Economics in the Media…

…from David Robinson, senior lecturer at Haas School of Business, University of California, Berkeley, published December 28, 2015: “Don’t Forget the ‘Social’ in Social Security”

Robinson writes – in response to this op-ed by Wharton professor Jeremy Siegel – “There is never any expectation that upper-income earners will do as well from the government as they would if they’d invested that money themselves. The system relies on higher contributions from those who are fortunate enough to earn handsome salaries. Social Security is by design a system to transfer wealth to low-wage earners in their retirement. There’s simply no way that a janitor could save enough in his working years to provide a decent retirement.”

Is this true? CafeHayek shines a light:

A janitor’s median annual salary today is $26,586. An 18-year old today who starts work as a janitor, who works until the full Social Security retirement age of 66, and who each year is paid this median salary can expect to receive, upon retirement in 2063, a monthly Social Security check for $1,108.

But suppose that this janitor is relieved of having to pay the now-required 6.2 percent of his wages – $1,648.33 annually – into Social Security and, instead, he invests each year this sum into financial instruments that pay, on average, a real annual return of 5 percent, compounded monthly. Saving and investing no more than this sum each year during his work life, this janitor, when he retires at age 66, will own a pension worth $337,591. Even assuming (unrealistically) that these funds earn no further returns for the rest of the retired janitor’s life, if this janitor lives for another 15 years, every month he can take from his retirement fund $1,875.51 – or 69 percent more than the monthly amount that he would instead have received from Social Security. Looked at differently, in order for this janitor’s monthly payment out of his private retirement account to fall short of the monthly payment he will get from Social Security, he would have to live past the age of 91.