The “Truth” about Social Security

Social Security, the most important social program in America, is also the least understood. Many retirees depend so much on Social Security that any discussion provokes anger. The very young are the opposite— they dismiss it with a cavalier shrug, assuming it won’t be there for them.

Most people know so little about Social Security that they fall victim to “all or none” thinking, one of the most common cognitive errors we make as human beings. This is an observation, not a judgment.

So, after setting off alarm bells for lots of readers last week, I’d like to provide some factual grounding in the realities of Social Security.

Here are the basics.

It is the largest single source of income for retirees. Loss of the benefit would be catastrophic for most retirees. Even very affluent retirees would find their standard of living badly damaged if they no longer received benefits. A recent report from the Employee Benefit Research Institute found that Social Security accounted for 39.8 percent of income for those 65 and over.

The program has lots of money coming in. Employment tax collections in fiscal 2009 were $654 billion and accounted for 31 percent of all federal revenue.

Employment tax collections exceeded benefit payments from 1983 to the present. During those 27 years the surplus was spent by Presidents of both parties and by Democrat controlled Congresses and Republican controlled Congresses. The weasels took our retirement savings and gave us IOUs from the U.S. Treasury. The Social Security trust fund is now nominally worth $2.3 trillion. The only problem: The Treasury has no money to make good on its bonds because our government is already running a gigantic deficit.

And, no, the money could not have been invested elsewhere. First, it would have overwhelmed the private investment markets. Also, holding thobligations of Fannie Mae, Freddie Mac or private companies like AIG wouldn’t have been better.

Paying down existing federal debt is the only way that extra $2.3 trillion would have benefited future retirees. This would have required that the regular budget of the United States was balanced, an event that has occurred only 3 times in the last 50 years: 2000, 1999 and 1960. Then the employment tax surplus could have paid off our public debt, creating room for future borrowing.

The problem is bigger than any single politician. It was not caused by George W. Bush and the Iraq war. He simply made an existing problem more difficult by spending more and taxing less.

We can’t blame it all on the politicians. When Social Security was created in 1935 the life expectancy at birth of American men was about 58 years. It has been growing ever since. It hit 74.9 years in 2005. It costs more to live longer. That’s why the 1983 “reform” that was supposed to fund Social Security for 75 years is underfunded by over $5 trillion only 27 years later.

We can solve the entire problem by reducing our life expectancy. If we live (and die) as they do in Russia, Social Security would have no problems. But most people would prefer to die at 78 rather than 66. We have a problem of success, not failure.

At 78.24 years, the United States ranks 49th in the world for life expectancy according to the CIA World Book. That’s well behind the 79.16 years of Britain or the 81 years of France, where they have the terrible socialized medicine that costs half as much as ours.

It is still good to defer taking Social Security benefits. How can that be? Simple. Even under the worst case scenario— that nothing is done to improve program funding— tax revenues will still cover 76 percent of benefits as far in the future as 2037.

Can your corporate pension do that? Not likely.

Most workers no longer have pensions. Those that do should worry about their funding. Waiting to collect a larger Social Security check is a wash for the program (they’ll pay out more money for fewer years) but it gives workers a larger benefit income. That larger benefit check will also help people avoid spending their life savings while interest rates are held low to benefit the Too-Big-to-Fail-Banks.