The Hidden Price of Social Security

Imagine handing your landlord $300,000, living in his house for two years without ever making a rent payment, and then getting the full $300,000 back when you move out. 

Did you just live there for free?

Millions of renters in South Korea would tell you no. Under Korea’s jeonse rental system, that is exactly how a lease works: Instead of monthly rent, the tenant hands over a lump-sum deposit — typically 50% to 80% of the property’s value — and receives it back in full at the end of the lease. In the meantime, the landlord invests the deposit and the tenant’s real cost is forgoing the investment returns he could have earned on that money himself.

If that $300,000 could have earned, say, 4% a year, the housing really costs about $12,000 annually, even though no rent check is ever written. Economists call this “opportunity cost”: the value of what is given up in choosing one alternative over another. In the jeonse structure, that usually “unseen” cost sits in plain view of every Korean renter.

Now consider the U.S. Social Security system, in which the opportunity cost is every bit as real but is much more concealed.

A worker earning $60,000 a year sends 12.4% of his wages to Social Security: $7,440 annually, every year of his working life. Half is deducted from his paycheck; the other half is paid by his employer, which economists broadly agree comes out of the worker’s wages anyway, though he never sees it. There is no deposit slip or account with his name on it, but this is money that would otherwise be his.

That same $7,440 a year, invested for 40 years at an inflation-adjusted 7% — roughly the long-run historical performance of U.S. equities — would accumulate to about $1.5 million. Social Security, by contrast, offers most younger workers an implicit inflation-adjusted return in the range of 1% to 2%, and lower still for higher earners. The difference is the program’s hidden price tag: hundreds of thousands of dollars per worker in forgone compounding, paid invisibly across a lifetime.

Consider this: Money invested at 7% doubles every 10.3 years. Money invested at 1% won’t double for 70 years.

It is tempting to imagine those contributions sitting somewhere on the worker’s behalf — that a genuine retirement system would at least have the government hold each worker’s 12.4% in mutual funds until retirement age. That is not what happens. Social Security is pay-as-you-go: Today’s payroll taxes go straight out the door to today’s retirees, in effect repaying them for the payroll taxes they paid to provide benefits for generations who came before. Even the trust fund’s past surpluses were not invested in productive assets; they were lent to the Treasury and spent, leaving the government holding IOUs to future retirees.

Return to the jeonse frame and the arrangement comes into focus: The government is the landlord, taking the use of the worker’s capital and capturing the return for itself. But where the Korean landlord must hand back the principal on a fixed date, the worker’s “deposit” comes back only as a promise of future benefits payable by taxing the workers who come after him.

One objection is that this comparison is unfair — Social Security is stable, the stock market is risky. But the objection is weaker than it sounds. The bar is low: Even a high-yield savings account, about as conservative as savings get, rivals the implicit return Social Security offers most younger workers and beats it outright for higher earners. Equity risk, meanwhile, shrinks over the horizons that matter here: A retirement contribution compounds for three or four decades, and over periods that long, diversified portfolios have historically been far less volatile than their year-to-year swings suggest. Even in its worst 30-year stretch on record, the S&P 500 returned more than 4% a year after inflation with dividends reinvested.  

Most overlooked of all, Social Security carries political risk of its own. Its retirement trust fund is projected to run dry in 2032, triggering an automatic benefit cut of about 22% under current law absent congressional action. A worker counting on today’s promised benefits is not holding a risk-free asset; he is holding a political promise that may well be revised before he collects.

None of this settles what Social Security reform should look like. The point is about visibility. The Korean tenant feels his opportunity cost because the transaction makes it unavoidable: He surrenders a lump sum and gets it back on a fixed date, so the only live question is what that money could have done in the meantime.

The American worker is given no comparable signal. His contributions are collected in small biweekly increments, half routed through his employer, and the program is framed in the language of “insurance” and “trust funds” rather than capital and returns. The counterfactual — what 12.4% of his lifetime wages might have become — is a question the system never prompts him to ask.

Frédéric Bastiat famously distinguished between “what is seen and what is not seen,” arguing that the mark of a good economist is attention to the unseen. Jeonse builds the unseen into the visible terms of the deal. Social Security does the opposite: It takes one of the largest financial commitments of an American’s life and renders its true cost hidden by design.

A system confident in the value it delivers would invite comparison. One that depends on workers never running the numbers should make us wonder why.