Letter to the Editor ¦ May 1, 2000
Social Security returns

By David Langer

Omitted from Kevin Lansing's April 3 Other Views commentary on Social Security's rate of return is the reduction in financial responsibilities to needy relatives. If this saving is considered, then Social Security's return to many workers will be far greater than 1% to 5%.

Consider a married couple, both age 30, contributing $4,000 a year to Social Security. They have up to four surviving parents who are or will soon be retired and receiving each year from Social Security about $13,000 separately or $20,000 as husband and wife. This enables the parents to live without calling on the young couple for financial assistance.

Over the next 35 years the couple will pay $140,000 in Social Security taxes. However, the benefits received by their parents spares the couple from having to contribute, say, $8,000 a year toward their support for perhaps 20 years, for a total of $160,000. They then will have a net gain and, in addition, when they reach age 65, become eligible to receive their own annual Social Security income of about $20,000.

What is the rate of return on the $140,000 the couple paid in taxes over 35 years? In my example, there is no cost to them, since they have saved $160,000 by not having to contribute $8,000 annually for 20 years. They will thus receive gratis their $20,000 per year at age 65, and the yield on this outright "gift" is infinity.

Further, the $160,000 saved may enable the couple's children to go to college and raise their economic status. And the economic status of their children's children may be raised as well. What we have is a chain of increasing productivity, which will benefit the country well into the distant future.

There are other returns to workers that further enhance the yield, such as the full annual cost-of-living adjustment and the taxes they would incur for government programs for the increased number of poor persons in the absence of Social Security. The traditional savings account analogy for calculating the return on Social Security thus needs to be broadened.

- David Langer, a consulting actuary and president of David Langer Co., Inc.
New York