Social Security Benefits

BOYNTON BEACH — Republican Senate nominee Marco Rubio, who once favored giving younger workers the option of investing a portion of their Social Security payroll taxes in private accounts, says he abandoned that view at least six months ago after concluding the idea "doesn't work."

Rubio's position on Social Security has been under attack recently from independent rival Charlie Crist, who as a Republican in 1998 said that "maybe a very small percentage (1 or 2 percent) could be privatized."

Crist now favors making no changes to Social Security and says giving illegal immigrants an "earned path to citizenship" would increase the number of workers paying into the system and improve its solvency.

Social Security Math

Here's an interesting look at 20 years of Social Security payments versus what else you could have done with the money had it been yours. The summary:

If you paid in the maximum amount for the past 20 years and your employer did the same, you would have paid in $231k into the system.
If you had taken that money and invested it yourself in an S&P 500 Index Fund, you would have $739k.

Seems like a big rip off (you paid in $231k and could have had $739k), but the benefits don't seem that far apart. Note this:

At a 4% withdrawal rate, the ($739k) account would kick off nearly $30,000 in income the first year ($2,500 per month).
According to the Social Security website, the maximum benefit in 2010 is $2,346 per month (at age 66).

Ok, so not much difference between $2,500 and $2,346 -- assuming you only contribute for 20 years and that you get the max payout. But what happens if you contribute for 40 years? You'll have much more in the system and thus a lot more you could have generated with the invested amount, while the max Social Security payout remains the same.

Obviously Social Security is more than a simple retirement plan for one person. It's a system designed to have those that make more (in this case these people would "make more" because they're paying in the maximum amount) fund safety-net levels of retirement income for both themselves and others. That said, it looks like it's a bad investment for those people (versus what they could have done with the money on their own.) Or is it?

What's your take on the issue?