Social Security Myths

One of the things that seems to derail political discussions quite often is Social Security myths. It seems like everyone is confused, so I’d like to point out some of the fallacies and misconceptions.

1. Social Security is saving your money and will pay you out of the returns. This is just false, and it underlays most of the other issues. Social Security was designed as a pay-go system. It had to be, as it has always been self funded. People who retire are paid out of the money stream of people paying in to the system. The money you pay in Social Security taxes mostly goes right back out the door to pay current retirees. That’s not a bug. That’s a feature.
2. My contributions go into the Social Security Trust Fund. Also false. As noted above, your money is not being saved. Is there a trust fund? The answer is yes, but that trust fund is not a pot of savings, it is simply a buffer of money from periods when the unretired were paying in more than what the retired are taking out. In fact, Social Security was designed to have no net savings. That buffer is expected to be paid out, otherwise Social Security taxes would be lowered.
3. I could get better returns if I invested my Social Security myself. As noted above, the money is not being saved anyway. What does accumulate in the trust fund is invested in what is globally considered the safest investment: US treasuries. It needs to be safe, because that money is expected to be paid out eventually. The return on the trust fund is not a way to fund Social Security payments. It is simply a bonus when there is a surplus, as the surplus can earn some form of return before it is distributed. Now, if you weren’t paying Social Security taxes, it might be possible to earn more on the same savings, the same way you might be able to earn more with a defined contribution plan than a defined benefit plan. But defined benefit plans don’t run out of money, which leads to the next topic.
4. The Social Security Trust Fund is going to run out of money and I will get nothing. Again, there is no trust fund. Social Security is primarily funded out of ongoing payroll taxes. The one grain of truth in this is that those payroll taxes are insufficient to pay all of the benefits being accrued. This is not a secret. If you read your Social Security statement, they say that they can only guarantee 70% of the benefits. This problem could be solved by increasing the current payments into Social Security. The two most common proposals are to eliminate the cap, i.e. tax incomes greater than $137,700; or simply increase the tax. Currently social security collects 6% from employers and 6% from employees. You can do the math yourself, divide 6% by 0.7. If we increased the tax from 6% to 8.5%, then Social Security would be solvent. That’s all it would take. This would not be very radical. In the 1980’s Reagan doubled the tax rate from 3% to 6% because Social Security was going broke, and the difference was having to be taken out of the federal budget to avoid benefit cuts. One should also expect that this would happen again. That is, if Social Security needed to reduce benefits, money would simply be taken out of other taxes. Consequently, the real choice is which taxes to increase. Do we increase Social Security taxes to get more money in Social Security, or do we increase general taxes because money is being taken from them to pay for Social Security?
5. Congress has stolen money from Social Security. Congress is very good at bad accounting, and they have often used the current Social Security surplus to make the federal budget outlays look better than they are and justify either more spending or more tax cuts (which are more spending). But that is not stealing. What is often used to illustrate Congress stealing from Social Security is actually payments to beneficiaries. Using that criterion, you’re stealing money from your bank account every time you write a check.
6. Social Security is not an entitlement. I paid for my benefits. This has elements of truth, but it should not be used as a bludgeon. As noted previously, payments into Social Security are not a savings program. Based on your payments into the system you are entitled to ongoing payments once you reach the required age. And this is a good deal. On average, most people get more in Social Security payments than they paid in. I’m sure you can find plenty of contradictions to that statement, but they’re playing games with the statistics or simply failing at math. One must also note that Social Security payments are not flat. A person who earned $100,000 annually will not get double the payment of someone who earned $50,000 annually. It will probably be closer to 50%. That’s why I used the qualifier ‘on average’. In general, once you’ve gone 15 years on Social Security, you’re in the black.
7. Social Security is a Ponzi scheme. This is not true, although there are similarities. In a Ponzi scheme, one depends on an increasing number of new people paying in to support the previous people. Eventually it maxes out. Social Security does rely on an increasing population. It expects more people to be paying in than are taking out. Otherwise, as long as the population is working, money will be coming in to the system. The tax rate can be varied to adjust for this, but that’s actually a complicated actuarial calculation. Nevertheless, that is different than a Ponzi scheme.
8. The federal government is just incompetent with my money. Actually, the system has worked for years. It is well thought out. The problems it is having now are mostly the result of the uncertainty of forecasting (population growth has not gone as expected), and the resistance to raise taxes in Congress.

Some of you may be getting angry at this list. You may be asking yourself, where are his references? This is a good question, but it is also a cop out. I am not going to do your research for you. You can go to ssa.gov and find most of this out on your own with minimal effort. You might learn some other things along the way. Have fun.