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February 21, 2013

The Truth Abouth Social Security

Every day for the next 20 years, 10,000 baby boomers are expected to retire (According to the Pew Research Center).  Social Security is going to be on the forefront of most of these baby boomers’ minds.  The topic continues to be a cloudy one as many politicians have attempted to use the subject for their…

The Truth Abouth Social Security

ssEvery day for the next 20 years, 10,000 baby boomers are expected to retire (According to the Pew Research Center).  Social Security is going to be on the forefront of most of these baby boomers’ minds.  The topic continues to be a cloudy one as many politicians have attempted to use the subject for their own political agendas.  Discussed are some of the most common misunderstandings regarding Social Security.

Social Security will be gone by the time you need it…

Contrary to what some would like you to believe, the Social Security system is not about to collapse, at least not anytime soon.  It could, however, use a tune-up.

Without changes, the system will be able to pay around 75% of promised benefits after the year 2037.  Several proposals have been suggested on how to restore its financing to solid ground before this happens. The bipartisan Debt Reduction Task Force, headed by former Republican Sen. Pete Domenici of New Mexico and Democrat Alice Rivlin, a former director of the Congressional Budget Office, suggested several repairs that would have significant impact towards putting the trust fund back on track:

  • Gradually increase the full retirement age to reflect improvements in longevity.
  • Change to a different measure of inflation that grows more slowly to calculate cost-of-living increases.
  • Slightly reduce the growth in benefits for the top 25% of wage earners.
  • Boost the amount of earnings subject to the payroll tax over time.
  • Bring newly hired state and local government workers into the system.

These are just a few suggestions. An immediate 1.8% payroll tax hike or a 12% overall benefit cut could also work.  Implementing a combination of smaller benefit cuts and tax increases may be the most reasonable, not to mention politically palatable, way of restoring the system to a strong financial footing.

The Social Security’s coffers are empty…

The Social Security trust isn’t broke; however, it may not be sitting in something like cash like you or I would prefer.

To understand how the trust fund is invested, we need a quick history on how it operates.  The Old-Age and Survivors Insurance and the Disability Insurance trust funds collect payroll taxes and invest the surplus, when there is one.  Over the years, the surplus has been lent to the federal government to pay for other programs. In return, the trust fund received IOUs in the form of special-issue, interest-paying Treasury bonds. These bonds are backed by the full faith and credit of the U.S. government, just as regular Treasury’s are.  This is the way the trust fund has worked since its inception in 1939.

The big issue is that the Treasury will need to come up with the money to make good the bonds when it’s time to cash them in. This cash will likely have to come from: increased taxes, reductions in other spending or additional borrowing. Although the trust fund assets aren’t scheduled to be depleted for another 25+ years and there are ample assets currently in the fund, this need for the Treasury to redeem the bonds will put pressures on the federal budget well before 2037, according to the Social Security Administration’s board of trustees.

Congress doesn’t care about Social Security because its members don’t have to pay in…

Although they used to be exempt, all members of Congress, the President and Vice President, Federal judges, and most political appointees, are covered under the Social Security program since January 1984. They pay into the system just like everyone else. Thus all members of Congress, no matter how long they have been in office, have been paying into the Social Security system since January 1984.

Many also believe members of Congress participate in an extravagant, exclusive pension that guarantees 100% of their salaries for life, even if they serve only one term.  If that was the case, I think we could argue that we all picked the wrong profession.

The truth isn’t quite as grand. Congressional lawmakers contribute to, and benefit from, pension programs that cover all federal workers. Before 1984, Congress and other federal employees were covered by the Civil Service Retirement System. Workers and lawmakers hired since then are covered by the Federal Employees Retirement System.

The pensions under either system depend on the federal worker’s pay and how long he or she worked for the government (as like most pensions). By law, the pension can’t exceed 80% of the employee’s pay in his or her last year on the job and benefits paid under the system are reduced by the amount of Social Security a participant receives.

Eighty percent of final pay sounds pretty good, but the reality is that few federal workers, including lawmakers, will receive that much benefit. They simply won’t participate in the system long enough. The average monthly benefit payment for federal workers is a bit more than $2,200, according to the U.S. Office of Personnel Management.

The real reason Congress hasn’t been able to fix Social Security comes down to politics.  It’s not that they don’t want to right the ship; it’s that the most likely solutions all face strong opposition. Repairing Social Security is going to require some difficult and unpopular changes.

Illegal immigrants are draining the system…

Almost 4% of the entire US population is living here illegally, more than 11 million people.  While illegal immigrants have had a significant negative impact on schools and the health care system (among other things), their effect on Social Security has actually been quite positive. Illegal immigrants contribute billions of dollars a year, according to Social Security’s chief actuary, Stephen Goss. Over the past few decades, the net positive contribution totals somewhere between $120 billion and $240 billion.

Often times, undocumented workers will pay taxes into the system under stolen Social Security numbers but rarely try to collect benefits, since they’re not legally entitled to them. Of course, some apply illegally, fraudulently costing the system about $1 billion a year; still far less than what other illegal immigrants pay in.

To put this fraud into perspective: The Social Security system sends out $59 billion in checks every month, or more than $700 billion a year.  From 1937 (when the first payments were made) through 2009 the Social Security program has expended $11.3 trillion.

The problem facing Social Security isn’t illegals but the demographic aging of America.  We have fewer workers supporting more retirees and other beneficiaries.  According to the Social Security Administration, as of 2006 (the latest year for which data is available), there were 3.3 workers paying into Social Security for every person who received benefits.  By 2030, that ratio will be 2 to 1 due to the baby boomer generation retiring.  Contrast this with the ratio of Social Security workers vs beneficiaries in 1940, when the program began: 159.4 to 1.

Although Social Security faces some long-term problems, the program could be preserved for generations to come with some modest but politically difficult changes to benefits or taxes, or a combination of both.  It will be interesting to see if this current Congress steps up to the plate and really addresses the issues or just kick the can forward like so many before them.

– Written by Chris

Sources: Mike Piper, “Social Security Made Easy,” Liz Weston, “5 Myths About Social Security”, Shannon O’Brien, “How Does Social Security Work?”,



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