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5 Political Lies About Social Security – Understanding the Problems

By Michael Lewis

social security benefitsSocial Security was created on August 14, 1935 when President Franklin D. Roosevelt signed the Social Security Act and has been controversial since its beginning. A Cato Institute commentary compared Social Security to Otto von Bismarck’s welfare state in Germany, calling it a “Ponzi scheme, with new contributions used to pay off earlier ‘investors.'” The author of the Cato commentary, Marc Rudov, doubles down his criticism in a second American Thinker article, stating that “Social Security is irreversibly insolvent.” These negative statements assume that future beneficiaries will receive no benefits or will receive payments less than their contributions because their contributions are being used to support current beneficiaries.

But what are the facts?

Though viewed by many as “socialism,” Social Security was created to protect Americans from the ravages of old age, poverty, and unemployment. In 1937, 53,236 beneficiaries (primarily white males) received benefits of $1.3 million, while in 2012 56,758,185 retired workers, dependent family members and survivors, and disabled workers and their family members received $773.2 billion in benefits. Social Security payments represent the majority income for more than two-thirds of all retirees, with an average monthly benefit of $1,235 – hardly enough to live comfortably in today’s expensive society, yet it often means the difference between homelessness, hunger, and despair.

In 2035, an estimated 91 million Americans will be eligible for benefits. While the program’s funding and benefits mechanisms will be changed, it will remain the primary financial safety net for most citizens.

5 Big Lies About Social Security

Social Security has become a political football in recent years, the right decrying the program as the epitome of an entitled, socialized populace increasingly dependent upon government, with the left viewing the program as the “right and expectation of every American to a secure, healthy, and dignified retirement.”

Republicans have proposed privatizing the program, allowing (or requiring) each American to be responsible for his or her own investment success, while Democrats view such efforts as a backdoor attempt to gut the essence of the guaranteed benefits. Neither political party has shown a willingness to discard the rhetoric for facts, view the program without prejudice, or entertain amendments which conflict with their political ideologies. This environment and the continued over-the-top histrionics leaves the average American confused, conflicted, and concerned about the Social Security Program and its future.

Here are five of the most common political lies:

1. Social Security Is a Major Factor in the Nation’s Annual Deficit & Debt

Social Security payments do not add to the federal deficit or debt, despite conservative politicians’ claims. By law, Social Security is self-sustaining with its own funding – the payroll taxes collected from every working American – and cannot spend money (Social Security benefits) it doesn’t have. Paid payroll taxes are collected in either the Old-Age and Survivors Insurance (OASI) Trust Fund or the Disability Insurance (DI) Trust Fund, invested to earn interest, and used to make beneficiary payments.

In the early years of the program, there were more people paying into Social Security than people receiving benefits, naturally creating a surplus. That surplus was invested in the safest security in the world: debt securities issued by the United States. Conservative icon President Ronald Reagan stated explicitly in the 1984 Presidential debate, “Let’s lay it to rest once and for all…Social Security has nothing to do with the deficit. Social Security is totally funded by the payroll tax levied on employer and employee.”

social security card

2. Social Security Is Going Bankrupt

Vice presidential candidate Paul Ryan stated that “Medicare and Social Security are going bankrupt” in the 2012 vice presidential debate. However, his statement (and similar comments by conservative politicians) is untrue, as it ignores the program’s annual revenues. If we applied that same logic to the largest corporations in America, none of them would last a year.

For example, Apple had approximately $57 billion in short-term cash and investments at the end of September 2012. Annual expenses, excluding revenues, are approximately $87.4 billion. Congressman Ryan’s logic suggests that Apple would be bankrupt within eight months, and obviously, that doesn’t make sense. Social Security received more than $725 billion in taxes in 2012, a number that is likely to increase as more people return to work and income levels rise.

The Social Security program is analogous to a large lake that provides water to a community. The lake is created when excess rain is collected, the level of water moving up or down as rain falls or people draw the water. If the lake is fully drained (all of the surplus water from prior years are used up), the community’s water usage will be limited to the rainfall in that particular year. In real life, droughts force water use restrictions; in the Social Security system, continued deficits between payroll tax revenues (rain) and beneficiary payments (water usage) require lower beneficiary payments to the level where total payments equal total payroll taxes collected.

social security future

Source: Social Security Administration 2012 Trustees Report

In 2010, payments to Social Security beneficiaries exceeded receipts from payroll taxes for the first time, requiring the use of the surplus funds to maintain the promised level of benefits. If no changes are made, the surplus will be eliminated by 2033. At that time, if payroll taxes have not increased, benefits will be cut to match the revenues; the estimate today is that benefits will require a 25% reduction from existing rates. However, as Nobel Laureate economist Paul Krugman wrote in 2004, “It’s not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come.”

The Motley Fool agrees. A combination of increasing payroll taxes by reducing the cap on earned income, slightly raising the retirement age for payments to begin, and reducing the Cost of Living Adjustment (COLA) would fix the fund for the next 75 years. The total impact would be the equivalent of raising total payroll tax rates 1.6%  – the payroll tax rate in 2013 will be 12.4% split equally between employers and employees – or about the cost of annual unemployment insurance, the high-end Bush tax cuts, or one-fifth of the defense budget.

The Congressional Budget Office in July 2010 issued a comprehensive study analyzing 30 different options available to maintain the existing level of benefits and ensure future generations will receive similar benefits as previous generations, but Congress has yet to act on any of its recommendations.

3. Social Security Funds Have Been “Stolen” By the Government

Conservative politicians have asserted for years that the surplus payroll funds collected in previous years have been stolen by government officials and used to fund other federal programs without the knowledge or consent of taxpayers. At best, such statements represent a misunderstanding of security investments, as the surplus has been invested in special issue Treasury bonds backed by the full faith and credit of the United States Government.

These Treasury securities differ from other U.S. debt as follows:

  • The Principal Amount Does Not Fluctuate and Is Always Redeemable at Par. Corporate and other government bonds have a fixed interest rate and maturity. If the security is sold or redeemed before it matures, its market value may be more or less than the principal amount depending upon the movement of interest rates. For example, if interest rates have moved up since the bond was issued, the amount received on early redemption will be less than its face value – a bond with a face value of $1,000 with a 2.5% interest factor would provide its holder with $25 interest each year. If interest rates increased to 5%, the market value of the bond would fall to $500 – a 50% loss – since an investor could buy a new bond and earn 5%. Social Security Treasuries are guaranteed redeemable at face value even if they are redeemed early.
  • All of the Treasury Securities Purchased Earn Interest at the Same Rate of Medium-Term Treasury Securities. This is true even though the securities held by the OASDI Trust funds may be only one- or two-year terms. For the last three years, the Trust funds have earned more than 4% each year, considerably higher than the three-year record for the 100 best mutual funds ranked by U.S. News. In 2011, the average U.S. pension fund grew an estimated 1.4%, while the Social Security funds grew by 4.4% in the same year. Despite the downgrade in our country’s investment ratings, U.S. Treasuries, according to “Pensions & Investments,” remain “highly favored investments” and a “way to immunize risk” in a highly volatile equity market.

Critics often compare Social Security’s guaranteed monthly income with the projected benefits of private defined benefit or pension plans. According to Mercer, a global human resource and actuarial consulting firm, corporate pension plans have been underfunded by more than $689 billion. As a consequence, corporations are discarding defined benefit plans as quickly as possible from an estimated 112,000 plans in 1985, to less than 26,000 plans in 2011. The failure of corporations to meet their pension obligations led to Congress establishing the Pension Benefit Guaranty Corporation to protect corporate plan participants.

State and local government plans are in worse shape (a $1.4 trillion shortfall). This will undoubtedly lead to higher taxes, service reductions, and municipal bankruptcies.

4. The Benefits of Social Security Are Inferior to Private Sector Retirement Alternatives

The critics are wrong for the following reasons:

  • Social Security Has Features Not Available in Private Plans. There are a number of these features. First of all, spouses get benefits even if they never earned wages. Most married couples with only one wage earner will continue to get more in benefits than they paid in taxes. Second, children get benefits if they have a working parent who dies. And third, people who are too disabled to work can get benefits for life.
  • Investors’ Expectations About Investment Returns in Private Plans Are Overly Optimistic. Virtually every discussion of past investment results includes cautionary language to the effect that “investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.” This statement reflects the massive variability of investment returns – which investments are made, when they are purchased, how long they are held, when they are sold – so that future projections are unlikely to be met. A survey by the University of Michigan’s Survey Research Center indicates that the average individual investor expects the stock market to return about 10% per year over the next 10 to 20 years, but actual results show that such high returns are rare. David Certner, legislative policy director for the American Association of Retired Persons (AARP) recently noted that private pensions, retirement savings, and home values took a big hit when the economy collapsed, putting a big dent in the retirement plans of many Americans. However, Social Security benefits were unaffected.
  • Less Than Half of Americans Have Access to Company-Sponsored Retirement Plans. Where plans are offered, only 54% of the eligible employees participate. Younger workers who would be likely to gain the greatest compounding effect on the values in the plan are least likely to participate (31%). Examples of individuals who have significant retirement values are atypical and not indicative of the average worker. For this reason, Social Security will continue to be the foundation of retirement planning for most people.
  • Employer Contributions Are Mandated in the Social Security Program. Employers must match the employee contributions of 6.2% of wages up to a maximum income of $113,700 in 2013, effectively doubling the employee’s investment in his or her social security benefits. However, employer contributions are voluntary in private retirement or savings accounts. Private plans without employer participation are supported solely by the employee’s contributions.

5. Social Security Is Just a Retirement Program

Social Security Beneficiaries 2012
Social Security Administration

According to Robert M. Ball, a past Commissioner of Social Security, the Social Security Program is “social insurance” designed to help people “when earnings stop because one is too old to work or too disabled to work, or because the wage earner in the family dies, or because there is no job to be had, or when there are extraordinary expenses connected say with illness.” The Motley Fool echoes this sentiment, saying that Social Security isn’t a retirement plan, but rather is a universal insurance program that protects workers, retirees, and their families from life’s unknowns.

While the majority of benefits are provided to retirees, the following people are also eligible:

  • Those Who Are Temporarily or Permanently Restricted to Being Employed With a Physical or Mental Disability. Such people can receive monthly benefits through Social Security Disability Insurance.
  • Those Who Are Involuntarily Unemployed. These people can receive partial income replacement for up to 39 weeks if they have a prescribed amount of employment and earnings within a specified base period. Unemployment benefits are administered by the states, but paid from a public fund administered by Social Security.
  • Dependents of Deceased Fully Insured Workers. Social Security does provide a small lump sum death benefit, as well as ongoing benefits to children, dependent parents, and spouses of deceased workers.

Final Word

Is our Social Security system perfect? No, but our leaders agree that the Social Security program, in the words of Dwight D. Eisenhower, is “vital to the economic security of the American people.” Harry S. Truman once stated that it “is neither a dole nor a device for giving people something for nothing, but earned and guaranteed by the law of the land.” And President John F. Kennedy said on June 30, 1961, “The Social Security program plays an important part in providing for families, children, and older persons in times of stress. But it cannot remain static. Changes in our population, in our working habits, and in our standard of living require constant revision.”

Changes in the program are necessary and recognized by both political parties, although Republicans and Democrats have different views on the appropriate and necessary amendments.

What do you think – is Social Security worth saving? What amendments do you favor?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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  • http://www.swimupstreamtowealth.com/ Kirk Kinder

    Very thorough article on Social Security. I think we need to get back to the original intent of Social Security, which was a safety net for the truly despondent. It shouldn’t be seen as a retirement plan. We could then lower the tax considerably and still meet the objective of helping the poor.

    The fact that we need to make any modifications to ensure solvency shows Social Security isn’t a viable program when you consider we had close to 12 workers contributing for every 1 beneficiary a few years ago. Management similar to a pension plan would have produced substantially better outcomes.

    I do think that any change needs to affect the Boomers. Most of the solutions detrimentally affect Gen X and below. The pain should be felt by all.

    • Mlewis

      Kirk,

      Thanks for writing. The sad fact is that most Americans rely on Social Security for the bulk of their retirement and are likely to do so in the future. As you know, corporate pension plans are generally dinosaurs, having been replaced by profit-sharing plans. While equity investments can do very well properly managed, they are also subject to the vagaries of timing as many discovered in past years.

      I do agree that the pain should be felt by all; no older person I know wants to burden his children. I imagine the outcome will be a combination of raising eligibility age, decreasing the CPI adjustment, means testing, and a rise in employer/employee contributions.

  • http://www.mdhomesearchonline.com/ Bridget Hendricks

    Great article. Very detailed. I believe Social Security is a great way for people at retirement to have a safety net. However, I do agree with Kirk. Social Security should not be seen as a retirement plan. Unfortunately, not a lot of people are savvy with their money, so this is all they will have.

    • Mlewis

      Bridget, In a perfect world, everyone would save enough to take care of themselves and their family members. Unfortunately, we live in a precarious economic environment with tremendous costs if you have children. It is very difficult for most people to save enough to pay for college educations, retirement and unanticipated health care costs.

      Dealing with elderly is a societal problem we have yet to solve that, unfortunately, falls mostly on the young. Thanks for writing.

  • http://www.radiopay.com/ Slava R

    Michael,
    thank you for such an informative article. I learned some new things about social security.
    In my opinion, US definitely need Social Security and I don’t like the fact that they haven’t considered these 30 options yet. I think that Social Security is one of the major pillars US economy is based on and I disagree with President Ronald Reagan’s statement – everything in economy is connected, even indirectly.

    • Mlewis

      Thanks for writing, Slava. Being a member of the retired community, I can appreciate the value of Social Security, particularly after the losses sustained in private savings accounts over the past 5 years. I believe Social Security is morally right and economically essential for the greatest country of the world and it should be saved.

  • http://www.themoneyprinciple.co.uk/ John@TheMoneyPrinciple

    Much the same is being said over this side of the pond by equally stupid politicians – and sometimes financiers. For example, following a particularly nasty case where a company stole from its pension fund (the Mirror Group under Robert Maxwell), the government here instituted a requirement for to report the size of company pension pots every year. The liabilities of these pots will of course be discharged over many years to come – some people won’t have retired, some will even die before retirement etc etc. But the finacial people just add the current value up and run around like headless chickens when the stockmarket is low, saying the pension fund it bust, assuming it has to pay out everything immediately. It isn’t but it is used as an excuse to cut pensions – unless you are a top banker or course.

    On the other hand, many pension funds were built on dodgy actuarial bases assuming mortality from the 1950s. So there is an issue because we are all living longer. But that should be solved by allowing/encouraging people to work longer (possibly in a flexible way) which is equitable. If you contribute over 40 years to a pension plan, in the original model you would expect to die at say 70-75. But as we are now living into our 90s, it is only right that we should either be prepared to work longer or accept a lower pension. It is only recently for example that people are ‘allowed’ to work past their 65th (men) and 60th (women) birthdays.

    • Mlewis

      Thanks for writing, John. I agree that longevity is a problem as well as the growing disparity between payments and benefits. Some have suggested privatization of the funds – investment into the equity markets – but that will also have a lot of unintended consequences which I’ll explore in a later article.

  • Crash14235

    You call this “Truth” but much of this is opinion.

    • Mlewis

      Crash, I appreciate your taking the time to write and your comment. Which of the 5 points I’ve discussed do you believe to be opinion, rather than fact? If you have information that I’ve missed, please post it.

  • http://www.facebook.com/drew.leven Drew Leven

    As an MBA with 30 years of finance experience, I have to ask what seems like an obvious question. If the Social Security trust fund “earns” 4.4% on its investments while the market only pays 1.4%, where does the difference come from and how? Somebody has to pay that interest, it doesn’t just appear out of whole cloth. If it is the government, then Social Security is truly a Ponzi scheme. That difference would have to come from general revenues. In other words, they do add to the deficit. Please tell me where I am wrong.

  • CashWhisperer Kendall Peterson

    Hmmm well Michael, Since Crash had trouble with specifics, let’s take a look at #2, First of all the Apple analogy is flawed. An apple covered in caramel and an onion covered in caramel both look the same once you put a stick in them, but they are far from similar. Apple produces a product in demand by consumers in order to create the cash flow. Social Security will depend on our children and grandchildren paying in to it for our benefits to be paid out, and even then, in Flemming v. Nestor the Supreme Court states that “entitlement to Social Security benefits is not a contractual right.” The whole reason Americans have Social Security numbers is because in the beginning we had individual accounts but Congress couldn’t stand seeing all that money just sitting there so it made changes to pool it and well, as you’ve already admitted, Social Security will need to be changed in some way to remain solvent (which therefore makes #2 true) If your oil exploration company needed to change the way it did business to remain solvent that means its going broke.
    As for #4 Michael, I would argue that as a retirement vehicle Galveston, Brazoria and Matagorda counties have proved that Social Security can be inferior to other Retirement Alternatives out there. That being said, the points you made showed how SS was different, but differences don’t make one inherently better or worse than the other. One example, when I was an employee, the fact that employer contributions are mandated only made me angry since the cost of having me as an employee was the same to the company whether that money was going to the government or going in to my pocket. I’m going to say that nasty “R” word – Responsibility – in reference to how many people choose to take advantage of ANY retirement plan, be it employer sponsored or individually done like an IRA.
    I’ll agree with you on #1, Reagan did say Social Security has nothing to do with the deficit, while #3 is semantics and I haven’t heard a politician say #5. It was a great Op-Ed piece, I’m not sure the title fits.

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