Monday, November 21, 2011

Social Security and Consumer Debt

Proponents of Social Security like to say that it is the only thing that keeps millions of
seniors out of poverty. Of course that ignores all the taxes that they paid
into Social Security before retiring. I doubt you’d thank a mugger if he give you
twenty bucks back after stealing your wallet. In order to decide whether or not
social security actually benefits people, you have to look at what they would
have done had they not had to pay all those taxes. Proponents implicitly assume
that people would completely waste all that money and it would just be gone by
the time they retire. Thus, any payment from social security is treated as a
pure gain.

If you look at social security as an investment, you can calculate the return to your investment. Social Security returns are higher for low income workers with long lives. The Social Security administration provides numbers here and more analysis is available here. Suffice it to say that the returns are pretty bleak with an average of 1-2% after inflation.

These returns are pretty pathetic when compared to investing in the stock market
where inflation adjusted returns are closer to 8%. When there are discussions
of privatizing social security, they talk about how risky stocks are and they
revel in every dip in the Dow. The real risk is not having enough money during
retirement and social security is at least as risky for this standpoint.

Instead of looking at the stock market, you can look at debt. Americans, especially the poor, are
drowning in debt – from credit cards, auto loans, underwater mortgages, to
student loans. The Wall Street protestors and community activists like to blame
banks and demand principal reductions and loan forgiveness. Simple math will
tell you that it is foolish to earn 1-2% on your savings while paying 10% on
your debt, but that is exactly what Social Security forces people to do.

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