Today I decided to analyze Social Security payments as if they were interest bearing loans. The results are surprising to me, partly because they don't make sense. I think I made some false assumptions but I'm not sure where. If anyone wants to help me correct my analysis, that'd be awesome!

Social Security is a lot like a government bond. You give the government money at time A and expect more back at time B. You are essentially loaning money to the government. If the Social Security tax is like a loan to the government from workers, what is the interest rate on that loan? Here is an intuitive calculation: “A single person who made the average wage (about $47,800 in 2015 dollars) and retired in 2015 would have paid about $272,000 into Social Security and would receive about $294,000 in lifetime benefits.” source $294,000 is more than they contributed by about 8.1%. That’s effectively an 8.1% interest rate.

Let's compare that interest rate with the 30 Year Treasury Bond, which is another, more explicit loan to the government. Suppose you retired at the age of 66 in 2015 and started your career at the age of 24 years old, 42 years earlier in 1973. Based on this chart, if you chose to buy a 30 year Treasury Bond in January of 1973 instead of paying into Social Security -- well, you couldn't, because 30 year Treasury Bonds were only introduced in 1977. But its rate of return is usually similar to the 10 year Treasury Bond, which did exist, so using that as a proxy, this chart indicates you could have expected an explicit, contractual rate of return of 7%. Which is 1% lower than the return the average person got out of their Social Security payments. By comparison with that, the government gave workers in 1973 a pretty good deal. One can imagine an alternate history where, instead of making workers pay the Social Security tax, the government forced workers to buy 40 year Treasury Bonds. It would have amounted to roughly the same thing for the worker -- paying money every month and accruing regular, larger payouts ~40 years later -- but Social Security's slightly higher "interest rate" effectively made it a more attractive option.

After considering the numbers from 2015 I decided to adjust them for 2023. $61,681 is the average annual income for a man in 2023. source The average retirement age in the USA is 66 and if I suppose most people started their career around 24 years old, it follows that a single person who made the average wage (about $61,681 in 2023 dollars) and retired in 2023 probably started their career in 1981. The internet says the median annual wage in 1981 was $42,973 (source) and the social security tax was 6.65% (source), whereas in 2023 it is 12.4% (source). So based on this spreadsheet it looks like our single person would have paid $204,454 into Social Security. But this is where I fear I must have done something wrong. This contribution is much much lower than the number that was calculated for 2015. I would think contributions would have risen from 2015 to 2023, since the Social Security tax rose during that time. So I must have done something wrong. Help me find out what!

Moving forward, though, it looks like the average monthly payout in 2023 is $1,825. Social Security payouts are supposed to keep pace with inflation, so if most US taxpayers die at 77 then our single person should expect to receive $1,825 per month, plus inflation, for 11 years. Let’s be generous and suppose the government gets inflation down to only 2% per year. Based on the same spreadsheet, our single person should expect to receive about $271,652 in lifetime benefits. $271,652 is more than they contributed by about 33%. That’s effectively a 33% interest rate.

I am quite confident I must have done some bad math here. But if my math was right, it would imply that Social Security is -- by comparison with any bond the USA ever produced -- an incredibly good deal. A 33% rate of return would constitute a ridiculously high payout. I'm sure my math is wrong, but to whatever extent it is rather high, I suspect that is due to this: Social Security was instituted in 1935, when life expectancy was in the low 60s. But it only kicked in at the age of 65. So I don't think the government expected to make payouts to individual beneficiaries for very long -- the total lifetime benefits were expected to be much smaller, and therefore the effective "interest rate" would have been a lot lower. Today, US taxpayers tend to live til 77, 11 years after Social Security kicks in. So we keep receiving payouts for a lot longer, which raises the effective rate of return over time. Perhaps Social Security, when compared with bonds, is such an "excellent deal" because nobody knew -- when it was created -- that it would have to pay out so much compared to the amount it rakes in through taxes.

Anyway, the point is, if you analyze Social Security as a type of bond, then by comparison with other bonds it has long offered a better rate of return. But its massive payouts cost the government a lot. I doubt the government realized, when they created this form of welfare, that it would end up this way: a force dragging them closer to bankruptcy every year. They can't keep paying off a "loan" whose effective interest rate is consistently far higher than the market's interest rate. That "something's gotta give" in Social Security is well known for a long time, but I think it's interesting to compare it with interest bearing loans to see how silly it really is.