A Better Way for Young Families to Build a Future: Social Security Taxes vs. Down Payments

Would you rather save for retirement by building equity in a house or by putting money in an underfunded government program?

Thanks to Social Security, what you are going to do with 12.4 percent of your salary has been decided for you by government nannies. You must send it to a retirement program, which admits to having liabilities much greater than its assets, rather than use it for something you might prefer — such as making a down payment on a house. Would it be better to save for your retirement by building equity in a house, or by having your money put into a government program which entails no property rights at all?

A constant theme of American politics is the individual and social advantages of home ownership. But a constant complaint is how difficult it is for young people to accumulate sufficient funds for a meaningful down payment, which would allow them to become property owners on a financially sound basis. One big reason that saving is hard for them is that Social Security taxes take so much of their youthful incomes, sight unseen, and, as everyone knows, these receipts are forthwith spent by the government, not saved. Having made saving harder, the government then sets up other programs to push risky, low-down-payment loans.

Suppose you are 24 years old, finished with schooling, employed, and launched into grown-up life. By 30, you would like to be married with children, or at least planning on them soon, and, by 32, you would like to buy a house for your family. Suppose you are making a moderate $40,000 a year, and will have modest annual raises of 3 percent (2 percent inflation plus 1 percent real).

In the eight years between the ages of 24 and 32, you will have paid more than $44,000 in Social Security taxes from your income. Suppose that instead this money had been put in a special restricted savings account for accumulating a down payment on a house. Even with Bernanke-level interest rates of less than 1 percent on savings, you would have about $45,000.

That would provide a sound, 20 percent down payment on a house costing $225,000. The median house price in the United States is now about $180,000. You get an 80 percent traditional mortgage that amortizes in 30 years. If you pay it off on schedule, you will own the house free and clear at the age of 62.

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