The Social Security system, also known as Old Age, Survivors, and Disability Insurance (OASDI), was enacted in 1935. In 1940, the first benefit check, for $22.54, was paid to Ida May Fuller. She ended up collecting $22,889 in benefits after paying only $49.50 in taxes into the system.
That 46,000 percent return was a fabulous deal for Fuller. Such large returns compared to payments have cemented support for the program among beneficiaries.
However, those large returns were made possible only by the Ponzi features of the system. When Fuller received her first Social Security check in 1940, there were 42 workers paying into the system for each retiree drawing funds out of it. Today there are just more than three. With fewer workers to pay the taxes to support Social Security benefits, future retirees face dwindling returns. . . .
Investing a portion of the payroll taxes collected from workers in stocks and other income-producing assets would generate new revenue to keep Social Security viable for a longer time or to supplement retirement benefits. Individuals could be put in control of their own investments through a system of personal retirement accounts.
The long-term history of the U.S. stock market lends credence to the idea that personal accounts would work as suggested. Over the past 80 years, shares of stock in U.S. companies, on average, have grown in value by more than 10 percent per year compounded. The inflation-adjusted compound rate of return has been 7.6 percent per year.
If these types of historical returns on investment are repeated in the future, personal Social Security accounts would grow into enormous sums. If the current Social Security taxes for a person who worked at minimum wage for his or her entire working life (about 45 years) were invested at these historical rates of return, it would grow to nearly $500,000. This would be sufficient to purchase a lifetime annuity paying about $37,000 per year.
If the current Social Security taxes for a person who worked at the average wage for his or her entire working life were invested at these historical rates of return, it would grow to more than $1.1 million. This would be sufficient to purchase a lifetime annuity paying about $90,000 per year.
Both of these figures compare quite favorably to both the average ($11,460 per year) and the maximum ($22,500 per year) Social Security benefit over the same timeframe.
Where's the downside to that?
Social Security needs to be fixed. Phased-in private accounts would not only fix the system it would also make it better.
(via Club For Growth Blog)