Social Security Sense and Nonsense

October 7, 2010 | Alex Stone

Via Off the Charts Blog:

By Paul N. Van de Water

Here are the facts. Social Security is a well-run, fiscally responsible program. People earn retirement, survivors, and disability benefits by making payroll tax contributions during their working years. Those taxes and other revenues are deposited in the Social Security trust funds, and all benefits and administrative expenses are paid out of the trust funds. The amount that Social Security can spend is limited by its payroll tax income plus the balance in the trust funds.

The Social Security trustees — the official body charged with evaluating the program’s long-term finances — project that Social Security can pay 100 percent of promised benefits through 2037 and about three-quarters of scheduled benefits after that, even if Congress makes no changes in the program. Relatively modest changes would put the program on a sound financial footing for 75 years and beyond.

Nonetheless, some critics are attempting to undermine confidence in Social Security with wild and blatantly false accusations. They allege that the trust funds have been “raided” or disparage the trust funds as “funny money” or mere “IOUs.” Some even label Social Security a “Ponzi scheme” after the notorious 1920s swindler Charles Ponzi. All of these claims are nonsense.

Every year since 1984, Social Security has collected more in payroll taxes and other income than it pays in benefits and other expenses. (The authors of the 1983 Social Security reform law did this on purpose in order to help pre-fund some of the costs of the baby boomers’ retirement.) These surpluses are invested in U.S. Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard these securities as among the world’s very safest investments.

Investing the trust funds in Treasury securities is perfectly appropriate. The federal government borrows funds from Social Security to help finance its ongoing operations in the same way that consumers and businesses borrow money deposited in a bank to finance their spending. In neither case does this represent a “raid” on the funds. The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.

As far back as 1938, independent advisors to Social Security firmly endorsed the investment of Social Security surpluses in Treasury securities, saying that it does “not involve any misuse of these moneys or endanger the safety of these funds.”

Moreover, Social Security is the “polar opposite of a Ponzi scheme,” says the man who quite literally wrote the book about Ponzi’s famous scam, Boston University professor Mitchell Zuckoff. The Social Security Administration’s historian has a piece on this topic as well.

Unlike the frauds of Ponzi — and, more recently, Bernard Madoff — Social Security does not promise unrealistically large financial returns and does not require unsustainable increases in the number of participants to remain solvent. Instead, for the past 75 years it has provided a foundation that workers can build on for retirement as well as social insurance protection to families whose breadwinner dies and workers who become disabled.

Posted in A Fair Deal at Work, Retirement Security, Social Security

Comments

  1. Randy says:

    Great article. I talk to so many who think Social Security has essentially given its funds away or that it only got “IOUs.” As to the word Entitlement: how does this not apply to something that people paid into? I think Social Security is in quite a different position than some county thinking it’s “entitled” to federal funds for a new bridge.

    Another case of a “buzzword” being inserted into the nation’s consciousness by…? ( media, special interests ). These must be vigorously and consistently slapped down and refuted.

  2. wpkelpfroth says:

    A soothing article, but I just don’t see it.
    Up until the early 50s, there were something like 8-10 workers paying into the system for every retiree. Now there are about 3, trending to 2 workers for every recipient. This might be adequate for the next 30 years but what happens after that? What happens if the government of China stops buying the US Treasuries that support the Social Security program? I keep reading that US Treasuries are backed by the full faith and credit of the United States. Well, the pension systems of Greece, Spain, Ireland, Italy and Portugal are also backed by bonds with the full faith and credit of their nations, too. Other countries have defaulted on their bond obligations and it’s within the realm of possibility that the US will at some time. I would be buying Treasuries right now except that with a 1% coupon rate there won’t be a secondary market for them when I need to cash them out. I’m not the only one to see this.

    • The very fact that U.S. Treasuries are being sold at low interest rates tells you that investors don’t see a default anywhere on the horizon for the U.S. If they did, they’d demand higher rates. Apparently, you don’t see it as much of a risk either, because you yourself would buy them – except for that very same low rate. So that particular bucket doesn’t hold water.

      The number of workers per retiree doesn’t matter, period. What matters is whether Social Security can fund its obligations – and there is every indication it can. Every year, the Social Security Trustees project the program’s finances 75 years into the future. Doing so requires making numerous assumptions about economic growth, productivity, wages, fertility, longevity, immigration rates, and other factors. Three different scenarios are created, although often the projections from the Intermediate scenario are reported as certainties.

      The intermediate assumptions for 2010 project that the Trust Fund will to continue to grow until 2025. From 2025 to 2037, Social Security will draw on the Fund principal to finance the retirement of the baby boomers, as intended by the Reagan‐Greenspan plan. In 2037 the assets of the Trust Fund will be spent down and payroll taxes alone will cover 78% of benefits.

      If the Trust Fund is exhausted in 2037 as the Intermediate forecast projects, payroll taxes alone at the current level would cover benefits averaging $19,300 – about $1,600 more than today’s typical retiree receives after inflation. That’s because over time, wages go up a little faster than inflation because of gains in productivity – the amount a worker can produce in an hour’s work. By 2037, average wages after accounting for inflation are expected to rise from $43,000 in 2010 to $60,000. Typical retirement benefits are projected to increase from $17,676 to $24,700 annually.

      But the intermediate projections are just that – projection. Under the slightly different assumptions of the “Low Cost” scenario, the Trust Fund will never be depleted. In fact, it will begin growing again by the 2050s and continue growing through the rest of the century.

      You can spin “what if” scenarios if you’d like, – but at some point, you have to back them up with facts, Winslow. And these are the facts about Social Security. Take a look.

  3. Randy says:

    If the “government” defaulted on what it owes to Social Security, it can just eliminate the Defense and NASA Budgets to meet the obligation. Why should senior citizens take it on the chin because the country has mis-managed it’s tax revenues.

    Are we saying older folks get to live on cat food because we keep trying to be the world’s policemen primarily to defend oil and other interests abroad?

    Run the country primarily for the benefit of the majority, plain and simple, whatever that entails. Am I staking my entire retirement on Social Security income? Of course not.

  4. wpkelpfroth says:

    Good points, Randy, although you might want to remember that the Treasury bonds held by the SSA are not money per se; bonds redeemed for the current year are a demand on current federal tax revenue, and that could be a problem.
    One scenario for keeping the system more sustainable is to borrow a page from Alaska, where a board of directors for the oil wealth decide how much of a dividend goes back to the citizens each year. Much as CalPers invests in a wide range of securities, SSA could do the same, then payout the dividends. In good years the pensioners would do well. In bad years, not so well.

    • Yours is a solution in search of a problem that does not exist. The Social Security Trust Fund is secure, and runs at a surplus. The program is fully funded and financially sound for decades to come. And it provides a steady and reliable source of income for 1 in 6 Americans, a bedrock of our economic security.

  5. Winslow P. Kelpfroth says:

    You’re missing the point, Aaron. The return on funds in the system is adequate to pay benefits for the foreseeable future, but the source of the return is general revenue, and the source of most general revenue at the federal level is income tax. If a fund invests in seed and field prep, the return is in a crop. If a fund invests in timberland, the return is lumber and paper. These are examples of productive investments. They don’t always pay off; there’s always some risk of a return lower than you expected. By investing solely in treasuries, the social security fund invests only in the ability of the government to shake money out of wage earners at some future date. This is a non-productive investment, and I have problems with it from a moral perspective.

    • Winslow, an investment in U.S. Treasuries is an investment in the most productive resource of all: the American people.

      The reason those treasuries pay off is because our economy grows over time, thanks to the labor and effort of our workers. That labor and that growth is only possible because of the public structures we collectively manage through our government – like our schools, colleges and universities where our workforce is educated; like the TV, telephone and internet services that exists thanks to regulation by the FCC; like the binding contracts that are disputed and interpreted in our courts of law.

      If you really believe our government is a “non-productive investment”, ask yourself this: How easy is it to earn a decent living in a place with no government, like Somalia?

  6. Randy says:

    It’s interesting that we’re discussing this as the French protest changes in their system. I’m 62, still working and healthy. IF ( big if ) I can continue to find employment I plan to work several more years. Now I understand the argument from young people that if we seniors don’t retire it plugs up the career path for them. Two thoughts. First: many of us will continue to work if we’re allowed to — that is, if the courts don’t continue to support employers’ attempts to force us out in defiance of age discrimination laws. So working longer helps the retirement systems. ( and also if private interests aren’t allowed to act like pirates, flinging the economy into deep recessions while searching for short-term profits ).
    Second: the reason many of us are not ready to retire is because the whole game changed during our working lives. When I started working 401ks were unheard of. As time went on defined pensions were phased out, or underfunded ( again due to lack of proper regulation ). So many of us couldn’t even start investing in 401ks until late in life. Now any twentysomething with a brain knows they must save and invest for retirement. Of course, where can you get any kind of return is another matter.

    This whole aberration of having extremely low interest rates is having a big impact on many trying to either save during their final working years or trying to maintain some income from interest on savings. Why is the government having to keep interest rates so artificially low? In my view it’s primarily because capitalism must be regulated and managed. Without that it works well for a few gifted (amoral? ) people who learn how to exploit things for short-term gain and does nasty things to everyone else.

    It reminds me of real estate developers who come into a somewhat “virgin” area, build it out to the point that most humans wouldn’t want to live there — AND THEN THEY MOVE SOMEWHERE ELSE, not having to live with the results of their work.

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