What if Social Security didn’t exist?

It’s important to remember that throughout the year, not just when we’re celebrating Social Security’s birthday, because we otherwise can become focused on the system’s challenges—of which there are many. Despite those challenges, however, it would be devastating to millions if it didn’t exist: According to the Center on Budget and Policy Priorities (CBPP), the percentage of those aged 65 and older living below the poverty line would more than triple—from 10.3% to 37.7%—if they didn’t receive Social Security benefits.

I want to focus on this segment of the retirement population because it’s all too easy for investment analysts (myself included) to focus on the more esoteric aspects of retirement financial planning and the finer points of retirement portfolio design. But for a large percentage of retirees—especially older women, many of whom are single—such discussions are beside the point. For this other cohort, Social Security is perhaps the only thing that really makes a difference.

To help drive home how big a difference Social Security makes to the elderly poverty rate, take a look at the accompanying chart, based on data from the CBPP. For each of the 50 states and the District of Columbia, the chart shows the percentage of elderly in that state that would be living below the poverty line, both currently and assuming Social Security didn’t exist. Think about what it would mean for the elderly who live in your state if that rate were to jump as much as indicated by the chart.

The largest difference—at 38 percentage points—is for West Virginia, followed by Arkansas (37 percentage points), Mississippi (36 percentage points), and Kentucky (36 percentage points). Even for states in which Social Security has the least relative impact on the elderly poverty rate, its impact is still huge. In Hawaii it is 17 percentage points and Maryland 21 percentage points.

By pointing these statistics out, I’m not taking a position on whether FDR should have come up with a better system for insuring retirement financial security. There are many theoretical and practical arguments on both sides of this question, and protagonists have become increasingly polarized over the years. But, for better or worse, Social Security now plays such a crucial role in retirement financial security that it’s politically unrealistic, and academic in the worst sense of the word, to imagine what a wholly different approach might look like.

The best birthday present we could give Social Security would be to spend less energy on those academic issues and focus on what can be done practically to strengthen the system.

How good is Social Security?

Another way of appreciating what Social Security offers is to estimate the cost of annuity that would provide the same guaranteed income stream. It will have to be an estimate because, unlike Social Security, no insurance company currently offers an annuity whose payments are indexed to inflation. Regardless, we know that the cost of such an annuity would be substantial.

Consider the minimum monthly Social Security benefit that would be paid to someone who has worked and paid FICA taxes for at least 30 years. This minimum, known as the “primary insurance amount” (PIA), is $1,033.50 for 2023. To determine what it would cost to purchase an annuity that equals that PIA, I turned to the calculator at ImmediateAnnuities.com, assuming a single 65-year old male and that inflation over the next 30 years would average 3% annualized. The lowest cost of such an annuity would be $227,921.

It should go without saying that only a small fraction of Americans reaching retirement age have savings that large. According to the latest “How America Saves” yearbook from Vanguard, the average 401(k)/IRA account balance at Vanguard in 2022 was $112,572, with a much-lower median balance of $27,376.

So happy 88^th birthday, Social Security. May you get stronger and financially more stable, and thereby have many happy returns!

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com