A story told in the Daily Caller today, illustrates the big rip-off that is Social Security. William Shipman, co-chairman of the Cato Institute Project on Social Security Choice, tells the story of Ernie, the prudent electrician, who saved the same amount each month in private retirement accounts that he was paying in social security, only to find what a big rip-off the system is.

He wasn’t a sophisticated investor, so he took what he thought was good advice, and invested in broad indexes of stocks and bonds… He retired at the end of last year, at age 66, the age at which he could receive full Social Security benefits.

When he applied for his benefits in 2010… He earned $48,000 in 2010 so his first year’s benefit of $19,968 totaled about 41 percent of his last year’s pay check. …

Ernie was shocked. Even after including the stock market crash of 2008, he could take out $37,000 [from his portfolio] in 2011, and increase it every year for 25 years by 3.0 percent, the historical inflation rate. Or he could buy an annuity providing a comparable benefit. Of course he could take out less, so as to leave some assets for his children. Or he may want to hedge whether he’ll live longer than 91.

Ernie was confused. He couldn’t figure out why saving and investing the same amount he paid the government resulted in almost double the benefit. [Emphasis added]

Cato’s Dan Mitchell shares six things you need to know about social security and explains why personal retirement accounts are a better solution to ensuring the financial well-being of elderly Americans for decades to come.

Also, see Nicole Kurokawa Neily’s take on why we must, and how we can, transition from the current government-run system to one that is solvent, safer, and secures a more prosperous retirement for America’s elderly.