Social Security: 83% Welfare

In my post earlier today, I analyzed my recent social security statement and found that the government was giving me a -0.8% (yes, that is negative) rate of return on my forced savings.  You can read that post for the methodology, which I admit was simplistic (I have a day job, after all) but I still think is pretty accurate.  There is not getting around the fact that the government is forcing
a retirement program on you that is such a ripoff that a private company would likely get
prosecuted for offering it.

One of the arguments I have seen go back and forth, and that I refer to in that post, is whether Social Security is a retirement plan or a welfare program (its a floor wax and a desert topping!)  One of the reasons this argument comes up so much is that its defenders take both sides of the question, depending on whom they are arguing against.  If you argue that as a welfare program, Social Security is terribly inefficient and pays too many benefits to richer workers, they argue it is a retirement program with premiums and you can't cut benefits to anyone who has paid in.  Argue as I did in this post that it is the worst retirement program in all of America, and its defenders say that you can't analyze it that way because there are welfare benefits embedded.

So I wondered, could I solve this with numbers?  I stared at my belly button for a moment, and decided that 6.5% was a good conservative private return number that I would be willing to plan my retirement around.  I plugged this number into my spreadsheet (Download socialsecurity4.xls) and found that my social security premiums, invested privately, would yield an annuity at 67 of $11,699 per month, or an amount 5.89 times larger than social security is currently promising me for the same inputs.  This tells me that only about 17% (1/5.89) of my taxes in social security are going to my own retirement.  The other 83% are going to a huge welfare program, either directly, as payments for someone else's retirement, or indirectly, through the inherent government inefficiency you accept when you provide intellectual welfare  (I define "intellectual welfare" as the government doing something for you because it doesn't trust you not to screw the task up if you did it yourself -- in this case, the task is saving for retirement).

Postscript:  As pointed out in my postscripts and the comments to the original post, taxes, inflation, spouse survival, etc.  all complicate the analysis, but most of the effects work both ways.   For example, Social Security provides some benefits to surviving spouses I don't include.  That potentially understates the value of the SS package.  However, as pointed out in the comments, private savings would be inheritable by my family in the case of my early death, and would dwarf SS survivor benefits in most cases.  Ditto for disability benefits.


  1. Matt:

    If they admit it's a welfare program, then we'll get to kill it. So they have to keep pretending it's a retirement program, despite the fact that running a retirement program that wasteful would literally be a crime if it were done by anyone but the government.

    As long as the largely-innumerate electorate thinks of Social Security as something that benefits everybody (including them), they keep voting for politicians who promise to keep it running. If the mass of voters ever realized what a fraud it is, Social Security would have at most 6 years left in its present form.

    The irony, of course, is that if we were to set up a welfare program for the elderly poor, and _not_ try to pretend it's a retirement plan for the whole country, we could probably do it in a fiscally sound way and not be careening at maximum speed toward total government insolvency as we are now.

    I'd happily pay to keep poor old people from starving in the streets. And I'd even more happily chuck in some extra cash voluntarily to keep my mother from ever moving in with my fiancee and I. (Don't kid least 80% of the support for Social Security among the young comes from the "if the government checks to mom and dad stop, the wife and I will never be able to have sex again, because our parents will have to live with us and it'll be like being 14 all over again and all the work I've done to prove myself as an adult will be for nothing" factor.)

    But I object to being coerced under the law into paying for the retirement of people who've had the means to do their own savings. Especially when the whole point of that aspect of the program is to make the welfare component more politically palateable.

  2. JC:

    In Australia, 9% of your salary must by law be paid into a retirement savings (superannuation) account. There are various provisions ensuring you cannot withdraw it until retirement age.

    This retirement savings account is a personal account with your name on it. You can choose the investment type - cash, bonds, shares, property, all of the above, whatever. The accounts are managed by various private sector companies, or you can do it yourself, again subject to the protected-until-retirement laws.

  3. Wiseburn:


    I'd just like to point out that the other 83% isn't going to welfare. It goes to the general fund which the United States Congress spends on whatever it feels will help them get re-elected. There is an 83% tax on your retirement contribution. Just imagine if they invested this instead.

    When you buy your annuity, you need to make sure it has annual cost of living increases in the payment. If you earn more than a certain limit, you also need to make sure that some percentage of your annuity payment is treated as taxable income. The former requirement will reduce the equivalent tax you are paying on your contributions. I don't believe the latter feature cannot be found in any annuity plan.


  4. Ironman:

    Social Security's actuaries have found that a given individual's rate of return on their "investment" in Social Security is determined mostly by four things:

    1. When they were born. Earlier is by far better, as those born earlier paid into Social Security at much lower rates than today's contributors.

    2. Their average lifetime annual income. The benefits are skewed so that those with lower incomes get substantially better rates of return.

    3. How long they live. Longer is better, with the expected rates of return for people born more recently increasing with their increased life expectancy. Without the increase in life expectancy for these individuals, the rate of return from an "investment" in Social Security would steadily decline as time marches forward.

    4. Their marital status, with a one-earner couple outpacing all others. Single males do the worse, with a shorter lifespan being the main culprit. Single women and two-earner households do just about as well as each other.

    The actuaries' data is modeled here.

  5. Greg:

    Social Security has always been designed with elements of both individual equity and social adequacy. Social Security functions as a welfare program, but if it didn't also function to give benefits to all, with more benefits to those who pay more, then people wouldn't support it.

    The formula is that your benefits are based on 90% of your monthly income to X, then 32% of your monthly income to Y, then 15% of your monthly income to the cap. X = 680, Y = 4100.

    You can read about the design of Social Security and see an impartial discussion of various proposed fixes in this monograph from the American Academy of Actuaries.

  6. Mesa EconoGuy:

    There is no contractual guarantee to pay specified benefits at specified times. And there is no opt out.

    This is an illegal program, under many statutes, and would be shut down.