5 myths about Social Security
System reform is a hotbed of controversy. But to move ahead, we've got
to identify the myths, toss them aside and refocus on realities.
By Liz Pulliam Weston
You can't write about Social Security and not get flooded with angry
e-mails representing all points of the political spectrum. From those
who dub it "Socialist Insecurity" to those who hold their checks to be
an inalienable right, people often have passionate and firmly held
beliefs about the system.
Unfortunately, sometimes those beliefs are based on myths. In the
interest of more honest debate, let's review some of these legends.
Looking for the cash hoard
Myth No.1: There is no Social Security trust fund. You may have heard
this assertion so often that you'll be surprised to learn that there
really IS a Social Security trust fund that collects our payroll taxes
and invests the surplus. It's called the Old-Age and Survivors Insurance
and Disability Insurance Trust Funds.
What isn't in the trust fund is a big hoard of cash.
Three-quarters of the money that's collected in Social Security taxes
goes right out the door again in the form of benefits to Social Security
recipients. The surplus that isn't needed to pay benefits is loaned to
the federal government to pay for other programs.
In return for this loan, the trust fund gets IOUs in the form of
special-issue, interest-paying Treasury bonds. The interest isn't paid
in cash, however; the Treasury issues the fund additional bonds for the
interest amount. Last year, the fund was credited with $80 billion in
interest; the total value of the securities is about $1.5 trillion.
Critics often deride these bonds as "a bookkeeping entry" or a fiction,
but they're real obligations of the U.S. government, said Steve Goss,
Social Security's chief actuary. In the past, they've been cashed in
when Social Security or its sister program, Medicare, temporarily ran
low on funds. The last time was in the early 1980s.
"They're backed by the full faith and credit of the U.S. government,"
Goss said. "They're every bit as real . . . as any savings bond or
Treasury bond any individual might hold in society."
The problem, of course, is that the government now owes the trust fund
so much money -- and relies on its surplus so heavily -- that real
problems will be created when it comes time to cash in those IOUs. Uncle
Sam is going to need to find another source of income to replace the
surplus (or cut spending, or borrow money from somewhere else), plus
come up with cash to pay the bonds it's already issued.
Myth No.2: Congress doesn't pay into Social Security, so it doesn't care
about fixing the crisis. The idea that U.S. lawmakers don't pay into
Social Security is 20 years out of date. Before 1984, U.S.
representatives and senators -- like all other federal employees --
weren't covered by Social Security and didn't pay into the system.
Congress passed a law in 1983, which took effect the next year,
requiring all its members (and all federal employees hired after that
year) to participate in the system.
This myth is often accompanied by the assertion that Congress
participates in a private pension scheme that pays them their salaries
for the rest of their lives. In fact, the Civil Service Retirement
System, which covered federal employees in earlier decades, was closed
to new participants after 1983. The pensions available under this old
system depend on the federal worker's pay and tenure with the
government, but by law can't exceed 80% of the final year's pay.
Benefits paid under the system are reduced by the amount of Social
Security the participant receives.
The reason Congress hasn't fixed the Social Security crisis is politics.
The most likely solutions -- raising taxes, cutting benefits,
establishing private accounts or some combination of the three -- all
face strong opposition. In addition, the people currently receiving
benefits are represented by one of the strongest, most
politically-connected lobbies in existence: AARP. The 20-something
workers who likely will pay the cost for congressional inaction don't
have nearly the same clout.
Life expectancy and disappearing assets
Myth No.3: Age 65 was picked as the retirement age because when Social
Security was started in the 1930s, most people were dead by then. The
average life expectancy for a baby girl born in 1935 was about 63 years.
For a baby boy, it was about 59 years.
But those statistics reflect the higher infant and child mortality rates
of the times. If you survived childhood, you had a good shot of living
beyond retirement age. Men who lived to age 30 in 1935 could expect to
last another 37 years. Women at 30 had a 40-year average life expectancy.
If you actually reached retirement age, your prospects for a relatively
long retirement were good. Men who were 65 in 1935 could expect to live
another 12 years, while women faced an average 13 more years. (Today,
men of the same age can expect to live another 16 years, and women 19
years.)
In fact, about half of the 30 state pension plans that existed in 1935,
and many of the private pension plans, used 65 as a retirement age. Most
of the others used age 70. Social Security's creators thought 65 was the
more reasonable age and believed the system could be self-sustaining if
they chose that age.
Myth No.4: Social Security will run out of money in 2042. Social
Security will still be receiving payroll taxes from workers in 2042.
What may have disappeared by then are the assets in the Social Security
trust fund.
Even that isn't cast in stone, however. The Congressional Budget Office
in June projected that the trust fund wouldn't dry up until 10 years
later, in 2052. The CBO used different assumptions than those used by
the Social Security Administration, projecting faster growth in worker
earnings, higher interest rates and lower inflation.
Here's how the Social Security Administration projects the timeline:
* In 2018, Social Security will begin paying out more than it takes
in. For the first time, it will have to use the interest being paid on
the securities it holds in order to meet its obligations.
* In 2028, Social Security would have to start redeeming the
securities themselves.
* By 2042, Social Security would have cashed in the last security,
and the system would have enough revenue to pay out only 73% of promised
benefits. That percentage would drop over time if Congress failed to act.
Demographics and add-ons
Myth No.5: Social Security wouldn't be having problems if foreigners
weren't able to claim Social Security benefits. The number of checks
sent overseas in 2002 totaled 404,640 -- a tiny fraction of the 53
million or so checks Social Security issues annually. Many of those
folks may well be Americans who retired abroad. Social Security doesn't
break down the overseas checks by citizenship.
In any case, foreign workers who live in the United States have to work
and pay taxes into the system for at least 10 years to qualify for
Social Security benefits, just as U.S. citizens do.
What will really hurt Social Security are two factors: demographics and
the scope of Americans who are covered.
In 1950, there were 16 workers for every person receiving Social
Security benefits. By 2015, there will be only three workers for each
beneficiary. Fifteen years after that, the ratio will be down to 2.2 to 1.
Even that demographic shift wouldn't be such a disaster if Social
Security hadn't expanded far beyond its original mandate of providing
retirement benefits for workers. About 30% of Social Security's total
benefits are paid to retirees' dependents and survivors and to disabled
workers.
Here's a summary of the add-ons over the years:
* In 1939, five years after Social Security began, Congress added
payments for the families of workers who died, and for retirees'
dependents (such as stay-at-home spouses).
* In 1956, Congress added disability benefits for workers.
* In 1974, Supplemental Security Income or SSI was established as a
welfare program for low-income seniors and people with disabilities.
* In 1965, Congress established Medicare to pay health-care costs
for seniors.
Of these add-ons, however, only the first two -- disability benefits and
payments to dependents, widows, orphans -- actually affect Social
Security's bottom line.
SSI benefits are paid out of the federal government's general revenues.
Medicare is paid for with its own tax and has its own trust fund.
(Medicare is in far worse shape than Social Security. Medicare's
trustees project insolvency in 2019, 23 years before the earliest date
Social Security is scheduled to run aground. Medicare has an unfunded
liability of $27.7 trillion over the next 75 years, while Social
Security's unfunded liability for the same period is $3.7 trillion. To
put this in perspective, the entire national debt is currently about $7
trillion.)
Like Medicare, the disability insurance program also has its own tax and
its own trust fund. But the disability fund's results are combined with
that of the retirement system when Social Security insolvency
projections are made, Goss said, and account for $700 billion of the
$3.7 trillion unfunded liability.
If the disabled, the dependent and the survivors were booted out of the
system, Social Security could pay for itself --assuming tax levels
remained the same.
"The system would be more than adequately funded," Goss said, "if only
retirees were receiving benefits."
That's not a solution Goss -- or anyone else who really thinks about it
-- could endorse. Even if it were morally viable, kicking out all the
widows, orphans, disabled and stay-at-home spouses is politically untenable.
So we're back to choosing from the same controversial list of options:
cutting benefits, raising taxes, privatizing some or all of the system.
What we choose, though, should be based on the realities of the system
-- not the myths.
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