Vanguard's expense ratio for an S&P 500 ETF is
0.03%.
That's a couple of orders of magnitude less than the difference in the real return from the S&P 500 in the long term (roughly 5% to 10% depending on exactly how and when you define "long term") and the same from Social Security (which, again, U.S. bonds historically return ≤ 0% in real terms, which sucks).
Vanguard is going to charge you $71 on $10,000 invested for 10 years.
Even a 5% return nets you $5,513 after ten years.
So you're still coming out $5,442 ahead even net of fees.
If Social Security returns 0% as it normal does, you're $5,442 behind already. Increase the contribution amount and the market return, and this becomes even more crazily lopsided.
Yeah, bonds are "safer," but no investment advisor recommends them being the *only* investment vehicle throughout your working life (and they are for many Americans through payroll taxes and the SSA). If you are in this for the long haul, then short-term losses matter little. The market has always rewarded those who stick it out. Forcing the poorest among us to invest so conservatively is not actually doing them any favors. It is risk-adverse to the point of destructiveness and hurting their chance to build some wealth.
Sometimes a pennywise -- being so adverse to risk -- is ultimately many pounds foolish.
The "safer investment" argument is also overblown. The circumstances that determine real returns from stocks and bonds are not independent of each other. A situation that would crash the market to the same degree it crashed in the late 1920s and early 1930s (e.g., a MAJOR war, a huge series of bank failures, or an Argentina-style run on U.S. debt and rampant inflation, etc.) would also reduce the real return on bonds.
Let's walk through an apples-to-apples example...
$15 / hour worker at 2080 hours per year = $31,200 working from age 21 to age 65
Assume one investment strategy with a 0% rate of return = Social Security
Assume another with a 5% (minus 0.03%) investment strategy = S&P 500 index fund
Saving 12.4% of their income (which is the total Social Security contribution)
In the end, the investor at 0% has $174,096.
The investor at a little less than 5% has $612,641.
The 0% investor has enough money to cover their preretirement income for 5.6 years.
The 5% investor has enough money to cover their preretirement income essentially forever.
A 5% return on $612,641 is $30,632 -- close to but not quite enough to cover $31,200 per year. Even if they live to be 100, they would still have $545,164 left. At the 0% return, the person who only had enough for 5.6 years has already outlived their retirement savings by at least three decades.
Do you not understand how powerful compound interest is in the long term?
I ran this model out into the far future and found out the 5% person only goes into the red once they turn 142. That's much better than going into the red when they turn 71, isn't it?
You're not doing people a favor. You're barring them from accruing long-term wealth. You can dress it up as helping them however you want to, but the numbers above settle the matter.
