Last November I posted a comment on my expected Social Security income, pointing out that it will be nowhere near the income I would have had I been able to invest the payroll tax money in a 401k-type retirement account. But my earnings put me at the higher end of the wage spectrum, and Social Security payouts are strongly biased toward the low-end wage earner, so I decided to do the identical calculation for a low-end wage earner to see if my results still held.
Consider the case of John Doe. Born January 1, 1941, John started working on January 1, 1957 at age 16 at a minimum-wage job, which he kept for the next 50 years, retiring on January 1, 2007 at the age of 66. John never earned more than the minimum wage.
Using the Social Security PIA (annuity) calculator, John will take home from the Social Security Administration the princely sum of $881/month for the rest of his life. Each year that amount will be adjusted for inflation.
Now consider the case of John’s twin brother, James. James also worked from the age of 16 to 66 at the same minimum-wage job as did John. The difference is that James was allowed to take his and his employer’s FICA (payroll) tax and invest it tax-free in the stocks that make up the Dow Jones Industrial index, which James faithfully did. On January 1, 2007, James had accumulated $224,468, which distributed on a 30-year payout at 5% interest, will give him a monthly income of $1,158.
Assume that John and James both live their expected lifetimes, which according to the United States Life Tables, 2003 is age 82 (16 years). When he dies, John will leave his heirs nothing. James will leave his heirs $144,531.
Explain to me again why Social Security shouldn’t be privatized. Better yet, explain to John why his identical twin James is taking home 30% more income in retirement.
[A note on methodology. I used the minimum hourly wage and FICA tax rates from 1957 to 2007 to compute John and James withholding taxes. The total (employee plus employer) withholding was $36,632 for each over 50 years. Each had a final (2007) salary of $12,168. John’s social security check represents 87% of his final salary; James’ annuity income represents 114% of his final salary. To estimate James’ heirs inheritance, I used the standard mortality tables which give an average expected lifespan for a 66-year-old male of 16 years. All of the data is easily available on the internet.]