Is one major cause of wealth disparity a poor rate of return on social security?

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Conventional wisdom has it that a home—with a median sales price of about $290,000—is the average family’s biggest financial asset. But about 35 percent of Americans don’t own a home, and about two-thirds of homeowners have a mortgage, so their home asset is usually less than its face value.

So what is the average American’s biggest asset? The value of his or her Social Security benefits.
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Their 2013 report estimates that a single male worker earning the average income of $44,800 (in 2013 dollars) turning 65 in 2015 can expect to receive $287,000 in Social Security benefits. However, that worker paid in $337,000, for a net loss of about $50,000. Both estimates assume a growth rate of 2 percent, which happens to match Piketty’s projection of long-term GDP growth.

That disparity between contributions and benefits declines significantly for women, who tend to live longer. A single female worker would have paid in the same amount, $337,000, but could expect to receive $314,000.

Thus, Social Security is the average American’s greatest financial asset, even bigger than their home equity—if workers had a private property right to their contributions. But the U.S. Supreme Court has ruled that they don’t. Congress can cut those benefits—as some members have proposed—or even (although very unlikely) eliminate them; and the only recourse Americans would have is at the polls.

But what if workers were able to put that same amount of money . . . into a personal retirement account that could be invested in broad-based equities?

.... since the market’s inception U.S. stocks’ average long-term real rate of return is about 7 percent. Financial Advisor magazine estimates that the future long-term real rate of return for U.S. stocks is closer to 5 percent—but both are close to the 6 percent that Picketty only ascribes to the wealthiest.

Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000. Factor in that wealth and income inequality largely evaporates. People don’t have to be in that top thousandth percent of income to get excellent returns on their money and create real wealth. All they need is a private property right to keep and invest what they are contributing to Social Security right now.

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