Social Security: Some facts and fiction

Recently, there have been a variety of statements made about Social Security, many negative, critical and downright scary.  Some are factual, but many are simply not true, especially the fear-mongering ones.  So we'd like to take this opportunity to discuss a few in order to dispel the myths and clarify the real situation about Social Security.  While we're at it, we'll add out opinions.

No. 1: Social Security is Socialism.

This just plain is NOT true.  Socialism involves government ownership ol the means of production.  In other words, the people, via the government own all businesses.  Social Security is not a business.  It is also not social welfare.

It is a retirement fund, one that is funded by payments made into the Social Security Trust Fund (via FICA payments) by people who have jobs.

It appears to us that there is an attempt to link Social Security with  "social welfare" which is erroneously also linked to  "socialism," which  the general public often opposes (in some cases, without actually knowing what socialism is).   But Social Security is neither.

 To read about Socialism, Capitalism and Communism 

No. 2: Social Security is a Ponzi Scheme.

Nope.  It is a pay-as-you-go system, one that also is used by some private pension systems in the business world.  It involves today's workers contributing to the retirement (via income deductions) of those who went before.

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It has been noted that part of the rationale for this arises from the fact that today's workers create the work opportunities for tomorrow's workers, and since they do that, when they reach retirement age it is appropriate for those who are then working to contribute to their retirement.

A superficial comparison can be made between pyramid or Ponzi schemes and pay-as-you-go programs in that both involve money from later participants going to pay the benefits of earlier participants. But that is where the similarity ends.

Social Security does not require an increase in participants to pay for recipients.  Ponzi schemes do -- they rely on doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants.  It is this ultimately unsustainable requirement of people making payments that causes all Ponzi Schemes eventually to fail.

Finally, with Social Security, there does NOT have to be precisely the same number of workers and beneficiaries at a given time--there just needs to be a fairly stable relationship between the two.  As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

No. 3: Social Security adds to the deficit.

Not True.  Can't happen under current law.

By law, Social Security funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.  If Social Security income is insufficient to pay beneficiaries, benefits may have to be reduced, but that's all.

Unless, of course, Congress chooses to use general funds to pay Social Security benefits.  This could happen, but is not clear that it ever will happen.  But even were that to happen, whether it causes a "deficit" or not will depend upon the income into the general fund (i.e., taxes) and the amount of other expenses for the general fund.  In other words, why and how a Federal Budget deficit occurs is complication.  So there are all sorts of things that can be done in the Federal Budget that could make utilization of those funds to pay Social Security irrelevant to any deficit.

We think that discussing the federal deficit with regard to Social Security is far more complicated than those who say it will happen (thereby increasing the deficit) are willing to admit, or address.  In other words, we think it is simply a way to use a political hot topic (the federal deficit) to critique and thereby justify changing Social Security.

 To read about more about the Federal Budget

No. 4: Social Security is going bankrupt

Ummm, no, it's not.

Even in the unlikely event that nothing changes and the program's entire surplus runs out in 2036, as projected, checks would keep coming. Payroll taxes at current rates would cover 77 percent of all the future benefits promised. That's true for young and old alike, and includes inflation adjustments.

And up until 2023, Social Security will be able to pay out all scheduled benefits without any changes.  Why?  Because the reality is that by 2023, there will be a  $4.3 trillion surplus in Social Security  .And after 2037, it could still pay out 75% of scheduled benefits, without any changes. The program started preparing for the Baby Boomers retirement decades ago.2

We think that those who insist Social Security is broke are probably doing so, because they want to break it themselves (like, maybe, privatize it).

No. 5: We have to raise the retirement age because people are living longer.

There are two parts to this: (a) assertion that people are living longer, and (b) the assertion that this requires increasing the retirement age, because it implies that each retiree is likely to draw more money from Social Security than in the past.

But the first part is NOT true, so the second part is invalid.  People are NOT living longer.

Follow along with us here, because it gets a smidge complicated.  The myth is based on semantics, specifically the statement that "people are living longer."  Now, it is TRUE that the average life expectancy has gone up.  But you need to know that "average life expectancy" is calculated FROM birth.  In other words, it is a number that says, on the average, how long people live FROM birth.  The reason that number has gone up is that fewer people die as children than they did 70 years ago.  AND, just so you know, it is the case that life expectancy from birth has only gone up around 2 years for those at the bottom half of the income brackets, while those at the top have gone up a little over 6 years.

Retirees are living about the same amount of time as they did 70 years ago.  In other words, "life expectancy" from age of retirement (around 65) hasn't gone up appreciably.

We think it is possible that those intent on cutting Social Security make this false statement, because raising the retirement age is the same as an across-the-board benefit cut.

No. 6: People would be better off they kept their Social Security taxes in their own private investment account.

Well, this really depends on how much they could actually put in such an account.  And for most it would require faithfully putting that money aside, every year of their working life, in a mix of stocks and bonds, without ever skipping a year, drawing on their nest egg or selling when the market dropped.  AND it would depend on whether, or not, those investments actually held value (especially at retirement age).

Very probably easier said than done.  A person would need to invest far more than one might expect to match the benefits Social Security pays. For example, take a 65-year-old couple with a single breadwinner who earned the average wage. At retirement, they'd currently get about $2,170 a month, plus inflation adjustments, for life, the Urban Institute reports.  To equal that sum in private savings, they'd need to have about $580,000, and the money might last only 30 years.

We think this is simply a misleading assertion made by those who want to privatize Social Security.  We're not mind readers, so we can say WHY they pitch for privatization, but we do think that Wall Street and bankers could benefit, so we wonder if that's not an underlying source for this idea.

No. 7: You should get out of Social Security the amount you put in.

No. Social Security is not an individual investment program (see Myth No. 6).

Current taxes (FICA) pay for the earlier generation of retirees. Current workers are paying for current retirees. The total amount of a person's benefit depends on how much that earned, whether he, or she gets get a spousal benefit, and age at retirement and how long the person lives.

No. 8: The Social Security Trust Fund has been raided and is full of IOUs

No, the Social Security Trust Fund isn't full of IOUs.

It is full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.

The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market--which would have been disastrous--but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.

It is true that buying those Treasury Bonds put money into the general fund that belongs to the Social Security Trust Fund, and paying it back to the Social Security Trust Fund is part of the Federal Debt.  BUT remember that was money the Federal government used to pay for other things, and that is the true source of possible deficit, not the repayment of the bonds.  Cutting taxes, while borrowing to meet expenses has been a major contributor to deficits.

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