Pondering Social Security (Appendix - Assumptions and Model)
This is the model and underlying assumptions with which I used to calculate the Social Security 'effective return'. Please note the following:
- Average Salary reflects the average salary in any given year (you could actually start with any salary figure and the results would be the same)
- The effective Interest Rate was derived by calculating the internal rate of return of the stream of cash flows in and out (the last column)
- The model assumes all Social Security receipts collected in a given year are distributed each year
- Social Security payments are calculated by simply multiplying salary x the Social Security rate (7.65%)
- Social Security benefits are calculated by simply multiplying salary x (ratio of working/retired) x the Social Security rate (7.65%)
