You've heard "buy term and invest the difference," right?

Well, it's time to apply the same logic to social insurance: skip the employment tax and invest the difference. Had you done it over the last 40 years or so, you might be significantly better off.

How much better off? It all depends. A basic analysis for someone about to retire, however, would involve a choice between about $400,000 of your own money--- or $1,798 a month from Social Security.

I did this calculation because many retired readers responded to my recent "McJobs/Retiree Exchange rate" column. They said they weren't dependent on legions of low-wage workers.   They believed their employment tax money had been invested and had grown handsomely. They deserved every dime of the checks they received.

Alas, Social Security is not an investment program. It is a spending program. It takes money from people who are working and gives it to people who are retired. It was a good idea a generation ago; it is a poor idea for the next generation. While surplus employment taxes have been used to build the Social Security Trust fund since 1983, the Trust fund has never been--- and won't ever be--- a funded pension plan.

Still, it would be interesting to know how much those tax dollars might have grown to, had they been invested.

Here's how to do the figuring. First, you visit www.ssa.gov and download the precise benefits calculator. From there, you can put in your own earnings record from your annual Social Security Statement.

You can also do as I did and create an imaginary taxpayer, John Q. Uppermiddle. John was born in 1938. He will retire in January at 67. He is currently earning around $54,000. The software can backtrack to create a wage record by several methods. I chose to give John an average career, reflecting the wage increases of the average worker back to when he started working in 1960.

In 1960, John paid Old Age Security Income (OASI) taxes of $132. His employer paid the same amount. The disability tax portion wasn't included in the calculations but no adjustment has been made for the life insurance value of survivor's benefits.   The Hospital Insurance tax contributions were also excluded. By 2004 John was paying $2,888 in OASI taxes. Over the entire period he and his employer paid in a total of $112,828.

Calculating the growth of those contributions by assuming an 8 percent return, I found they would have grown to $417,460. Invest that sum in a life annuity, and www.immediateannuities.com tells us that John can have a monthly check of $2,886 for his life alone, or $2,481 guaranteed for his life or 20 years, whichever is greater.

Social Security, meanwhile, offers a monthly check for $1,798. That check, of course, is adjusted yearly for inflation. But with a running start of $683 a month ($2,481 less $1,798), investing on your own looks like a comfortable alternative. Similarly, you could invest the money and withdraw at a 5.17 percent annual rate. That would start you with a $1,798 monthly check that you could adjust each year for inflation. While there is a chance you could run out of money, there is a much larger chance that you'll leave an estate.

Could you have gotten an 8 percent return?

History says yes. During that 44-year period large common stocks provided an annualized return of nearly 10.5 percent, intermediate government bonds returned 7.5 percent, and Treasury bills returned 5.7 percent. Inflation took a toll of 4.3 percent annually.

Is this example representative?

Yes and No. Social Security is a social insurance program, not an investment program. As a result, your benefits depend on your circumstances as well as your contributions.

John Q. Uppermiddle could collect more if he was married and his wife didn't work. For no additional contribution, his wife would get spousal benefits. That beats the investing option cold.

If John Q. Uppermiddle was older and had retired earlier, his "return" on his employment tax contributions was higher because he contributed a smaller percentage of his income for more years. Workers born earlier get better "returns" on their employment tax contributions than workers born later.

How did this happen?

Simple. This is the fastest growing and most regressive tax in America. It rose from a mere 1 percent on the first $3,000 of income in 1935 to 5.3 percent of the first $87,900 of income in 2004. For those approaching retirement, this tax has been the fastest rising cost in their standard of living for their entire adult lives, starting from a small base. For young workers, the tax starts large but the benefits will be smaller--- and far less certain.

On the web:

Social Security Benefits Calculators  

Who Pays You To Retire?

Cato Institute study: Social Security: Rates of Return and the Fairness of Benefits