The Myths of Social Security

My wife recently expressed anger about something posted on Facebook relative to Social Security and our "thieving politicians." I read it and explained that most of what had been written was false. The trouble is that those inaccurate statements are widely believed among Americans today.

In my view, the Social Security system is sustained by a system of myths and evidentiary short-term results that are extrapolated as sustainable over the long-term. I will explain that jargon jumble later. I believe that the Social Security system would enjoy far less support among the general public if understanding of the system were not founded in untrue or partially true myths. Interestingly, most of the myths are believed by both supporters and opponents of the system. Consider these:

Myth: I have a Social Security account.
Debunk: No individual Social Security accounts exist. In Helvering v. Davis (1937), the Supreme Court ruled, "The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way."

Still too technical? To put it bluntly, none of the Social Security taxes you have paid are yours. Your contributions do not go into an account in your name or any individual's name. They go into a single gigantic holding fund that is accounted for separately from the rest of the U.S. Government's budget. (This Just Facts website is not too bad on discussing how the system really works.)

Myth: I have a right to Social Security benefits.
Debunk: It turns out that no one actually has any right to Social Security benefits, regardless of how much they have paid into the system. In Flemming v. Nestor (1960), the Supreme Court ruled that no one has any contractual right to Social Security benefits and that our politicians can change or even eliminate benefits at any time. Benefits are subject to political whims rather than contract law.

Myth: Social Security would be fine if our politicians hadn't raided our Social Security savings.
Debunk: As Just Facts explains, any amount the Social Security Administration receives in excess of its current obligations must be loaned to the federal government by law. The program was designed this way from the beginning.

There was never a plan to hold a huge pile of contributions in something like Uncle Scrooge's money bin. Excess funds are "invested"* in government bonds because they were deemed to be the safest instrument. Remember that the law was passed in 1935, shortly after the 1929 stock market crash and during the Great Depression, so any instrument with any kind of risk was strictly out. By law the government must repay the loans with interest. It has never yet failed to do so. Of course, it has often incurred debt to make the payment.

*Bonus lesson: Whenever someone uses the word "invest" or any of its synonyms or derivatives in a political manner, it means spending more money on government programs. It's code for unpopular phrases like "tax increase" and "pork barrel spending." 

In essence, everything workers pay into the system today goes to pay benefits to today's beneficiaries. Low interest rate government bonds are purchased with any contributions in excess of benefits paid. Taxpayers (hey, that's us) are on the hook to repay the bonds with interest. When today's workers retire, future workers are supposed to pay enough into the system to cover the benefits paid to the beneficiaries of that day. (See my March 2012 post on why this is a problem.)

Myth: If I retire at the average age and live an average lifespan, I can expect to get back about as much as I pay into the system plus moderate interest.
Debunk: This is somewhat complex. The statement is still true for some people, but not for the average worker. As of 2011, average workers can expect to receive less than they paid into the system. In some cases, quite a bit less. The charts and tables in this Urban Institute publication paint a decent picture of how it actually works.

Humorously (although, I don't think he meant it as such), Dan Kadlec suggests in this August 2012 Time article that you should take actions to extend your life so that you can be sure to collect at least as much in Social Security benefits as you paid into the system. As the character Manny says in Ice Age 4 (one of the many sequel laden animation franchises), "It's the spiteful ones that live the longest."

While Social Security is a bad deal for most of today's workers, most could plan to collect far more in Medicare benefits than they pay in Medicare taxes. Of course, that system's not sustainable. So you probably shouldn't plan on it.

Myth: The Social Security system is broke or soon will be.
Debunk: The government long collected more in Social Security taxes than it paid out. It has now hit the point where that is no longer the case. Unless some change is made, it is estimated that the system will no longer be able to fully meet its obligations beginning in 2033. That doesn't mean that it will be broke. It could afford to pay out about 75% of promised benefits for many years after that. Various combinations of benefit reductions and tax increases have been offered as potential solutions.

Myth: Although the Social Security system will go through a period of much higher payouts than revenue collections, it will once again be on sound footing as soon as the Baby Boomers finish working their way through the system.
Debunk: Although this might be technically true, it cannot work that way in reality because Social Security doesn't exist in a vacuum. The amount of debt the government would have to incur to pay full benefits until after the Baby Boomers die out would put the country so deep in hock that just paying the interest (like having a huge interest-only mortgage payment) would swamp the government (and likely wreck the economy).

Reality vs. Myth
There are many more Social Security myths that are widely accepted. The few I have presented are among the most common. If most workers today understood that:

• Nothing they pay into Social Security is theirs (either now or in the future)
• They have no contractual right to Social Security benefits
• There won't be enough future workers to support future retirees
• They will likely pay more into the system than they will receive in benefits
• The benefits they plan to receive must be trimmed and the taxes they pay must be increased to keep the system functional

it is likely that support for the system would drop off dramatically. No one willingly invests in something on which they know they will lose money. On the other hand, the system isn't in as dire of financial shape as some believe it to be. My debunk comments are too brief to be completely accurate. But they are far more accurate than the myths they debunk. Grasping the realities of Social Security may leave some feeling relieved. Others will be more angry than they were.

The description of Social Security as a Ponzi scheme is at least somewhat apt. That is, it depends on a continual supply of new contributors to pay off earlier contributors. The difference is that Social Security is not fraudulent. The government has been completely up front about the matter, although, Americans' perception is otherwise. At the time the system was designed, few thought much about what would happen if birth rates declined and life spans increased in the future, as has been happening for more than a generation.

People believe in Social Security today partly because it has successfully provided benefits for two generations of retirees. When it comes to lifespans, however, this is a short-term payout, similar to the way Ponzi schemes work. Given current birth rates, the system is unsustainable in the long term. We are rapidly approaching the point where there won't be enough revenue from new contributors to pay off older contributors.

Although the Social Security Administration is quite forthcoming about the fact that Social Security was never meant to be any retiree's sole source of retirement income, it is well known that it is the only retirement plan many workers have. Unsurprisingly, this is particularly true of lower earning workers. Due to earning capacity and/or life choices, these workers would never be able to retire without Social Security or something to replace that planned revenue stream. Any future solution to the program's woes would have to address the situation of those with no retirement savings.

The chief myth of Social Security—that people 'own' their contributions—makes reducing benefits a hard sell politically. When an article recently appeared in the Wall Street Journal arguing for cutting all or most Social Security benefits for the top quarter of earners, one reader responded that in that case it would only be fair to refund these people their contributions. This makes a salient emotional point, but it fails to appreciate the facts that no one owns their contributions and that such a refund would constitute a greater benefit than they would otherwise receive if benefits were not cut.

Our Social Security system has long presented significant political problems, many of them based in myths that politicians are loath to expose. Exploding myths in a way that resonates with the public would destroy public support for the system. But the system is on its way to a publicly unacceptable condition anyway if it isn't revamped to some degree.

Unfortunately, all of the potentially effective solutions for these problems are politically painful. Politicians that go seriously after such solutions tend to get punished. So politicians are more likely to let things go along as they are until matters get so bad that the public broadly demands action. Another common approach is to use class warfare to target the least politically powerful segment in order to pass various changes.

This nation needs a serious discussion about Social Security. But such conversations need to be guided by realities and not by myths.