Our current Social Security program is going bankrupt.
This is not because we don't tax people enough, but because we run the program so badly.
In any retirement fund between 70% and 90% of the retirement benefit is actually coming from the interest earned over the forty years or more of time that the invested money has been earning compound interest. Our current program doesn't earn any interest, because we spend all the money we bring in as soon as we get it. None of the money gets saved and invested in something that will pay compound interest.
Here are some numbers. I have used a very conservative 9% interest rate, even though the normal stock market generally does better than that over long periods of time.
A person making only $40,000 a year makes $3,333 a month.
Social security tax is 7.5% from the employee, and another 7.5% from the employer for a total of 15%
15% of $3,333 is $500 a month
With the Bush Tax cuts the amount the individual pays is cut to about 4.5% for a total of 12%
This would be $400 a month
If you invest $500 a month from the time you are 25 years old, until you are 65 years old (retirement age of 65) you will have worked 40 years.
Your total net worth at 9% interest will be $2,340,660
If you work for 45 years (start at age 22, end at age 67) then you would have $4,025,317
$40,000 a year is well below the national average income and you would still retire a multimillionaire
We do not have to privatize Social Security to get this kind of benefit. We just have to run Social Security the same way a private retirement fund is run. This will require some up front investment. For starters we would have to pay back all the money we have borrowed out of the social security program to fund other programs. This amount is at least 600 billion. Reforming Social Security may even cost more than this.
To switch the program from its current structure to the structure I have suggested would require considerable investment. we would have to pay for current retiree benefits while putting the payments from younger workers into private retirement accounts.
This would require a great deal of fiscal discipline.
The end result however would be worth it.
After all, wouldn't you like to retire a millionaire instead of a pauper? In the numbers quoted above, you can have a retirement of 2.4 million, but your total out of pocket expense is only 10 percent of that. Therefore compound interest has multiplied your retirement benefits by a factor of 10.
By switching social security to a privatized structure, where each person has his own account that earns compound interest, we could easily have a minimum of five times the retirement benefit, for the exact same cost.
Here is a spreadsheet that has these calculations set up. It is in Open Document format.
You can download a free office software suite to open it if your current office software doesn't work.