Yeah, yeah, we've heard it a million times. The Social Security Trust Fund will be depleted by the year 2034. After that, payroll taxes won't be able to pay the promised amount and retirees will receive fewer benefits. Some want to kick the can down the road, saying this shortfall can be overcome “merely” by raising taxes and reducing benefits. But, what if there were a way to both increase government revenues (without raising taxes) and increase retiree benefits?

Each year, the government takes 15 percent of your gross salary (7.5 percent from you and 7.5 percent from your employer) and places it in a trust fund. In exchange, you'll receive an annual payout upon retirement, the amount dependent on the actual age you decide to begin collecting this annuity. A sure thing sounds good to a lot of people.

Social Security is the ultimate numbers racket. By paying more to the initial beneficiaries than they put in, it was designed to rely on tax revenue from future beneficiaries to pay current beneficiaries. That, my friends, is the very definition of a Ponzi scheme.

Social Security has cost the government dearly and the beneficiaries even more. If it was originally designed like a defined contribution plan instead of a defined benefit plan, both the government and retirees would be richer.

Let's say a 22 year-old starts work at a salary of $13K and gets a 3 percent raise every year. At retirement (age 65/66) our worker is making $53-55K. Retiring at age 70, that same worker would be making $62K. According to the online Social Security Quick Calculator, someone born in 1950 would receive between $19K-$27K upon retirement. Someone born in 1960 would receive between $22K and $28K upon retirement. In both cases, that's only a fraction of their salary.

What if, instead of a pension plan, Social Security was a 401(k) plan invested at market rates?

The average 49 year return is 10.99 percent. Investing those 15 percent Social Security payroll taxes into this hypothetical plan would yield a retirement income of between $125K/$139K (retiring at 66/67) and $191K (retiring at 70) (assuming a 4 percent withdrawal rate). In each case, this is far above the retiree's ending salary.

Don't trust the average? The worst 49 year return is 7.71 percent. That return would yield a retirement income of between $49K/$53K (retiring at 66/67) and $67K (retiring at 70). The early retiree receiving 90 percent of the ending salary and the late retiring receiving more than the ending salary.

You don't want to know what happens in the best case return. Those lucky folks will withdraw between $267K and $445K a year in retirement. Imagine the largess of government tax receipts from that windfall.

Instant Insights /

How the government can make money on Social Security

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