Social Security, the primary retirement savings tool and biggest tax for millions of Americans, is a bad deal, critics contend.

They argue mandatory Social Security is a poor investment because it only provides an average annual payment of some $17,500. This is a lousy return on taxes, critics contend. They say most would obtain superior returns with private investments, creating more capital and helping the economy.

“Americans would be better off keeping their payroll tax contributions and putting them into private retirement accounts than having to sacrifice them to the government’s broken Social Security system,” according to the Heritage Foundation’s study “Is Social Security Worth Its Cost?”

Social Security officials defended the program as more than just retirement income. (See Notes: “Still a Good Deal, Social Security Official Says”).

How You Pay and Pay and…

Social Security, collected through payroll taxes, is the biggest tax many younger and low/middle income workers’ pay. Critics argue younger workers, with decades to invest, miss the opportunity to amass significant assets because of high taxes.

Social Security’s revenues are collected through payroll taxes levied at 6.2 percent each on the worker and the employer. The worker pays the entire bill if an independent contractor.

The average Social Security recipient receives $1,461 a month, although most seniors now pay a tax on these payments (They were untaxed until the 1980s).

Young People—-This is a Lousy Deal for You

The Heritage Foundation study found younger workers paying into Social Security over decades will lose the most. Returns will be between minus -0.04 percent and minus -14.53.

“We are telling young people to put money into this program that guarantees zero or negative returns,” says Rachel Greszler, one of the report’s authors.

Greszler notes this is versus a 4.76 percent annual return for those conservatively invested: half in stocks and half in government bonds, according to the study. Greszler concedes the long-term results of private investments are likely better than 4.76 percent. However, she says “we wanted to use a conservative estimate.”

Social Security taxes and benefits have been much debated. Taxes have been raised and benefits cut several times over 40 years. (See Notes “Social Security Cuts; A Short History”).

But Social Security’s trustees say its two trust funds are in the red.
The Trustees projected “the combined trust funds will be depleted in 2035.”

Don’t Depend on It

Many advisors caution clients preparing for retirement not to over rely on Social Security.

“I tell people to be very conservative about Social Security payments in building a retirement plan,” says Ronald Roge, a Long Island advisor. “It should be no more than a third of your income.”

Former presidential advisor Martin Feldstein said each dollar put into Social Security by a worker or an employer reduces private saving by 87-cents.

Greszler complains high Social Security taxes foster “income equality.” Those with low incomes, she says, “have less to invest than those with higher incomes.”

She warns Social Security, with a deficit of some $16 trillion, will have a payment cut of 25 percent if changes aren’t made by 2034. Private account options are critical, she adds, especially for young people.

However, Greszler predicts they will not be offered by the next administration. She fears payroll taxes will be raised. That should make taxpayers, especially young ones, very angry. You should get a much better deal than minus 14.53 percent.


Still a Good Deal, Social Security Official Says

Social Security is more comprehensive than the private retirement account proposed by critics, an official said in response to the Heritage Foundation study.

“It is important to note that Social Security provides much more than a retirement pension. About one third of benefits paid are for disability and survivors insurance protection,” says Steve Goss, Social Security Chief Actuary. “Such benefits cannot be provided from individual savings in a retirement account.”

Goss also contends that some people wouldn’t do well in private retirement accounts in part because private sector firms would charge high management fees.

“It is important,” Goss says, “to consider administrative costs for the accumulation and distribution periods of any benefit program. Personal accounts invested in private markets can incur administrative costs of one percent or more a year.”

These costs could reduce the private accounts accumulation by 70 percent, he adds. Goss said Social Security administrative costs are considerably less.

However, both critics and defenders of Social Security can agree on this: The system faces a crisis over the next 15 years. Goss says that the program’s “reserves will become depleted in 2035.”

That would mean a 20 percent cut in benefits, he says. Goss, in a sentiment that the program’s critics echo, says “Congress will need to act.”

Social Security Cuts; a Short History

Problems over how to fund Social Security have persisted over decades. Both presidents Carter and Reagan, in the 1970s and 1980s, respectively, signed Social Security reform packages that called for higher taxes and benefit cuts.

Carter said his package would make the system “sound.” Reagan said his changes would “protect the financial integrity of Social Security.”

Neither happened.

The issue is how much should the government tax one generation of taxpayers to pay for the benefits of another generation?

These funding debates go back to Social Security’s founding in 1935. That’s when President Franklin Delano Roosevelt’s Treasury Secretary wondered about the system’s financing.

Henry Morgenthau questioned whether Social Security supporters considered if new generations of taxpayers would pay higher and higher taxes.

“They would place all confidence in the taxing power of the future to meet the needs as they arise,” Morgenthau wrote. “We do not share this view.”


Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.