Doubling Down on Bad Programs

Democrats want to fix Social Security. Unfortunately, the way they want to go about it is to double-down on a poorly designed program. To summarize their plan, they want to raise the payroll taxes by almost 20% (from 12.4 to 14.8), increase benefits by 2%, and expand the program to income 400k and up (excluding income between 132.9k - 400k)

Social Security was designed over 75 years ago for a society much different from todays. It redistributes wealth from low income earners with low life expectancy to the affluent. It redistributise wealth from dual-earner couples to single-earner couples. Why do we want a system that does this?

Furthermore, as has been shown, Social Security is a terrible pension plan. Their own research shows that almost everyone would be better off investing their money in an index fund. The only people whose returns might rival an index fund are couples, with only one earner in the lowest income group. Every other income group, every other combination of earners performs relatively poorly.

Let's take an example to show how much better off most would be with an index fund.

A two-earner couple, born in 1985 is in their 30s now. They can expect a return of 2.45% on their Social Security "contributions." The S&P500's average annual return is 9.8% over the past 90 years. If each starts working at 25 with a salary of $30,000 and gets a 3% raise every year until they retire, at retirement, they'd have more than five times the savings from an index fund as from Social Security. (You can play with assumptions by copying this workbook)

This demonstrates how lousy a program Social Security is. I understand that one of the benefits of Social Security is that it can provide some security in case the market crashes. It would be  intolerable to have saved your whole life, and then the market crashes. However, this is an extremely high price to pay to guarantee retirement security. Imagine there was no payroll tax as you worked, but Social Security was funded by taxing your retirement savings right as you turn 65. This example shows that it's an 80% tax of your potential savings.

Surely we can design a system that can guarantee retirement savings (even for single-earner couples) and not mal-distribute so much wealth for a fraction of the price.