cut of around one-fifth. That obviously would reduce returns from Social Security.
While there are other (and better) ways to fix Social Security’s finances, no matter how we do it, rates of return paid by Social Security will on average be consistent with this “payable benefits scenario.” We might raise taxes rather than cut benefits, or we might cut benefits gradually rather than all at once, or we might cut benefits for some but not for others, but the net effect on rates of return will on average be the same.
And under this realistic baseline rates of return aren’t exactly staggering. For instance, a typical couple retiring today would receive a return of less than 3.2 percent, which is about what you’d get on government bonds. But considering the political risk of Social Security, my guess is people would consider government bonds to be a better deal. Going forward returns will be lower. And for single individuals or higher-earning couples, returns can be well below the government bond rate.
Is Social Security a terrible deal? For a low-risk investment, no. But is it a good deal? Not really.