Top Ten Myths About Social Security

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Commentary

Top 10 Myths About Social SecurityBy Mark Miller | 07-12-12 | 06:00 AM | Email Article

Social Security is going bankrupt. It's a Ponzi scheme. The program's trust fund

contains nothing but a bunch of worthless IOUs.

Those are just a few of the comments we hear frequently from journalists,politicians, and policymakers about Social Security. But they're all false--and that'sa big problem.

Social Security i s one of our most important linchpins of retirement security, yetdiscussion and analysis of the program and its future are remarkably fact-free--asituation that isn't likely to improve during this year's election season.

So, let's dispel the fog. Here's my list of the top 10 myths about SocialSecurity--along with the facts.

Myth 1: Social Security is going bankrupt.A quick Google search turns up plenty of supporters for this myth--none moreprominent than President George W. Bush, who floated it in his 2005 State of theUnion address, as he campaigned to replace Social Security with privateinvestment accounts. "The system . . . on its current path, is headed towardbankruptcy," he said. "And so we must join together to strengthen and save SocialSecurity."

Facts : The word "bankruptcy" is meaningless in the context of a federalgovernment program. Nancy Altman, an advocate for Social Security and historianof the program, notes in her book "The Battle for Social Security: From FDR'sVision To Bush's Gamble" that "As long as the federal government has, under theConstitution, 'Power to Lay and collect Taxes' and the authority to issue and sellTreasury bonds, it and its programs will not go bankrupt."

Social Security does face a long-term financial challenge. In April, the program'strustees reported acceleration of the drawdown of Social Security's vast trust fundreserves. The trust funds of the retirement and disability programs are on a course

to be exhausted in 2033 as baby boomer retirements accelerate--three yearssooner than projected a year ago.

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But the trustees also noted that after 2033, there will still be sufficient assets frompayroll taxes to pay about 75% of promised benefits. Although that isn't a fair oracceptable outcome, it's still a fact that Social Security will have substantial assetseven after 2033. A far more likely outcome: Congress will take action to correctthe imbalance (see Myth No. 10, below).

Discussing the trustee report, Social Security commissioner Michael Astrue went

out of his way to emphasize that the program is far from broke. Social Securitytook in $69 billion more than it spent last year, when you include tax receipts andinterest on bonds held in the Social Security Trust Fund . The SSTF had reserves of $2.7 trillion last year.

Myth 2: Social Security is a key driver of the national deficit.Facts : Social Security lends money to the federal government, not the other wayaround. It was designed as a pay-as-you-go program, and every penny it receivesis credited to the SSTF. Social Security is prohibited by law from borrowing, so itneeds some level of reserve to pay benefits whenever cash on hand runs short. It

so happens that those reserves are at a historical h igh point right now as a resultof reforms made in 1983 aimed at funding the anticipated retirement of the babyboom generation.

The surplus trust funds are lent via a special type of Treasury note to the federalgovernment, which uses the funds to finance ongoing operations. But SocialSecurity is no more a driver of the debt than China. Both are lenders to agovernment that chooses to spend significantly more than it levies in taxes--andboth have the right to be paid back what they are owed.

Jeffrey Brown, a professor at the University of Illinois College of Business anddirector of the univer sity's Center for Business & Public Policy, offers more on thedebate about Social Security's role in the deficit in this blog post.

Myth 3: The Social Security Trust Fund is nothing but a bunch of paperIOUs. It doesn't really exist.Facts : This is a favorite argument of Social Security conspiracy theorists, whoargue that the government has raided Social Security to fund other programs, andthat the money will never be seen again. President Bush in effect amplified themyth during his 2005 privatization campaign by paying a visit to a file cabinet inWest Virginia where the aforementioned Treasury notes are kept.


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The 2012 Trustee report confirms--yet again--that the surplus funds are investedin "special issue Treasury bonds" and that they are "full faith and credit"obligations of the government. (Click here to see the relevant excerpt lifteddirectly from the Trustee report.)

Myth 4: Social Security is a Ponzi scheme.Facts : Social Security and a Ponzi scheme are as different as night and day.

The Merriam-Webster Dictionary defines a Ponzi scheme as: "An investmentswindle in which some early investors are paid off with money put up by later onesin order to encourage more and bigger risks."

The perpetrators of Ponzi schemes lie to their investors; Social Security is an openand transparent system. Its trustees send a very detailed actuarial report toCongress that projects the program's finances 75 years into the future. Thetrustees include three cabinet secretaries, two independent appointees (oneDemocrat, one Republican), and the commissioner of the Social Securi tyAdministration.

It's irresponsible to suggest that the program is an unethical fraud or swindle.What's more, Social Security has never missed paying a dime's worth of benefits,and it will be there 25, 30, and 75 years from now.

Myth 5: We're all living longer, so we should raise the retirement age.Facts : Everyone isn't living longer. The country's longevity gains aren't spreadevenly across the population because of differences in health care, li festyle, andother factors. For example, in the past three decades, men in the top half of income distribution enjoyed a six-year gain in li fe expectancy from age 65, whilelower-paid men had a 1.3-year gain. Paul Krugman, the Nobel Prize-winningeconomist, sums up the argument behind this myth: "(It basically says) that

janitors should be forced to work longer because these days corporate lawyers liveto a ripe old age."

The longevity argument also masks the fact that a higher retirement age results ina substantial across-the-board benefit cut--no matter when you r etire--becauseit raises the bar on how long you need to wait to receive a full benefit.


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Myth 6: We need to "fix" Social Security in order to save it for youngpeople when they retire.Facts : The proposed fixes involve benefit cuts that would fall most heavily on thechildren and grandchildren of today's seniors.

Former Senator Alan Simpson, who co-chaired the Simpson-Bowles deficitreduction commission, has argued that he's trying to save the future of youngpeople who "are going to get gutted" unless the r eforms he recommends areadopted.

Simpson-Bowles relies on three types of benefit cuts for 63% of its proposedsolution to Social Security's long-range imbalance. These include lower benefits forpeople with higher-than-median lifetime earnings, higher retirement ages, andsmaller cost-of-living-adjustments, or COLAs.

The cuts would be gradual and cumulative, with the largest cuts coming in the out

years. An analysis of Simpson-Bowles by the National Academy of Social Insurance


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concludes that most of its cuts would fall on people many decades away fromretirement.

(Note: Simpson-Bowles is one of many Social Security reform plans that have beenfloated, but I reference i t throughout this analysis because the commission wascreated by President Obama and it's what passes for centrist, bipartisancompromise in Washington these days.)

Myth 7: Benefit cuts would be phased in; today's seniors won't be affected.Facts : It's true that Social Security benefit cuts usually are phased in graduallyover many years, giving beneficiaries plenty of time to plan and adjust. But there'sa major exception this time around: a proposed change in Social Security's COLAformula.

COLAs are calculated using a formula tied to the Consumer Price Index. Simpson-Bowles proposes to substitute an experimental index maintained by the U.S.Bureau of Labor Statistics called the chained CPI. The chained index reflectschanges that consumers make in their purchasing across dissimilar i tems inresponse to price changes; the theory is that a spike in gasoline prices will promptconsumers to spend less on fuel and perhaps more on food.

A chained CPI would affect today's seniors. The chief actuary of the Social SecurityAdministration estimates that the chained CPI will rise about 0.3 percentage pointsless per year than the CPI. With compounding, that translates to huge lifetimebenefit cuts. The National Women's Law Center calculates that the averagebeneficiary filing for benefits at age 65 would lose $8,100 by age 80, and $19,245by age 90.

As an illustration, NWLC calculated the lost benefits into the number of weeks of groceries lost annually for a single elderly woman starting at 65 with a monthlybenefit of $1,100: six weeks at age 70; 13 weeks at age 80; and 20 weeks at age90.

Myth 8: Social Security pays generous benefits.Facts : Benefits are modest, and they're shrinking. The average retirement benefitthis year is $14,800--about $3,300 above the the U.S. Census Bureau's povertythreshold for an individual.

Looked at another way, Social Security replaces 41% of pre-retirement income forthe average worker. That's scheduled to fall to just 29% by 2030, the result of


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higher retirement ages already in place, taxes on benefits, and expected higherMedicare Part B premiums (which are deducted from benefits).

Higher-income seniors have other sources of income, of course. But the financialcrisis and eroding middle-class incomes during the past decade mean SocialSecurity will be the life raft for a very large segment of seniors in the years ahead.

Just 14% report they expect to have enough money to live comfortably inretirement, according to the Employee Benefit Research Institute. Sixty percent of households tell the EBRI that the total value of their savings and investments--excluding their homes--is less than $25,000.

Instead of cutting Social Security, we should be looking for ways to boost benefits.Some ideas: increase benefits for the very old, who are most likely to haveexhausted their other resources and can't work; boost survivor benefits forwidows; adopt a more generous COLA that more accurately reflects inflation facedby seniors, such as medical expenses (see the experimental BLS CPI-E).

Myth 9: Means testing can save Social Security.This one sounds so reasonable and painless--which is why politicians love it. Thewealthy don't really need Social Security, so let's cut their benefits. Supporterspoint to Simpson-Bowles for support of this idea, but S impson-Bowles doesn'tpropose real means testing, which would require taking benefits away from peoplewho have other available sources of income or resources.

Instead, Simpson Bowles looks at a senior's lifetime earning history and changesthe formulas used to determine benefi ts. Those cuts would hit a wide swatch of beneficiaries: According to NASI, by 2070, 94% of beneficiar ies would experience

benefit cuts as a result of this provision, including 29% who would have major cutsof 20% or more. Eighty percent of beneficiaries in the lowest quintile of householdincome would experience cuts.

Anyway, real means testing wouldn't produce much in the way of savings becausethe program's benefits don't mainly go to the rich. Despite all the ta lk we hearabout Warren Buffett's Social Security checks, only 2% of benefits go to seniorswith non-Social Security annual income of more than $100,000.

Here's another problem with means testing. The phrase implies measuring seniors'

financial adequacy to determine eligibility for welfare--that is, a test of inadequatemeans or poverty--not wealth. Social Security's retirement and disability programs


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aren't welfare at all; they are social insurance programs that we all pay into inreturn for a promise that benefits will be available when they're needed. Breakingthat promise to wealthier Americans would be a breach of faith.

Myth 10: Social Security costs are exploding, so we need to cut benefits.Facts : Retirement program outlays are rising as the baby boom generation retires,but the program remains affordable in the context of our huge economy. The

Social Security trustees report indicates that the combined retirement, disability,and survivor program outlays equaled 4.9% of gross domestic product in 2011.That will rise to 6.4% in 2035 before falling and leveling off at 6.0%.

What to do about that shortfall projected for 2033? Rather than cut benefits, acombination of gradual tax increases would close the imbalance and even createsufficient surpluses to boost benefits. For example, a coalition of Social Securityadvocates this month proposed several changes that would close the gap; theSocial Security Administration offers a wider list of options--and the percentagesby which they would close the gap--here:

Gradually eliminate the cap on payroll taxes (currently $110,000) over 10years (71%)Gradually raise payroll contribution rates for employers and employees from6.2% to 7.2% over 20 years (53%)Subject worker contributions to 401(k)s to payroll tax (8%)

Higher taxes might sound like tilting at windmills in the current political climate,but the idea enjoys substantial public support across political party l ines and agegroups.

For example, a 2010 survey for the National Committee to Protect Social Securityand Medicare found 50% of Americans support removing the wage cap--with only2- or 3-percentage-point differences between Democrats, Republicans, andindependents. Upper-income Americans--who would pay the higher taxes--werethe income group most likely to support removing the cap.

Mark Miller is a Morningstar columnist and author of The Hard Times Guide toRetirement Security: Practical Strategies for Money, Work and Living. The viewsexpressed in this article do not necessarily reflect the views of Morningstar.com .

Morningstar columnist Mark Miller writes about trends in retirement, aging, and the economy. Heis the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money,


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Work and Living, and writes a syndicated column for Reuters. Mark blogs atRetirementRevised.com Twitter: @retirerevised.


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Top Ten Myths About Social Security