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What everybody misunderstands about Social Security
[Updated repeatedly. I thank Mike Gay and other Facebook correspondents
for useful information.]
Most Americans, including quite a few of our politicians, are seriously mistaken about
how Social Security works. Please let me try to clear a few things up.
I'm writing this so I can refer to it later.
(1) "Entitlement" does not mean "unearned giveaway."
Whenever anybody says "Social Security is not an entitlement," they're showing they don't know
what the word means.
In the budget, an entitlement is not something unearned or undeserved.
It is something promised to a set of people — it is not a spending project that can be cancelled.
Veterans' pensions are entitlements. So are Social Security payments.
So is anything else that is promised to people who meet certain criteria.
That is what the word means.
(2) Your Social Security payments are not saved up to be paid back to you.
Somehow, everybody gets it into their head that Social Security is an individual retirement account.
It is not. It is a pay-as-you-go pension program, where the payments are funded by the taxes coming
in at the time.
Your benefits do depend on how much you paid in, and your account is a record of how much you
paid in. But your payments are not set aside for you (in a bank vault, in an investment, or whatever).
They are just remembered, and the government is obligated to make payments to you later, based
on them.
You wouldn't be any better off if your payments were saved up for you.
The only thing the government could do is invest them — in something that promises to
pay them back — and that promise is what you already have.
(3) Social Security is not about to vanish due to "running out of money."
Social Security is funded by its own tax (FICA, SECA) and is
entirely outside the federal budget.
For a long time, income exceeded expenses and was stored in the Social Security Trust Fund.
As the population has aged, that is no longer the case, and the Trust Fund is declining.
Even if the Trust Fund becomes completely empty, Social Security will still have tax income.
The obvious solution is to slightly increase the taxes,
or slightly reduce the benefits (by setting later retirement ages for people who came into the
system later), and those are obvious, common-sense things to do. If nothing else is done,
the benefits will be reduced about 20%, but Social Security will not go out of business;
it will be funded only by tax income.
The amount of the taxes has been
adjusted in the past and can be adjusted again.
The retirement age probably should be raised somewhat.
There is also the possibility of lowering
administrative costs.
We are not tied forever to the existing Trust Fund with its current rate
of income and outgo.
On the changes needed to make Social Security remain able to pay at current levels,
see the Trustees' Report,
especially the bottom of page 5 and the top of page 6 of the PDF.
(3) There's a good reason Social Security isn't invested in the stock market.
By law, the Social Security Trust Fund has to be invested in U.S. Treasury bonds.
Why? To keep another Great Depression from wiping it out.
Social Security isn't designed to compete with IRAs or other private-sector investments.
(You should have an IRA!) Social Security is designed to be less risky and
backed by the full faith and credit of the United States.
Does anybody remember what was going on just before Social Security Started?
Yes... the Great Depression. If you had had an IRA then, you would have lost it all.
The point of Social Security is that the government makes a commitment to keep you
from starving no matter what the economy does.
(4) Life expectancies and populations are shifting, and we can't deny it.
To put it bluntly, one reason Social Security did so well, financially, in its early decades
is that a lot of people died before turning 65, and collected nothing after having
paid in. U.S. life expectancy from birth was about 60 in 1935 and is now about 80.
I don't think we want to go back to dying before 65.
We have to shift toward retiring later, instead.
But I do not think we want to increase the Social Security retirement age to 80.
If we did, we could put taxes back to what they were in the 1930s and do fine.
If we agree, as a society, that the retirement age should be a lot less than the
average age of death, then we are committed to paying Social Security taxes comparable
to what we have now, or a little higher.
Social Security was designed as a safety net for people who are getting to be too old to work,
and who would, in earlier times, slowly die of malnutrition (often unrecognized) as
they became unable to afford necessities. Social Security was not designed to be a full
retirement plan. For that, you need your own investments.
(5) Social Security is not need-based. (SSI is.)
Social Security benefits depend on how much you paid in, and at what age you started to receive them,
not on your financial need. Many Social Security recipients also get SSI
(Supplemental Security Income), which is need-based assistance funded outside of Social Security
though administered with it.
Also, Social Security benefits can be reduced if you start them before full retirement age
and have substantial income. That is to discourage people from starting them too early.
But if you are at or above full retirement age, earning money will not "cost you your
Social Security." Far from it — as you continue to pay FICA taxes, your Social Security
benefits will increase due to your income.
[Added:]
(6) Social Security has not been "stolen" or "plundered" or "borrowed" and spent for other purposes.
Rumors of this kind seem to have been circulating forever.
One version is that LBJ "borrowed" Social Security money to fund the Vietnam War.
The fact is that there has never been a change in the separation of Social Security money from
the rest of the federal budget. However, Social Security was reported as part of the total
budget for a number of years when Social Security was doing well and the rest of the budget wasn't.
For more about that, see
this web page at the Social Security Administration.
Social Security money is already "borrowed by" the Treasury in the sense
that it is invested in Treasury bonds. A bond is a loan. When you buy a bond, you are lending money
to the Treasury, and they can spend it on other things, but they have to pay it back.
This is true whether I buy a savings bond or the Social Security Trust Fund buys a huge amount
of bonds. It doesn't make sense to complain that when you lend money to someone, they use it.
What matters is getting it back.
(7) Social Security is not in danger due to inept management.
A common talking point among radio commentators is that Social Security is so ineptly managed
that it is about to lose all its money and be done away with.
Sometimes they tie this to the fact that, viewed as an investment, Social Security does not
perform as well as stocks and bonds.
I see no reason to suppose Social Security is seriously mismanaged.
The Trustees do their jobs and issue reports.
Radio commentators apparently do not read the reports.
I've explained already that Social Security is not intended to compete with stocks and bonds.
It is intended to be immune to things like stock market crashes.
I've already explained that Social Security is not intended to be a full retirement plan or
even to compete with retirement plans. It is a social insurance system, which is why it's
called Social Security rather than Retirement. It provides a useful part of a retired person's
income and protects them from poverty. (And protects the rest of us from their poverty.
It's why you don't have to take Grandma into your home or organize charity drives for old people.)
It was never intended to replace a person's whole salary.
It is easy for politicians and commentators to stir up panic with half-truths about Social Security.
Many of them do not understand the full truth themselves.
It is also unreasonable to want the changes in life expectancy and population to have
no effect. You're not likely to be dead at 65. That's why 65-year-olds can't expect to
be supported in style by payments made by their peers who didn't live that long.
The system needs readjusting and will always need readjusting. Don't panic — but
do advocate good management.
Permanent link to this entry
The strange, unfair history of women's credit
Happy Women's History Month! But anybody who remembers the 1970s will notice
something wrong with a meme that is circulating widely...
If women couldn't get credit cards before 1974, how did my widowed mother get them?
Or Melody, who was then a high-school student and had a store credit card?
The answer is that the meme contains a half-truth. Some banks wouldn't issue credit
cards to married women without their husbands' involvement, partly because
of concern about property laws and the husbands' obligation.
But that's not all of it.
Before 1974, it was legal to use sex, race, color, religion, national origin, and
marital status as criteria for denying credit. Also (I am told) pregnancy,
family size, and maybe number of teeth or tattoos (I haven't confirmed those last two).
The Equal Credit
Opportunity Act of 1974 fixed that.
That is also why credit scores were invented. Bankers wanted some kind of measure that
absolutely excluded criteria that were illegal to use. About all they were left with
was previous repayment history, and that's how we got F.I.C.O. and Vantage.
The trouble with, credit scores still favor people who have gotten credit in the past.
Even rich people are at a disadvantage if they haven't
borrowed money in the past. People who couldn't get credit in the past still have
trouble getting it later. Credit scoring, as presently practiced, makes past
discrimination cast a long shadow.
For some years I have been working on a new kind of credit scoring based on actual
ability to pay — cash flow, income versus outgo — rather than history of
past borrowing. This has been my main project since retiring from UGA.
It is called FormFree RIKI and is starting
to reach the market. It should make the world of credit a good bit fairer.
One last point. I don't recommend spreading that meme because it
has no credibility with anyone who remembers women with credit cards in the early 1970s.
Promoting a good cause with misinformation is, in my humble opinion, wrong.
Be accurate.
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