## December 4, 2018

### THUS, THE THIRD WAY:

My Prozac Economics Lecture: Showing Students What They'd Earn if Their FICA Taxes Were Put in the S&P (T. Norman Van Cott , 11/26/18, FEE)

What if students, instead of being legally obligated to pay Social Security taxes, had the option of putting and holding those funds in the stock market?The discussion is organized around the following question: What if students, instead of being legally obligated to pay Social Security taxes, had the option of putting and holding those funds in the stock market?To this end, it should be noted that the average annual return in the stock market since 1928, as measured by the S&P 500 index, is 9.8 percent (not that the return every year is 9.8 percent, mind you--just that over the last 90 years, annual returns average out to 9.8 percent). Then pick an annual starting salary students might earn. Say it's $35,000, and assume it rises by 3 percent a year. Under this latter assumption, the salary never rises above the current $127,400 maximum taxable annual income.Assume the person intends to work 41 years. Then at the end of the first year of employment, his/her $4,340 Social Security tax for the year ($35,000 x 12.4 percent) is invested in an S&P 500 index fund and held for the following 40 years at the 9.8 percent average return. What will it equal at the end of 40 years? Believe it or not, $182,634. That's right; just the first year's tax will grow to $182,634. The second year's tax ($4,470), held for 39 years, will grow to $171,316, and so on.Making these calculations by hand is tedious, to say the least. For example, the growth in the first year's tax is the answer to $4,340 x (1.098)40. The second year's tax follows from $4,470 x (1.098)39 and so on. Don't despair. Websites like this enable you to make the calculations quite easily by plugging in the numbers.Thus, if the student never saved another penny in his/her whole life, just the first two years of Social Security taxes invested under the above conditions would grow to $353,950, more than one-third of a million dollars, when they retired 41 years after graduation.If the student's Social Security taxes for the first 10 years of working life were invested at the S&P 500's 9.8 percent return, he/she would have a $1,391,844 portfolio at the end of 41 years; the first 20 years of taxes would grow to $2,126,777; the first 30 years of taxes grows to $2,514,569; and for the entire 40 years, it's $2,718,713.

Posted by Orrin Judd at December 4, 2018 6:45 PM