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Even Janitors Can Save For Their Retirements

Here’s a letter to the Wall Street Journal:

Endorsing Social Security, David Robinson writes that “[t]here’s simply no way that a janitor could save enough in his working years to provide a decent retirement” (Letters, Dec. 30).

Let’s see.  A janitor’s median annual salary today is $26,586.  An 18-year old today who starts work as a janitor, who works until the full Social Security retirement age of 66, and who each year is paid this median salary can expect to receive, upon retirement in 2063, a monthly Social Security check for $1,108.

But suppose that this janitor is relieved of having to pay the now-required 6.2 percent of his wages – $1,648.33 annually – into Social Security and, instead, he invests each year this sum into financial instruments that pay, on average, a real annual return of 5 percent, compounded monthly.  Saving and investing no more than this sum each year during his work life, this janitor, when he retires at age 66, will own a pension worth $337,591.  Even assuming (unrealistically) that these funds earn no further returns for the rest of the retired janitor’s life, if this janitor lives for another 15 years, every month he can take from his retirement fund $1,875.51 – or 69 percent more than the monthly amount that he would instead have received from Social Security.  Looked at differently, in order for this janitor’s monthly payment out of his private retirement account to fall short of the monthly payment he will get from Social Security, he would have to live past the age of 91.

The above calculation is conservative.  Not only does it assume that the janitor’s pension stops earning real returns the moment he retires, it assumes also that the janitor saves and invests nothing more than what is now taken directly from his wages by Social Security.  Obviously, if the janitor’s employer were also relieved of having to pay $1,648.33 annually to Social Security on behalf of this janitor, the janitor’s salary would rise, enabling him to save even more during his work-life and, thus, further enhance his ability to provide for his retirement far better than Social Security does.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030