Social Security is worth $225,000 for a typical retiree

According to a report just released by the National Academy of Social Insurance, the average monthly benefit for retirees is $1,045 in 2007. A 65-year old who wanted to buy a guaranteed income of that size — with payments that go up with the cost of living and continue for a widowed spouse — would need to pay an insurance company about $225,000. The report also found that with social security, 10 out of every 100 retirees are living in poverty. Take social security away, and the number would jump to 50 out of 100. DR NOTE: If you are not saving for retirement, start today!

The report is worth reading if you’d like a primer on social security. Social Security: An Essential Asset and Insurance Protection for All (48 page pdf document) includes a section describing social security benefits and how they are calculated. For example, the percentage of income replaced is higher for lower income families (as you’d expect). Here’s a chart from the report depicting this aspect of social security:


The report also notes that while most associate retirement with social security, the program covers a lot more. A full 31% of social security benefits are paid out as disability payments or life insurance.

The future financial health of social security is sobering. The report notes that by 2041, “dedicated Social Security taxes coming into the program will cover only 75 percent of the benefits promised under current law.” Social Security benefits now represent 4.3 percent of the nation’s gross domestic product, but this percentage is expected to rise to 6.2 percent by 2030. This rise is the result of the aging of the baby boomers combined with the simple fact that people are living longer.

Source: National Academy of Social Insurance

Topics: Retirement Planning

2 Responses to “Social Security is worth $225,000 for a typical retiree”

  1. Thanks for posting this information. I am still young (24 years old) so I fully expect social security to change A LOT from now until I retire. A 25% reduction in benefits seems like almost a certain change but maybe even more. Based on the present numbers it seems the social security isn’t nearly as big a rip off as I had thought. Paying 6.2% of your gross earnings over your career gives you 28% back every year for life.

    I ran some of my own numbers and assuming both no investment returns and 8% return on contributions. Based on my salary projections, of $97,500 (the Social Security ceiling for 2007) and adjusted to inflation $299,000 by 2045, I will pay $437k into social security before I hit retirement at age 62. Assuming an 8% return that money would compound to $2.18 million dollars.

    If I get 28% of my final salary in social security payments it would cost $2.07 million dollars to buy an equivalent annuity. In other words, I only loose about $110k or 5% of the compounded value ($2.18 million) of my contributions. In return for that 5%, I also get the disability and life insurance benefits.

    If benefits are cut 25% and I only get 21% of my final salary it will be a loss of $630k or 28.9% of my compounded contributions. That would be a pretty terrible return but concerning the lack of risk it would not be complete larceny either.

    In the end, social security is not as big a rip off as I had thought, even for those at the top end of the earning scale like I am.

    About SS reform: I don’t think creating private accounts will do anything to improve the system because all it would do is shift the risk from the government to the individual. Beating the return on social security would mean too much risk for very little extra return for most low income Americans. Demographics and increased productivity will be the only ways to make the Social Security picture any better than it is today.

  2. Joe Dough

    Well, well, I can tell you from experience that starting out with a company that matches your contributions to a 401k account will pay you very well when you retire. This depends on diversifying your portfolio and reallocating as needed once a year and staying for the long haul. I will tell you that I tried my best to manage my own account with a large brokerage and in October of 2008 when I realized that this was a real crash happening, I moved everything into a bond fund that was available. My big mistake was not jumping back into a diversified portfolio once again after the dust settled at the bottom and then riding the wave back to the top again. Everyone I know that stayed in during the crash and up to now has made a recovery and then some. All I managed to do was save my original investment with matching funds and accumulated appreciation up until October 2008. I feel I lost out from any accumulation since that time but seeing my original funds in the account at this time just before retirement and estimating my pending social security payments coming, I am not in bad shape at all. With both the 401k and social security I think I can still live like a king. I suggest all young people starting out with any large corporation that offers a 401k plan, to get into it as soon as possible and contribute the maximum of what is usually six percent of your pay but some are now up to and over twenty percent. Get on a budget and stay on one. Don’t fall for all the toys and gadgets. Don’t try to keep up with the trending friends. This will only keep you poor. Learn to eat at home too. Eating out and burning up gas will drain your cash quickly and you’ll be living payday to payday. And don’t count on anyone leaving you anything when they die either. If someone does, it will be a bonus and something to save for the retirement account. I’m done, now go forth and save for the future!

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