re: Do you believe in Social Security choice?

Do I believe in Social Security choice? My answer would be, yes. However, I think the average taxpayer, at this point in time, is better off with it. There are several reasons some of which have already been mentioned. Many people would spend the 6.2% instead of invest it. Others would choose lousy investments or not take the time to do their due diligence. But, that is only part of the picture.

If I have the time I’ll try to find and update a spreadsheet I put together a couple of years ago. I took the annual salary of my wife as reported by the Social Security Administration. I used the report the Social Security Administration use to mail to you every year. I multiplied her taxable income for each year by 6.2% to come up with a “hypothetical investment contribution” amount she would have had available should she be able to self-invest that amount. I ignored the employer’s share. I then used the S&P 500 as her investment choice. I multiplied the previous year’s “hypothetical investment contribution” by the increase or decrease of the S&P 500 and added in the next year’s “hypothetical investment contribution”. I then repeated each year with the next year’s numbers: 1) her earned income for that year times 6.2% plus; 2) the previous year’s cumulative amount times that year’s S&P 500 increase or decrease.

I know this isn’t statistically correct for a couple of reasons, maybe more. One, for simplicity, I assumed that the entire 6.2% “hypothetical investment contribution” was deposited once a year instead of weekly, biweekly, or monthly however she got paid. Second, pretty much the same for the S&P 500 return. I just assumed one % amount for the year instead of increases or decrease that would occur on a daily basis during the year. I just wanted to get a ballpark figure.

Short version of my conclusion – wife was probably better off paying into and accepting Social Security than opting out and investing her 6.2% into an S&P 500 Index Fund. And, I am a fan of an S&P500 index mutual fund as an investment. Reasoning, the amount she would be paid annually by Social Security is more than she would be paid by withdrawing 5% each year of her ending balance of her “hypothetical investment” account. Note: I used 5% because 4% to 5% is the percentage of withdrawal rate that many advisors believe can be paid out and not deplete the account in your life time. Of course, that percentage is also debatable.

All of the above does not address the sustainability of Social Security as we know it today. Who knows what the future holds? Also, I need to add that I am of retirement age and my wife is close. So our history of Social Security payments and estimated payouts are more of a known factor than those of you that are younger.

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That is really what it is.

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Its never missed a payment.