Social Security Returns

Here’s a toast to all the suckers out there, you and me.  Our government “borrows” the social security payments we make during a lifetime and promises to pay the money back with interest.  A thirty year old loans the government money for 30+ years at an average interest rate of 3%, at which time the government starts paying the money back in the form of monthly Social Security checks.

Here’s the sucker part.  The U.S. Treasury also sells 30 year bonds to banks, other governments and financial institutions.  The historical data for the 30 year bond shows that while interest rates are extremely low now, since 1977 the Treasury has paid an average of 7.54% to borrow money using these bonds.  For the slightly younger set, the average has been 5.93% since 1990. Social Security has become a way for our government to cheaply borrow money from us at interest rates far below market.

Advocates for the current system of Social Security cite the 2008 financial crisis and stock market drop as a rallying cry against any privatization of Social Security.  “Can you imagine what would have happened to our retirement funds if we had privatized Social Security?”, they ask.  For those nearing retirement, the 3% we have been earning on our Social Security taxes is 40% of what our government has paid out to banks and other governments to borrow money for this long a period.  As you can see, we have already taken a 60% hit to our retirement funds because it is built into the Social Security system.  If our government borrowed money from us at market rates, monthly social security checks would be more than double what they are now.  Hey sucker, this is why most high schools only offer a semester or two in economics.  Keep the suckers stupid. 

Social Security Privatization

Slowly, very slowly, I am going through a file box with articles that I clipped from ten years ago.  As the debate renews – or continues – about the privatization of Social Security, we can learn from the past. 

In 1998, there was a loud call for the privatization of Social Security, whose return on the contributions we make is about 3%.  In 1998 the stock market was continuing its historic rise due to increases in productivity, output, and employment.  The dot com and financing boom of the “New Economy” was growing in strength and returns in the stock market were above 17% per year.  Comparing that 17% return to the paltry 3% return on Social Security contributions – well, there was no comparison.

Twelve years and a “lost decade” of stock market returns later, the safe 3% return on SS contributions doesn’t look as bad as it did in the heyday of the late nineties.  In 1998, Dean Baker wrote an Atlantic Monthly article examining the myths about Social Security and the arguments for privatization.  The article is online and it’s worth a revisit.