We each pay 6.2% of every pay check as a Social Security Income tax, except for the temporary reduction in our contribution. Our employer matches with 6.2%. That is 12.4% of your gross income being nicely tucked away for your retirement. Let’s looks at our current social security system versus a slightly different model to compare the outcomes. Let’s see how this would affect an dedicated minimum wage earner. For our example, we will take a young American citizen born on Jan 1st 1964. They turned 18 in 1982, starting at a minimum wage of $3.35 per hour. If our model citizen worked hard enough to stay employed, but garnered a mere 2% raise per year, and assuming minimum wage stays at $7.25 for the remainder of their working years (which is highly unlikely), they end up with an $862 monthly benefit from social security at age 66.

Now taking a look at a second model where these same social security income funds are deposited into a retirement account under our model citizen’s name similar to an IRA. They can manage the funds themselves. For the average of all the 50 year averages of stock market returns over the last 100 years (to make sure we get all the major crashes) the return is slightly more than 10% per year. The worst 50 year return happened during the great depression and is 6.8%. Since then we have been have been between 9% and 13%, let’s use 7.75% as a very low ball average yearly return. Now after our American toils year in and year out, they would have $542,864 in their retirement account at age 66. After retirement they shift their half million plus dollars into a very safe investment with just a 2% return. They would draw $904 in interest every month for the rest of their life.

This is locking in the minimum wage at its current rate for 20+ years which is not likely to happen.
This is using Federal minimum wage numbers, which are lower than most state minimum wage numbers.
This is using a yearly pre-retirement interest rate that is about 75% of the 50 year average and only has dropped below that 4 times in the last 110+ years.
This is using a paltry retirement return of 2%, which even with our current terrible economy with quantitative easing is obtainable in long term CDs.

I am sure rules could be created to allow some drawdown of principle over time, but let’s suppose that this doesn’t happen. Then the spouse/life partner/children would get this half million dollars. If two people do this that is over 1 million dollars which is over $1800 per month.

Now lets look at how this would work better than any program ever created to eliminate poverty. When the parents’ die, the children get their retirement account infused with a large sum. Lets say this family had three kids. Each child would receive over $330,000 to add to their retirement accounts. If their children struggle in life at minimum wage like their parents did, they would each almost be millionaires themselves. Just including the lump sum inheritance would move these children each to $1450 per month using the same numbers.

So the best life expectancy in 2020 as per our Federal government is 82.4 years. Using 83, the Federal government will have taken $727,438 of an minimum wage earner’s money, and given back $184,574 of that in payments, leaving the United States Federal government to keep the remaining $542,864. So every minimum wage earner is giving the Federal government over HALF A MILLION DOLLARS.

So why any working person, even a life-long minimum wage earner ever be against reforming social security into personal retirement accounts is beyond me. Apparently the poor in this country would rather the Federal government take their money instead having over HALF A MILLION DOLLARS sitting in their bank accounts when they retire.

(NOTE: Most middle class workers would have several million dollars in their personal accounts at retirement, which far exceeds anything they will get from the Federal Government.)

SOURCES:
1. Yearly federal minimum wages (http://www.infoplease.com)
2. Stock market 50 year averages (http://articles.marketwatch.com)
and (http://observationsandnotes.blogspot.com)
3. CD rates (https://www.google.com/advisor/uscd)
4. Life expectancy (http://www.census.gov)