Social security increases poverty

Social Security is often touted as a crucial safety net that protects American retirees from abject poverty. In reality, Social Security has made it harder for retirees to grow wealthier by reducing their ability to save and thus has contributed to poverty in old age, argues Texas A&M economist and Independent Institute Research Fellow Edgar K. Browning.

For those retiring in 2008:

  • Social Security returned an average of slightly less than three per cent on retirees' contributions, adjusting for inflation.

  • Had they invested their contributions in a balanced portfolio (60 per cent stocks, 40 per cent bonds), those retirees would have earned, on average, 5.5 per cent – a huge difference when compounded over a lifetime.

  • In fact, the annual retirement income provided by a 5.5 per cent return is double that provided by the three per cent return of Social Security; even more compelling, an investment in the stock market averages seven per cent real return, which would mean an annual income of three times what Social Security provides.

    Moreover, the yield from Social Security looks even worse when considering that savings fuel investment and economic growth, adds Browning. It is likely that we would have fewer poor among the elderly had they been free to invest their taxes in private assets. Once Social Security's rate of return drops to below two per cent, it will only continue to aggravate poverty in the future.

    Policymakers are left with the decision to cut benefits or double the tax rates. Neither option is attractive, but the longer the government waits, the harder it is to implement change and the more likely that Americans will be forced to accept substantially higher taxes, concludes Browning.

    Source: Edgar K. Browning, Social Security Increases Poverty, Independent Institute, August 22, 2008; based upon: Edgar K. Browning, The Anatomy of Social Security and Medicare, Independent Review, Vol. 13, No. 1, Summer 2008.

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    FMF Policy Bulletin/ 02 September 2008
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