Social Security

Nine major principles supporting the framework of Social Security. It’s important you understand them.

Misinformation about Social Security abounds. We can’t have an honest discussion about the future of the program unless it is based on facts.

Here are a few facts. Social Security cannot reach the point where benefits cannot be paid (at least most benefits), nobody stole the Social Security Trust money, the Trust earns interest, the Trust reserves are invested in US Treasury bonds, under the law general tax revenue cannot be used to pay SS benefits, SS was never intended to be the sole or even primary source of retirement income, while higher income workers get a higher dollar benefit, under the benefit formula lower income workers receive a higher benefit relative to their earnings, Social Security does not add to the federal deficit, and the COLA is determined by a set formula, not by whomever happens to the the president at the time.

As you listen to the rhetoric, ask yourself if what you are hearing is consistent with these principles.

Excerpt from THE TRUTH ABOUT SOCIAL SECURITY by Nancy Altman

These and many other accomplishments and adjustments have taken place within a framework consisting of nine major principles. Social Security is universal; an earned right; wage-related; contributory and self-financed; redistributive; not means-tested; wage-indexed; inflation-protected; and compulsory. As with any framework, the stability of the entire structure depends on the contribution made by each part, so it is useful to review these principles and how they work together.

1. Universal: Social Security coverage has been gradually extended over the years to the point where 96 out of 100 jobs in paid employment are now covered, with more than 142 million working Americans making contributions in 1997. The goal of complete universality can be reached by gradually covering those remaining state and local government positions that are not now covered.

2. Earned right: Social Security is more than a statutory right; it is an earned right, with eligibility for benefits and the benefit rate based on an individual’s past earnings. This principal sharply distinguishes Social Security from welfare and links the program, appropriately, to other earned rights such as wages, fringe benefits, and private pensions.

3. Wage-related: Social Security benefits are related to earnings, thus reinforcing the concept of benefits as an earned right and recognizing that there is a relationship between one’s standard of living while working and the benefit level needed to achieve income security in retirement. Under Social Security, higher-paid earners get higher benefits; the lower-paid get more for what they pay in.

4. Contributory and self-financed: The fact that workers pay earmarked contributions from their wages into the system also reinforces the concept of an earned right and gives contributors a moral claim on future benefits above and beyond statutory obligations. And, unlike many foreign plans, Social Security is entirely financed by dedicated taxes, principally those deducted from workers’ earnings matched by employers, with the self-employed paying comparable amounts. The entire cost of benefits plus administrative expenses (less than one percent of income) is met without support from general government revenues. This self-financing approach has several advantages. It helps protect the program against having to compete against other programs in the annual general federal budget— which is appropriate, because this is a uniquely long-term program. It imposes fiscal discipline, because the total earmarked income for Social Security must be sufficient to cover the entire cost of the program. And it guards against excessive liberalization: contributors oppose major benefit cuts because they have a right to benefits and are paying for them, but they also oppose excessive increases in benefits because they understand that every increase must be paid for by increased contributions. Thus a semi-automatic balance is achieved between wanting more protection versus not wanting to pay more for it.

5. Redistributive: One of Social Security’s most important goals is to pay at least a minimally adequate benefit to workers who are regularly covered and contributing, regardless of how low-paid they may be. This is accomplished through a redistributional formula that pays comparatively higher benefits to lower-paid earners. The formula makes good sense. If the system paid back to low- wage workers only the benefit that they could be expected to pay for from their own wages, millions of retirees would end up on welfare even though they had been paying into Social Security throughout their working lives. This would make the years of contributing to Social Security worse than pointless, since earnings deductions would have reduced their income throughout their working years without providing in retirement any income greater than what would be available from welfare. The redistributional formula solves this dilemma.

6. Not means-tested: In contrast to welfare, eligibility for Social Security is not determined by the beneficiary’s current income and assets, nor is the amount of the benefit. This is a crucial principle. It is the absence of a means test that makes it possible for people to add to their savings and to establish private pension plans, secure in the knowledge that they will not then be penalized by having their Social Security benefits cut back as a result of having arranged for additional retirement income. The absence of a means test makes it possible for Social Security to provide a stable role in anchoring a multitier retirement system in which private pensions and personal savings can be built on top of Social Security’s basic, defined protection.

7. Wage-indexed: Social Security is portable, following the worker from job to job, and the protection provided before retirement increases as wages rise. Benefits at the time of initial receipt are brought up to date with recent wages, reflecting improvements in productivity and thus in the general standard of living. Without this principle, Social Security would soon provide benefits that did not reflect previously attained levels of living.

8. Inflation-protected: Once they begin, Social Security benefits are protected against inflation by periodic Cost-of- Living Adjustments (COLAs) linked to the Consumer Price Index. Inflation protection is one of Social Security’s greatest strengths, and one that distinguishes it from other (except federal) retirement plans: no private pension plan provides guaranteed protection against inflation, and inflation protection under state and local plans, where it exists at all, is capped. Without COLAs, the real value of Social Security benefits would steadily erode over time, as is the case with unadjusted private pension benefits. Although a provision for automatic adjustment was not part of the original legislation, the importance of protecting benefits against inflation was recognized, and over the years the system was financed to allow for periodic adjustment to bring benefits up to date. But this updating was done only after a lag. Provision for automatic adjustment was added in 1972.

9. Compulsory: Social Security compels all of us to contribute to our own future security. A voluntary system simply would not work. Some of us would save scrupulously, some would save sporadically, and some would postpone the day of reckoning forever, leaving the community as a whole to pay through a much less desirable safety-net system. With a compulsory program, the problem of adverse selection—individuals deciding when and to what extent they want to participate, depending on whether their individual circumstances seem favorable—is avoided (as is the problem of obtaining adequate funding for a large safety- net program serving a constituency with limited political influence).

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10 replies »

  1. Most of #4 Is no longer true.

    “The entire cost of benefits plus administrative expenses (less than one percent of income) is met without support from general government revenues.”

    This is no longer true, because government bonds in the SS Trust Fund have to be cashed in to pay benefits. This money comes from general government revenues or debt. If it comes from debt or adds to the debt, it creates additional interest payments for future generations to pay forever.

    “It imposes fiscal discipline, because the total earmarked income for Social Security must be sufficient to cover the entire cost of the program. And it guards against excessive liberalization: contributors oppose major benefit cuts because they have a right to benefits and are paying for them, but they also oppose excessive increases in benefits because they understand that every increase must be paid for by increased contributions. Thus a semi-automatic balance is achieved between wanting more protection versus not wanting to pay more for it.”

    Congress has changed and can change the SS system at any time. Adding spousal benefits and benefits for minor children, if parent dies, are just two examples. It has never been true that contributors or their employers are paying enough in taxes to cover the future benefits that they will receive. SS taxes collected today do not even cover the people that are currently receiving benefits. The taxes we paid while working (except for the 2.7 Trillion in the SS trust fund) were paid to the people collecting SS benefits at that time.

    #9 to say that retirees have limited political influence is false. Politicians are aware that we vote and they lie to us every election cycle to get our vote. If Congress does nothing (highly likely) by 2034 we will see cuts in benefits, wiping out 15 years of COLA increases from the average SS check.

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    • #4 is true only because if the government didn’t borrow from the trust it would have had to issue general bonds to get the money needed in past years, so its a wash. Congress has not done its job keeping SS self-financing because it won’t tell people the truth that taxes need to be raised for several years past. Not sure what you mean re #9

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  2. Principal No. 7. “Benefits at the time of initial receipt are brought up to date with recent wages,…” ? How exactly ?

    Does this mean that all the past earnings from the top thirty years of earnings are recalculated using a Wage or Price Index? I may be wrong, but I thought I ran all the numbers on all past earnings with no adjustment and came up with the same benef it calculation as SS. That was in 2010 so maybe I am not recalling correctly.

    I’m any case, if past earnings ARE re-calculated, are the contributions to SS also? If so, the length of time it takes to receive back all that we and our employees put in is extended considerably.

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    • Yes, Indexing earnings. When we compute a person’s benefit, we use the national average wage indexing series to index that person’s earnings. Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.

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  3. A question and a concern.
    Q: is it true that on average someone receiving SS ACTUALLY receives more SS ‘income’ than they themselves contributed over their working lives. So, “I am only getting what I put in” is incorrect.
    C: COLA is a formula, does it include inflation factors of food and energy. I understand there is CPI and core CPI.?

    Bob

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    • I began collecting SS in November 2009 and after seven and a half years my wife and I (on my account) collected more than our lifetime of taxes paid plus all the taxes paid by employers. The CPI-W used for the COLA does include those items and many more.

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