Social Security or private investments?

A little boy overheard his parents talking about their shortage of money. He went to his room and wrote a letter to God. “God, our family is really having a hard time. My father has been laid off from work and my sister broke her arm. Please send $100.” He addressed his letter to “God in heaven,” put a stamp on it, and placed it in the mailbox. All such undeliverable mail goes to a mailroom in Washington where it is someone’s job to open it. The gentleman that opened this letter was so touched by this request that he took $5 out of his pocket and sent it to the young boy. The boy was so excited to get a reply and he quickly opened the letter. When he saw the $5 he went immediately to his room and wrote another letter to God. “God, thank you so much for the $5, but next time could you please not send it by way of Washington, they kept $95.”

That story reminds me of our Social Security program. Consider the scenario described in the table below. It describes the future finances of a couple starting off at age 27.

In each plan $13,000 is deferred. The employee owns assets and earnings and receives deductions for his contributions. In the private investment plan the heirs receive $1,285,000 versus zero with the current Social Security plan. After the death of one person, the surviving spouse has an income of $51,400 per year to live on rather than $22,800 from the current social security plan, which pays only the larger of the two benefits to a survivor.

The employee would get a tax deduction for his present contributions, reducing his taxable income by approximately $2,000. The purchase of a $1,000,000 term life insurance policy and disability income replacement policy on each person would cost less than $2,000, which would protect families with dependants from death or disability during the first 20 years. Under the Social Security system, qualifying for disability is difficult and cumbersome at best, and would provide a maximum of $1,400 per month for the person making $70,000 and $1,000 per month for the person making $35,000.

This scenario is very simplistic and doesn’t take into account situations where someone is unable to get life insurance or disability insurance due to health reasons. This also assumes that the government requires employers and employees to contribute to a tax sheltered plan. However, the disparity between the two outcomes is huge — a retirement income of $51,400 which not reduced by the death of one spouse as opposed to $39,600 which becomes $22,800 at the death of one spouse, as well as an inheritance of $1.2 million versus zero!

Special thanks to Stewart Welch, Jr., my father, for developing the content of this article.

Article by Babs W. Hart originally appeared in
The Tuscaloosa Business Ink.