Social Security and Education

Studies | Education | Social Security

No. 240
Wednesday, January 31, 2001
by Dr. Liqun Liu and Dr. Andrew J. Rettenmaier


Internal Rates of Return

Figure V - Internal Rate of Return from Social Security for Single Men by Education Level

An analysis of the internal rate of return of the Social Security investment indicates that individuals with lower levels of education generally have a higher rate of return than do those with higher levels of education.

Differences by Education Level in Internal Rates of Return for Single Men. The internal rates of return for single men, estimated according to their level of education, are presented in Figure V.

  • A 65-year-old who earned a high school diploma can expect a 2.18 percent inflation-adjusted rate of return, while similarly educated 20-year-olds can expect a 1.86 percent return.
  • There is a much more pronounced decline for men with a graduate school education; 65-year-olds can expect a 2.19 percent return, while 20-year-olds can expect a 0.96 percent return.

Among those nearing retirement, more educated men have slightly higher rates of return than the average, but in most other cases the less educated fare better than the more educated. The fanning out of the returns for younger men is consistent with the pattern observed based on the net present values.

Differences by Education Level in Internal Rates of Return for Single Women. For single women, as depicted in Figure VI, the story is slightly different. Their rates of return start higher among older women and drop across the board as age declines.17

"At every age, the rate of return earned by single men is less that what could have been earned in the private capital market."

Differences by Education Level in Internal Rates of Return for Married Men with Nonworking Spouses and Children. At any level of education, married men (with a nonworking spouse) receive a far greater rate of return than single men. Sixty-five-year-old married men at all levels of education except college graduates can expect a real rate of return above 4 percent. But of those born in 1980, only married men with less than a high school education can expect a real rate of return above 4 percent. The now-familiar pattern of declining and widening rates of return as we move from older to younger workers is again evident in Figure VII.

Figure VI - Internal Rate of Return from Social Security for Single Women by Education Level
  • Among married college graduates, 20-year-olds earn a rate of return almost 1 percentage point less (3.97 percent vs. 3.00 percent) than 65-year-olds.
  • Similarly, the rate of return declines from 4.37 percent to 3.60 percent among high school graduates.
  • The rate of return declines only modestly, from 4.75 percent to 4.36 percent among those with less than a high school education.
Figure VII - Internal Rate of Return for Married Men with a Nonworking Spouse

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