NEW YORK -- What is your Social Security account really worth?
The answer: A lot more than you think.
Many a worker imagines that he or she would be better off without compulsory Social Security taxes. But it takes a lot of money to guarantee yourself a monthly income for the rest of your life -- especially one that rises with the inflation rate.
I asked the Social Security Administration to compute for me what a 1990 retiree would need, in a lump sum, to duplicate the lifetime, inflation-indexed annuity that Social Security provides. I assumed inflation at 4 percent and asked about a woman 65 years old.
If she had earned the maximum Social Security wages all of her working life, she'd retire on a monthly income of $975 this year, said Social Security's Harry Ballantyne. To pay herself the same monthly income, plus an extra 4 percent a year over her life expectancy, she'd need a kitty worth $177,000, earning 6 percent interest after taxes.
That's a lot of money to save, even with your employer's help. And all it supplies is a basic income. You'd need a far larger pot of investments to supplement your $975.
Had this retiree earned what Social Security calls an "average" paycheck all of her life and quit in 1990 at age 65, she'd be getting $720 a month. To supply that, indexed at 4 percent, she'd need a nest egg of $131,000, also invested at 6 percent after taxes.
Insurance professionals will immediately object that, with $177,000, a 65-year-old woman can find a much larger lifetime annuity in the private market. Social Security, they say, is being cheap.
However, her payroll taxes also financed a lifetime of Social Security disability insurance and life insurance. Had she died, her dependents would have received a government income. So your Social Security annuity cannot be compared directly with a private insurance annuity.
But even if they could be compared, all of this is fantasy. Americans have trouble saving three months' income for an emergency fund. They'd never save an extra $177,000 to replace a voluntarily abandoned government retirement fund.
If they tried, they almost certainly would raid their fund from time totime for consumer purchases. That is exactly what happens to employee retirement funds. The majority of workers who leave their jobs and get a lump-sum payout spend the money rather than save it.
Furthermore, even if you do save it, who's to say you'll invest it wisely?
In short, for retirement savings, Social Security is hard to beat.
If you're a younger worker, you may not be so much offended by the compulsory nature of the tax as by the fear that you'll never collect. When the time comes for you to retire, you worry, the Social Security tank will be dry.
It'll never happen. If you doubt me, just look around and count the votes. How many among us would vote to abolish Social Security? What is the future of any politician who would propose it?It is true, however, that Social Security benefits won't be worth quite as much in the future. Your checks will replace a smaller percentage of your working income than they do today.
What's more, the retirement age is moving up. Today, full benefits are paid at age 65. But starting in the year 2000, the age for getting full benefits will gradually increase. Anyone born in 1960 or later won't get full benefits until age 67. You'll still be allowed to retire at age 62, but early retirement will reduce your benefit by 30 percent, compared with 20 percent today.
So, even though you'll receive Social Security, and even though it will be a substantial sum, you still should be saving more for yourself today.