Social Security - Return on Investment

I don't think that we should have the ability to pick the funds that our social security accounts are invested in. I do think that at least part of our Social Security taxes should be invested in the stock market. This will offer much better returns than what our Social Security taxes get currently.

The Cato Institute figured (in 1994) the rate of return on our Social Security taxes ranges from a negative return up to 6.3%, depending on gender, marital status, and class. In 1995, the Treasury Department did a study which found that rates of return on our Social Security taxes for males ranged from 5.04% to 6.17%. In June 2001, Social Security economists and actuaries found that a "two-earner couple" in 1955 would have a return between 1.49% and 3.2%.

It would probably be better if we didn't have the ability to decide where our Social Security taxes are invested. Currently many people who have retirement accounts don't pay enough attention to them. They leave them invested in money market accounts which don't even earn them the rate of inflation, thus they are losing their retirment money.

There are several retirement funds, such as the Vanguard Target Retirement Funds, which change asset allocation based on the age of the investor. I think this would be an ideal way to invest our Social Security taxes. These funds would be almost fully invested in stocks when the tax-payer is in their 20s. The fund would then slowly invest more of the money in bonds as the tax-payer approaches retirement. Finally by the time the tax-payer reaches retirement age the fund would be almost completely in bonds. These funds have very low expenses, less than 0.3% of the asset-value.

A quick note on the Social Security "returns" quoted in these studies. They are not true returns in the sense the money in invested. The returns quoted are based on the money paid in as Social Security taxes, and the money paid out as benefits. The money is actually "borrowed" by agencies in the government, then, in theory, paid back, without interest (I assume). The money that is paid to retirees as benefits is actually taken from taxes collected currently, not from a bank of money that has been building up over the years.

If this money were invested in the stock and bond market, we would get real returns, and based on historical stock market returns of 10.7%, that would be much better than the returns found by the quoted studies.