US Social Security is fundamentally not an investment plan. Workers who have not yet retired pay a special tax and this is used to pay benefits to those who have retired. Roughly speaking (using handy numbers) workers pay the tax for 44 years (ages 21 to 65) and collect SS benefits for 11 (ages 65 to 76), so in principle four active workers support one retired worker. SS benefits are very small, something like a third of what active workers make on average, so more like twelve active workers support each retired worker, so the tax is a very affordable amount.

Much of the confusion over this resulted in the 1980s, when Congress recognized that the changing demographics in the future (like, 50 years later) would mean fewer workers relative to retirees. They chose to prepare for this in advance by raising the SS taxes slightly above what was needed at the time to support retirees and investing the surplus in US Treasury bonds. This Social Security “trust fund” is now being tapped to provide benefits without raising the tax rate – as well as being used by Republicans to fool people into believing that when the supplemental trust fund is empty, Social Security itself will be “bankrupt”. Not true, because even then SS benefits will continue to be paid, either in slightly lower amounts of the tax rate is not increased, or at the same amounts of the tax rate is increased to cover it.

Incidentally, this SS trust fund is a huge part of what allowed President Reagan to rack up enormous debt without destroying (at least immediately) the US economy. Treasury bonds were paying about 2.5% at the time, so the SS trust fund was essentially a source of cheaply-borrowed money to cover the government’s general budget.