Social Security

* Re “Fix It Now or Risk a Generational War,” Commentary, June 12:

Rob Nelson, chairman of the board of Lead or Leave, suggests that current Social Security annuitants are receiving an excessive return on their investment. As an example, he states: “The average senior citizen paid just under $84,000 into Social Security and will get back more than $300,000.”

Indeed! Let’s see what a conservative investment of $84,000 should return to a retiree. Suppose that $175 per month is invested in a tax-deferred IRA, earning 6% compounded monthly, for a period of 40 years. The total paid in would be $84,000. At the end of 40 years, the value of the investment would be $384,510. (Compounding does work wonders.) Now suppose that the retiree amortizes the $384,510 over a pay-out period of 20 years at 6%. (The unused portion continues to earn interest). This would produce a flat monthly payment of $2,495 for 20 years, yielding a total payout of $598,880.

This not only suggests that current Social Security annuitants are not being unfairly compensated, but that they would be better off if they had been able to put their contributions into a personal IRA, rather than into the compulsory Social Security system. If the investment had been in an equity fund, the return could be much better than the conservative 6% assumed in the above calculation.

CASPER W. BARNES

Professor Emeritus, Electrical

and Computer Engineering, UC Irvine