Saturday, April 04, 2009

Social Security is not an Investment, but insurance

Individuals seek value for their money. No one likes paying more for an item such as gas, food or travel than they have too. The value one receives from Social Security depends on when you were born. If you were born prior to 1930, you got great value. If you were born after 1930 your value decreases on an increasing basis.

Insurance normally is a signed agreement for a defined coverage in return for a defined payment; Social Security has no such signed agreement as well as no defined payment and coverage. Social security is not guaranteed.

The Cost of Money is generally the highest rate of interest you are paying. Applying the Social Security tax to reduce the number of loan payments would be an excellent way to create wealth.

The average worker applying the Social Security tax each month to a mortgage reduces a 30-year mortgage to less than 14-1/2 years. Now make the very same payment of principal, interest and Social Security tax into 5% US Savings bonds for the remaining payments of the original term. At the end of 30 years the worker would have a home plus $370,646. This $370,646 is the value attributed to the Social Security tax being used to pay off the mortgage early.

The Social Security Administration has stated they can pay but 73% of benefits. This means the effective interest rate paid on our Social Security taxes is close to zero if not negative. Assuming a 1% return the value at the end of 30 years for the Social Security benefit is $177,807. The mortgage application method improved the net-worth of the worker by $192,839.

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