Is Social Security a Good Deal? Yes, If You Consider the Whole Package!

A recent article published by Associated Press has been picked up by numerous newspapers: "Social Security not deal it once was" is a typical headline – in this case from The Washington Post. According to the author it started out as a very good deal: "If you retired in 1960, you could expect to get back seven times more in benefits than you paid in Social Security taxes, and more if you were a low-income worker, as long you made it to age 78 for men and 81 for women." According to sources referenced in the article, this is no longer the case: "A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to a 2011 study by the Urban Institute, a Washington think tank."
We have not undertaken to analyze the underlying assumptions that drive these calculations, like discount rates used and so forth. Instead, let's grant this analysis the benefit of the doubt and consider the conclusion – that Social Security is not a good deal – from another point of view altogether. First, Social Security is not a retirement savings program. Rather, it is a mix of income insurance programs: in addition to the retirement benefits most of us associate with Social Security, the program provides income security for survivors, income to provide for dependent members of their families if they die young, disability income if they lose their ability to work through illness or accident, and supplemental income security for the very needy. All these programs are adjusted annually to protect the beneficiaries from inflation. In addition, they are progressive in design, meaning they are intended to replace a higher share of low income earners' income, and a lower share of higher income earners' income – on the assumption that the higher earners were better able to set aside other savings to complement Social Security benefits.
In other words, Social Security is a collection of insurance policies that will pay out for you, depending on your needs. Like most insurance policies, we usually feel better off if we never have to claim against them. No one pays for homeowners or car insurance, and then wishes for a home fire or car accident so they can get some money back out of their policies! Considered from this point of view, Social Security isn't a bad deal today after all: you get this broad set of income insurance coverage and, if you turn out to be an average earner couple who lives to an average age, you get most of your money back!
More importantly, asking whether Social Security is a good deal is not the most useful question to pose. Rather, the question that makes the biggest difference for you is this: Given that the system is what it is, how do I get the most out of it? We have seen over and over in our analysis of specific cases and longevity statistics that the exercise of a smart claiming strategy by an average earner couple who live to their average ages can easily put $100,000 or more in their pockets compared to the strategy most people use, claiming at age 62. Add that extra money into the case presented in the article and this couple does make some return on their Social Security tax payments. What insurance policies have you purchased that provide both the insurance and the potential for a return on your overall payments – all backed by the full faith and credit of the United States?