Renting or Owning Social Security

Over the weekend, I saw this column by Spencer Swalm in the RMN:

"...Our present Social Security system is a lot like "renting" a retirement plan. At the heart of the system is the notion that the government ("the landlord"), not the beneficiary ("the tenant"), is responsible for the retirement benefit ("the apartment"). In exchange for your Social Security payroll taxes ("monthly rent check"), the government/landlord takes care of everything from deciding how to use your money to guaranteeing you an apartment when you turn 65.

Like apartment dwellers, Social Security beneficiaries assume none of the risks of owning their retirement accounts. In the 70 years that Social Security has been in existence, there have been plenty of down times in the markets brought on by depression, inflation, corporate scandals, and wars.

But while Social Security beneficiaries have not participated in these declining values, neither have they participated (much) in the good times. And there have been more good times over the years than bad. According to experts, the rate of return on Social Security payroll taxes is about 1 percent or 2 percent. By contrast, an individual investing in a diversified mix of stocks and bonds over a working life time would earn 6 percent to 8 percent. Over a typical career, the difference could mean hundreds of thousands of dollars.

Death, again, deserves mention. Most Social Security survivor benefits depend on things you don't control: whether you have a surviving spouse or kids, how old they are and whether they were financially dependent on you. Thus, if your heirs fall into the right categories, they can wind up with a modest apartment that must be vacated at their death or emancipation. If they don't, regardless of whether you paid rent for 40 years, they can expect little more than a condolence card."

Great analogy!