The Facts About Social Security
Social Security has traditionally been a prime target of those on the far right, and now the left, and the subject of more misunderstanding and factual mistatement than almost anything else under public revue. As a conservative I find this very embarrassing but I have to plead guilty, having repeated a lot of the nonsense at one time or another myself. This essay is offered in order to try to clear away the cobwebs and misunderstandings created by Social Security's detractors by showing (A) That Social Security is not a "Ponzi scheme" as its detractors claim, (B) That it is not "broke" (C) That if you are in the system there is an account with your name on it, contrary to the claim of the detractors and (D) That the shortfall in Social Security's ability to satisfy its purposes, predicted to occur in about the year 2035, is not so serious that it cannot be corrected fairly easily and satisfactorily with clearly available and sensible measures. I am not, however, interested in being a propagandist or cheer leader for Social Security. It has its problems. They can and should be solved and, with some repair work, the system with its basic structure can and should be maintained. Here are some common errors and my response to them.
(1) "Contrary to what you are told, there is no Social Security account with your name on it". That is not true. There is an account with your name on it, identical in kind to accounts maintained by private insurance companies for people who purchase commercial annuities. The difference between Social Security and a "managing agency", which a ponzi scheme purports to be but is not, is that Social Security does not hold, or claim to hold, a lump sum for the client which he originally contributed to his account, plus interest accruing over time, and which he can demand and receive any time, or on specified withdrawal dates during the year. This is what a "managing agency" is. Social Security is a "pension program". There is no "lump sum" belonging to you because you never contributed a "lump sum" in the first place. A sum of money cannot accrue interest if there simply is no sum of money to accrue. WHEN CONSIDERING SOCIAL SECURITY, "RETURN ON INVESTMENT" IS ENTIRELY IRRELEVANT TO THE INDIVIDUAL ANNUITANT BECAUSE THERE SIMPLY IS NO MANAGED "INVESTMENT" OF PRINCIPAL. Or here is another way of thinking about the matter. Suppose that Joe Shmo buys a five dollar lottery ticket and wins a million dollars while at the same time Doris Doe also buys a five dollar ticket but wins nothing. Does Doris have a right to complain that Joe won an amount which was enormously in excess of what he paid in while she lost her whole payment? No. Each one paid five dollars and each received what he and she paid for, a chance to win a large sum of money --- not the same dollars used to buy the tickets, or those same dollars enchanced through wise investments and prudent savings. Each purchaser wanted a windfall, but Joe Shmo won and Doris Doe lost. I may pay into Social Security all my life and die too early to receive any benefit while someone else receives benefits for many years. That's the system. Those are the breaks of the game, and that's the way all insurance works.
(2) "When you die your heirs will get nothing from Social Security". True, but irrelevant. Social Security was never represented as a way of building a transferable estate. If you want that, you will have to do it on your own or persuade the government to convert Social Security to something else. It is a pension annuity program and like all pension programs its benefits expire with your death or the death of you and your spouse. If you buy a commercial annuity from an insurance company your annuity will also expire with your death unless you take a reduced monthly amount with a joint-and-survivor feature.
(3) "Social Security is a Ponzi Scheme". That is simply untrue all the way through. The name "Ponzi" came from the name Charles Ponzi, a Boston swindler who operated a pyramid whereby a small number of investors were paid from the contributions of a larger number of more recently enrolled investors. The scheme required an ever-increasing pool of "investors" whose contributions were used to pay earlier "investors". Jeff Jacoby, a conservative columnist, in citing a writer named Mitchell Zukov, wrote in a September 6, 2011 column; "Ponzi's scheme was a deliberate swindle that lured its victims with bald lies and get-rich-quick promises, . . . . whereas Social Security fully discloses its operations and makes no promise of huge returns. Ponzi schemes are intended to defraud; Social Security was designed to be a social safety net for the old". IN SEVENTY-FIVE YEARS, IT HAS NEVER MISSED A PAYMENT. Social Security is not only not a "Ponzi Scheme", it is not in any way a fraudulent enterprise, as every aspect of it is out in the open. Fraudulent schemes and embezzlement do not result in $2.5 trillion surpluses, which is the surplus now managed by the Social Security Administration, estimated to rise to $3.7 trillion by 2022 after a near-term PLANNED fall due to the influx of Boomers. In any case, while some adjustments will have to be made to preserve Social Security even on the assumption that the Treasury pays its debt to Social Security (see paragraph(4) below), I am quite sure that Bernie Madoff's clients wish that his scheme had performed as well and reliably for them as Social Security has.
There are two necessary caveats, however. First, If Congress never intended to pay its debt to Social Security's beneficiaries, incurred by means of bonds as discussed at paragraph (4) below, but instead intended and intends to devise some scheme for defaulting on that debt and blaming Social Security itself for running out of money it will be the greatest case of grand larceny in the nation's history, a monstrous crime with no historical precedent in this country. IF THAT IS THE INTENT IT MUST BE STOPPED. Second, There are a lot of prophets of gloom and doom running around who tell us that the Euro is about to collapse, and with it every economy in Europe, and following that the currency and economy of the United States, and for all I know that may be true. I'm not an economist. To conclude that they are all nuts, however, before you have even heard their arguments is unreasonable because there are some smart people in that group and their arguments do not sound irrational, at least not to me. If they are right then everything will collapse at once and why worry about Social Security? You may as well try to sell refrigerators to the Eskimos, go hang out with Glenn Beck or bang your head against a wall because who cares?
(4) "But the system is out of money". No, it isn't unless, as discussed at paragraph (3) above, Congress defaults on its bonded debt. If someone has a $2.5 trillion surplus, which Social Security does have, he is not "out of money". Then where is the money? It is invested in non-negotiable government bonds and those bonds are real paper bonds contained in physical boxes in Martinsburg, West Virginia. They are not just electronic blips in a computer. "But the government might default". Yes, and the Chinese could say the same thing about their U.S. bonds. "But the bonds held by Social Security are non-negotiable". Yes, because Social Security isn't allowed to make private investments by law and because the government does not want a secondary bond market competing with its own. Anyway, we have always been told that the safest investment is U.S. bonds. In other words the federal government borrowed the money which America's working people, and their employers, contributed and now the far left and the far right do not want the Treasury to pay it back, or so it seems. In fact, as discussed, the government would actually be stealing this money. We should always return to the point that Social Security is sound in and of itself and that the critical problem is the debt to Social Security by the Treasury. In other words, the problem is external, not internal.
This is really as much about truth and accuracy as it is about Social Security. No one is relieved of the moral and ethical responsibility to be honest with others even when it may not support his or her own ideology. When anyone, conservative, liberal or otherwise, ignores or deliberately obscures the truth because to do so would be idealogically inconvenient it undermines his credibility on everything --- on Social Security and everything else.
(5) "Contributions are mandatory". That is true. Any large developed country like the United States faces the problem of retirement and how to avoid retired people being indigent. Perhaps no answer to that is completely satisfactory. Given the temperament of the American people the prospect of millions of people with no means of sustenance is unrealistic. So what can be done? People can be urged to save on their own but many will not, and if they do not they will be a burden on their children or society in general. They can have their own private fund to be managed but not touched, an approach favored by President George W. Bush, but what if the market goes into a drastic decline and the savings evaporate? Social Security is a trade-off. You pay the tax and acquire a guarenteed annuity which is not dependent on the vicissitudes of the market. There are many approaches to this, but it is hard to deny that the problem of safety in retirement is not just an individual problem. It is a social problem.
(6) "Social Security contributes to the deficit". No, Social Security has never contributed a dime to the deficit. Quite the opposite, the Treasury has been borrowing from Social Security to finance its general operations, as a result of which Social Security has $2.5 trillion worth of bonds. The false claim that the general taxpayers will have to begin financing Social Security is intended to hide the fact that Social Security has been financing the government, not the other way around, and that includes hundreds of billions of dollars of wasted money.
(7) "The bill for today's pensions will be paid by the next generation." The truth is that today's benefits will be paid for by everyone who pays into the system and later receives benefits. That includes people now deceased who did pay but either received no benfit or relatively little benefit because they didn't live long enough. Where did today's $2.5 trillion surpulus come from? It certainly did not come entirely from the next generation of working people. Some of it did, just as some people in the next generation --- those who live a long time --- will benefit from the payments of those in this and the previous generation who died or will die early. The point is that everyone in the system pays and receives benefits if they meet the contribution and longevity requirements. Is everyone benefitted or burdened equally? Of course not. Social Security was never designed for that. Someone buys a million dollar life insurance policy and dies the next day. He (his estate) recieves a million dollars after paying one premium, perhaps only a few hundred dollars. Someone else has lived to age one hundred after having paid much more than he or his estate will receive in benefits. That's what insurance is. That's life.
We could have individually managed accounts. We could do a lot of things. But non-risk annuities paid for with a payroll tax is the choice that was made and it has worked well.
(8) "Social Security is in crisis and must be abandoned, at least as to those under fifty or some such age".
No, it is not in crisis. It is true that demographic patterns have changed with longer life spans and otherwise and that the system is expected to run into problems in about 2035 even if the treasury pays its debts, as it must. Here are some possible approaches for the future, without implying that they are all desirable or necessarily fair. They are possible. (A) Raise the ceiling on income subject to the FICA tax. (B) Raise the tax rate. (C) Raise the retirement age from 67 to 70. (D) Change the formula for the annual cost-of-living adjustment. More than 75% of the shortfall would vanish if Congrress reduced annual cost-of-living increases by 1 percentage point every year. (E) According to the News-Press of Fort Myers, Florida the entire $5.3 trillion shortfall over the next 75 years could be eliminated if payroll taxes were increased 1.1 percentage points for workers and employers. (G) Allow the non-negotiable bonds to be converted to negotiable bonds as that becomes necessary to meet current obligations. Bear in mind that no one argues that the entire treasury debt must be paid immediately. There will continue to be a FICA tax which will continue to fund the system. The bonded surplus exists to provide against shortages of cash as benefits become due.
Whatever else is done, Congress should be prohibited from using Social Security as a slush fund, and because experience shows that Congress can never be trusted to be ethical or responsible this result should be obtained by Constitutional Amendment.
(9) "We should abandon Social Security except for paying promised benefits to senrior citizens who paid into it and have relied on it". The last part is certainly true. Promises should be kept. But we should not abandon Social Security at all. The danger is that neither the right nor the left have any interest in maintaining it as to younger working people. It can be maintained, permanently. Its a question only of will. But conservatives have never liked it because they think of it as welfare. It is no such thing and never was, but curing so massive a misconception is almost beyond difficult because those on the right simply have no personal stake in it. Those on the left cannot claim credit for it so they aren't trying to protect it either. They would rather invent new schemes for wasting money, and buying votes with higher taxes, and blaming the decline of Social Security on the right.
Now Congress and the Administration have gotten into the habit of extending what was to be a "temporary" cut in the Social Security tax. That is simply another way of stealing from annuitant-beneficiaries. With cuts in the tax, the current $2.5 Trillion surplus will be depleted sooner than it would otherwise. The Democrats propose making up the deficiency caused thereby by taxing 'millionaires and billionaires'; in other words, soaking the rich. This is just more demogoguery by politicians who swim in the waters of demogoguery.
(1) "Contrary to what you are told, there is no Social Security account with your name on it". That is not true. There is an account with your name on it, identical in kind to accounts maintained by private insurance companies for people who purchase commercial annuities. The difference between Social Security and a "managing agency", which a ponzi scheme purports to be but is not, is that Social Security does not hold, or claim to hold, a lump sum for the client which he originally contributed to his account, plus interest accruing over time, and which he can demand and receive any time, or on specified withdrawal dates during the year. This is what a "managing agency" is. Social Security is a "pension program". There is no "lump sum" belonging to you because you never contributed a "lump sum" in the first place. A sum of money cannot accrue interest if there simply is no sum of money to accrue. WHEN CONSIDERING SOCIAL SECURITY, "RETURN ON INVESTMENT" IS ENTIRELY IRRELEVANT TO THE INDIVIDUAL ANNUITANT BECAUSE THERE SIMPLY IS NO MANAGED "INVESTMENT" OF PRINCIPAL. Or here is another way of thinking about the matter. Suppose that Joe Shmo buys a five dollar lottery ticket and wins a million dollars while at the same time Doris Doe also buys a five dollar ticket but wins nothing. Does Doris have a right to complain that Joe won an amount which was enormously in excess of what he paid in while she lost her whole payment? No. Each one paid five dollars and each received what he and she paid for, a chance to win a large sum of money --- not the same dollars used to buy the tickets, or those same dollars enchanced through wise investments and prudent savings. Each purchaser wanted a windfall, but Joe Shmo won and Doris Doe lost. I may pay into Social Security all my life and die too early to receive any benefit while someone else receives benefits for many years. That's the system. Those are the breaks of the game, and that's the way all insurance works.
(2) "When you die your heirs will get nothing from Social Security". True, but irrelevant. Social Security was never represented as a way of building a transferable estate. If you want that, you will have to do it on your own or persuade the government to convert Social Security to something else. It is a pension annuity program and like all pension programs its benefits expire with your death or the death of you and your spouse. If you buy a commercial annuity from an insurance company your annuity will also expire with your death unless you take a reduced monthly amount with a joint-and-survivor feature.
(3) "Social Security is a Ponzi Scheme". That is simply untrue all the way through. The name "Ponzi" came from the name Charles Ponzi, a Boston swindler who operated a pyramid whereby a small number of investors were paid from the contributions of a larger number of more recently enrolled investors. The scheme required an ever-increasing pool of "investors" whose contributions were used to pay earlier "investors". Jeff Jacoby, a conservative columnist, in citing a writer named Mitchell Zukov, wrote in a September 6, 2011 column; "Ponzi's scheme was a deliberate swindle that lured its victims with bald lies and get-rich-quick promises, . . . . whereas Social Security fully discloses its operations and makes no promise of huge returns. Ponzi schemes are intended to defraud; Social Security was designed to be a social safety net for the old". IN SEVENTY-FIVE YEARS, IT HAS NEVER MISSED A PAYMENT. Social Security is not only not a "Ponzi Scheme", it is not in any way a fraudulent enterprise, as every aspect of it is out in the open. Fraudulent schemes and embezzlement do not result in $2.5 trillion surpluses, which is the surplus now managed by the Social Security Administration, estimated to rise to $3.7 trillion by 2022 after a near-term PLANNED fall due to the influx of Boomers. In any case, while some adjustments will have to be made to preserve Social Security even on the assumption that the Treasury pays its debt to Social Security (see paragraph(4) below), I am quite sure that Bernie Madoff's clients wish that his scheme had performed as well and reliably for them as Social Security has.
There are two necessary caveats, however. First, If Congress never intended to pay its debt to Social Security's beneficiaries, incurred by means of bonds as discussed at paragraph (4) below, but instead intended and intends to devise some scheme for defaulting on that debt and blaming Social Security itself for running out of money it will be the greatest case of grand larceny in the nation's history, a monstrous crime with no historical precedent in this country. IF THAT IS THE INTENT IT MUST BE STOPPED. Second, There are a lot of prophets of gloom and doom running around who tell us that the Euro is about to collapse, and with it every economy in Europe, and following that the currency and economy of the United States, and for all I know that may be true. I'm not an economist. To conclude that they are all nuts, however, before you have even heard their arguments is unreasonable because there are some smart people in that group and their arguments do not sound irrational, at least not to me. If they are right then everything will collapse at once and why worry about Social Security? You may as well try to sell refrigerators to the Eskimos, go hang out with Glenn Beck or bang your head against a wall because who cares?
(4) "But the system is out of money". No, it isn't unless, as discussed at paragraph (3) above, Congress defaults on its bonded debt. If someone has a $2.5 trillion surplus, which Social Security does have, he is not "out of money". Then where is the money? It is invested in non-negotiable government bonds and those bonds are real paper bonds contained in physical boxes in Martinsburg, West Virginia. They are not just electronic blips in a computer. "But the government might default". Yes, and the Chinese could say the same thing about their U.S. bonds. "But the bonds held by Social Security are non-negotiable". Yes, because Social Security isn't allowed to make private investments by law and because the government does not want a secondary bond market competing with its own. Anyway, we have always been told that the safest investment is U.S. bonds. In other words the federal government borrowed the money which America's working people, and their employers, contributed and now the far left and the far right do not want the Treasury to pay it back, or so it seems. In fact, as discussed, the government would actually be stealing this money. We should always return to the point that Social Security is sound in and of itself and that the critical problem is the debt to Social Security by the Treasury. In other words, the problem is external, not internal.
This is really as much about truth and accuracy as it is about Social Security. No one is relieved of the moral and ethical responsibility to be honest with others even when it may not support his or her own ideology. When anyone, conservative, liberal or otherwise, ignores or deliberately obscures the truth because to do so would be idealogically inconvenient it undermines his credibility on everything --- on Social Security and everything else.
(5) "Contributions are mandatory". That is true. Any large developed country like the United States faces the problem of retirement and how to avoid retired people being indigent. Perhaps no answer to that is completely satisfactory. Given the temperament of the American people the prospect of millions of people with no means of sustenance is unrealistic. So what can be done? People can be urged to save on their own but many will not, and if they do not they will be a burden on their children or society in general. They can have their own private fund to be managed but not touched, an approach favored by President George W. Bush, but what if the market goes into a drastic decline and the savings evaporate? Social Security is a trade-off. You pay the tax and acquire a guarenteed annuity which is not dependent on the vicissitudes of the market. There are many approaches to this, but it is hard to deny that the problem of safety in retirement is not just an individual problem. It is a social problem.
(6) "Social Security contributes to the deficit". No, Social Security has never contributed a dime to the deficit. Quite the opposite, the Treasury has been borrowing from Social Security to finance its general operations, as a result of which Social Security has $2.5 trillion worth of bonds. The false claim that the general taxpayers will have to begin financing Social Security is intended to hide the fact that Social Security has been financing the government, not the other way around, and that includes hundreds of billions of dollars of wasted money.
(7) "The bill for today's pensions will be paid by the next generation." The truth is that today's benefits will be paid for by everyone who pays into the system and later receives benefits. That includes people now deceased who did pay but either received no benfit or relatively little benefit because they didn't live long enough. Where did today's $2.5 trillion surpulus come from? It certainly did not come entirely from the next generation of working people. Some of it did, just as some people in the next generation --- those who live a long time --- will benefit from the payments of those in this and the previous generation who died or will die early. The point is that everyone in the system pays and receives benefits if they meet the contribution and longevity requirements. Is everyone benefitted or burdened equally? Of course not. Social Security was never designed for that. Someone buys a million dollar life insurance policy and dies the next day. He (his estate) recieves a million dollars after paying one premium, perhaps only a few hundred dollars. Someone else has lived to age one hundred after having paid much more than he or his estate will receive in benefits. That's what insurance is. That's life.
We could have individually managed accounts. We could do a lot of things. But non-risk annuities paid for with a payroll tax is the choice that was made and it has worked well.
(8) "Social Security is in crisis and must be abandoned, at least as to those under fifty or some such age".
No, it is not in crisis. It is true that demographic patterns have changed with longer life spans and otherwise and that the system is expected to run into problems in about 2035 even if the treasury pays its debts, as it must. Here are some possible approaches for the future, without implying that they are all desirable or necessarily fair. They are possible. (A) Raise the ceiling on income subject to the FICA tax. (B) Raise the tax rate. (C) Raise the retirement age from 67 to 70. (D) Change the formula for the annual cost-of-living adjustment. More than 75% of the shortfall would vanish if Congrress reduced annual cost-of-living increases by 1 percentage point every year. (E) According to the News-Press of Fort Myers, Florida the entire $5.3 trillion shortfall over the next 75 years could be eliminated if payroll taxes were increased 1.1 percentage points for workers and employers. (G) Allow the non-negotiable bonds to be converted to negotiable bonds as that becomes necessary to meet current obligations. Bear in mind that no one argues that the entire treasury debt must be paid immediately. There will continue to be a FICA tax which will continue to fund the system. The bonded surplus exists to provide against shortages of cash as benefits become due.
Whatever else is done, Congress should be prohibited from using Social Security as a slush fund, and because experience shows that Congress can never be trusted to be ethical or responsible this result should be obtained by Constitutional Amendment.
(9) "We should abandon Social Security except for paying promised benefits to senrior citizens who paid into it and have relied on it". The last part is certainly true. Promises should be kept. But we should not abandon Social Security at all. The danger is that neither the right nor the left have any interest in maintaining it as to younger working people. It can be maintained, permanently. Its a question only of will. But conservatives have never liked it because they think of it as welfare. It is no such thing and never was, but curing so massive a misconception is almost beyond difficult because those on the right simply have no personal stake in it. Those on the left cannot claim credit for it so they aren't trying to protect it either. They would rather invent new schemes for wasting money, and buying votes with higher taxes, and blaming the decline of Social Security on the right.
Now Congress and the Administration have gotten into the habit of extending what was to be a "temporary" cut in the Social Security tax. That is simply another way of stealing from annuitant-beneficiaries. With cuts in the tax, the current $2.5 Trillion surplus will be depleted sooner than it would otherwise. The Democrats propose making up the deficiency caused thereby by taxing 'millionaires and billionaires'; in other words, soaking the rich. This is just more demogoguery by politicians who swim in the waters of demogoguery.
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