Social Security is a pay-as-you-go social insurance program, not an investment fund, but Monique Morrissey of the Economic Policy Institute says that its return on contributions is actually quite respectable compared to many retirement investment programs, especially given its low risk.
A “young worker today with average career earnings will receive Social Security retirement benefits equivalent to total employer and employee retirement contributions plus a 5.7 percent annual rate of return,” Morrisey wrote in a blog post Monday. “This ‘internal rate of return’ is not much lower than the 7.0 percent net return for 401(k)-style defined contribution plans between 1990 and 2012, and it’s higher than more recent returns for these plans and IRAs (3.1 percent and 2.2 percent, respectively, over the 2000–2012 period).”
Morrisey considers potential changes in the Social Security system that may occur in the coming years, including an increase in the contribution rate and an elimination of taxes on benefits for upper-income recipients, but says the implied return remains well above 4 percent in all scenarios.
