📋 AARP Poll: Social Security Support High, Confidence Lags (AARP Article)

@gail1, I am providing some calculations with my assumptions to put the comparison on as level ground as I could. First, I am using a 35 year time period. Second, I am using 5.0% as an average return for any type of asset allocation. This is the discount rate. Third, I increased the initial SS contribution each year by 2.5% to reflect COLA or inflation. Fourth, the initial Covered Earnings were $50,000. So, the FICA tax (initial contribution) was $3,100. However, I reduced that amount to $2,650 because approximately .9% or .009 is used to fund the Disability Income (DI) provisions. My thoughts are folks will still need to fund the DI insurance coverage because (1) most folks do not buy DI insurance and (2) it would take a long time to accumulate enough money in a defined contribution approach; and, based on when a disability may start, one may not attain 35 years of Covered Earnings. So, I used 5.3% rather than 6.2% of the initial  $50,000 or $2,650. Fifth, I used a calculator instead of 35 individual calculations that would reflect year to year changes in the rates of return. This is important inasmuch as the compounding from year to year is a positive powerful accumulator rather than annual calculations that may vary and even be negative in any given year. Here are my results: First, $2,650 for 35 years at 5% and no COLA will accumulate to $239,348 ($92,750 contributions + $146,598 gains). Second, $2,650 with 2.5% COLA each year for 35 years at 5% will accumulate to $333,137 ($145,559 contributions + $187,578 gains). To reflect a more realistic working career, I used 40 years instead of just 35 years. Third, $2,650 for 40 years at 5% and no COLA will accumulate to $320,119 ($106,000 contributions + $214,119 gains). Fourth, $2,650 with 2.5% COLA each year for 40 years at 5% will accumulate to $461,622 ($178,617 contributions + $283,005 gains). Full disclosure: I used the future value of an annuity calculator at calculator soup.com since that calculator provides a growth input (COLA) to the contribution. Also, I used annual compounding rather than month to month compounding. Over time, that reduces the accumulated values somewhat, but not enough for your request. Using a baseball expression, I am in the ballpark and with the assumptions I selected, in the infield. Remember, all of the above lump sum amounts are based on using tax deferred accounts such as IRA, 401 K, etc. So, you do not need to be age 62 to start a withdrawal strategy (income) as you do with the SS program. Another factor to consider is that with the defined contribution approach, the money that you accumulate is yours, not the SS Trust Fund's money. So, when you die, any remaining balance is payable to your beneficiary(s), if none, payable to your estate. 

So, I have accumulated values based on just an employee's contribution. You can double the above amounts to reflect an employer's contribution. The key fact to learn from these calculations is that compounding over long periods of time even with modest rates of return can produce sizable accumulated amounts/values. The next step is to compare the accumulated values with the present value of ones SS Benefits. 

This is where it becomes critical to compare the time factor as close to equal as we can. For comparison purposes, I will use just 35 years of accumulated values and a PIA of $2,000/month payable at age 67 or $1,400/month ($16,800/year) payable at age 62. IOW, 35 years of accumulation and 35 years of Covered Earnings. The present value of $16,800/year for 20 years (average life expectancy) at a 3% discount rate is $257,440. If you reduce the discount rate to 2.5%, the present value is $268,445. Increasing the discount rate to 5%, the present value is $219,833. Of course, nobody knows their actual life expectancy until one dies. So, the above amounts will vary individually, but based on ALE which is a good indicator for the population as a whole, it is the mathematically sound approach to comparing the two amounts at age 62. In summary, the SS Benefit approach (payable at age 62) with the assumptions I used (includes COLA) has a present value of $257,440. The investment approach (35 years payable any age) with the assumptions I used (includes COLA) has a present value (the accumulated value) of $333,137. If you include an employer's contribution in addition to the employee's contribution, the investment approach will provide the best outcomes. This is why the TSP is so well liked. The Feds are providing matching contributions up to 5%. So, if an eligible federal employee contributes 5%, another 5% is contributed by the Federal Government which gets the money from the taxpayers, essentially, all of us. In the TSP, you can earn 0% on your contributions and have a 100% return. In the employee benefit field, this is called "Gold Plated". Where do you sign up for that deal?