NEW YORK — Social Security has frequently been declared by stock market enthusiasts to be a poor investment compared with stocks. Using a simple savings account analogy, they have determined that while Social Security's rate of return was once on the order of 5 percent, it has now dropped to 1 percent or less. This is then compared with the average long-term historical yield on stocks of about 7 percent and much higher in recent years.
So after doing my own calculations, I was surprised to discover workers can reasonably expect to receive a much higher yield, and many will achieve a rate equal to infinity. Infinity? Yes, infinity.
Consider a husband and wife, Ed and May, both are age 30 and contributing a total of $4,000 a year to Social Security. They have up to four parents who are or will soon be retired under Social Security and receive about $13,000 singly or $20,000 as a couple, enabling them to live without calling on Ed and May for help.
Over the next 35 years, at $4,000 a year, Ed and May will have paid $140,000 in Social Security taxes. However, as is frequently the case, the benefits received by their parents from Social Security spare the couple from having to contribute, say $6,000 per year, toward the parents' support for about 25 years for a total of $150,000. Ed and May will then have a net gain of $10,000.
In turn, when they reach age 65, they become eligible to receive, without further cost, their own annual Social Security income of about $20,000 while both are alive and $13,000 to the survivor for life, normally totaling in excess of $400,000 in benefits. Such pension is tantamount to being an outright gift, there being no cost to them, and their yield on this "gift" is infinity. Try getting that on the stock market.
The explanation for this phenomenon is simply that the Social Security taxes paid by the 152 million workers and their employers are promptly redistributed to the beneficiaries, now numbering 44 million retired and disabled workers and their spouses, widows and widowers, children, etc.
This is what makes it all possible. The workers are in effect saying to the beneficiaries, "Here, you take this money to sustain yourselves. When we retire, die, or become disabled, we know that we and our families will be treated in the same way."
There are other items that, while not easily converted to a precise investment yield, still add significantly to Social Security's rate of return. Benefits are risk-free, which is worth a few percentage points when you don't want to worry about whether your money will be there when you need it.
There are full and guaranteed cost-of-living adjustments, which are not available either from the stock market or from insurers.
There is no chance that you or your spouse or your elderly parents can suffer a negative yield by being scammed out of their money as so often happens to stock market participants.
Adding indirectly to the yield are the following: Workers are covered automatically for substantial life and disability insurance at a cost and ease of availability that can't be matched anywhere.
Consider, too, that Social Security also keeps many millions off the public dole, resulting in a saving in the taxes that would otherwise have to be levied.
The savings account analogy for calculating the return on Social Security thus needs to be broadened to take into account all the benefits of the program. Workers obviously can receive a far greater yield than can be matched elsewhere and, given the widespread appreciation of Social Security, they may already understand this.
An acute irony can be seen in any proposal that all or a portion of Social Security taxes be used to invest in the stock market: The system came into being in 1935 precisely because that market's failure in 1929 created the Depression, a most painful period of financial insecurity.
Now we know that Social Security provides not only greater financial security than the stock market offers, but a better investment yield as well.
*David Langer, a consulting actuary, is chairman of David Langer Company Inc., in New York.
(c) Copyright 2000. The Christian Science Publishing Society