Social Security is the most important and most misunderstood program affecting American’s retirement. And yet a recent survey indicates that 70% of younger Americans believe Social Security benefits will be cut or even eliminated by the time they retire. Neither is true.
Knowing the facts about Social Security is important because basing retirement decisions on misinformation can be harmful. Misinformation causes us to develop perceptions and support changes that may not be the best alternative.
Have you heard that Social Security is going bankrupt? Nope! As long as there are incoming payroll taxes, Social Security can’t go bankrupt because there is a steady revenue stream.
The program’s financial problems are caused by politicians “stealing” the trust fund money. Oh my. The fact is Social Security has been funded the same way since it was enacted. Nobody has stolen the money. Excess revenue over current expenses is (was) used to purchase special interest paying US Treasury bonds. They generate about $80,000,000,000 a year for the trust, every penny of which is needed to pay current benefits. Just like with any bonds, including US Savings bonds, the seller is free to use the proceeds as it sees fit. In this case it’s the federal government.
The Social Security trust has several sources of revenue. Payroll taxes, the interest on its bonds and from the incomes taxes paid on up to 50% of the Social Security benefits being paid. Taxes paid on the additional 35% of benefits are used for Medicare funding. Surveys indicate 50% of retirees pay income taxes on their benefits.
And while we are talking about the trust, the words “surplus” and “reserve” are inaccurately used interchangeably. The trust is a reserve, that is gradually being depleted. If there were a surplus, the trust would contain sufficient assets to pay current and future benefit liabilities. It doesn’t. In fact, the unfunded liabilities for Social Security are estimated at $21 trillion dollars.
Many retires feel they paid for their benefits. Well, no they didn’t. There are no individual accounts and there is no relationship between the taxes paid and the benefits received. Don’t believe me? Consider that your benefits don’t stop when you have received payments equal to all payroll taxes paid. Also, take two workers with the same earnings, one being married and one not. The married family will receive 50% more in benefits. A worker can marry only twelve months before retirement and receive the same benefits as another married 50 years. How about a worker, a spouse and an ex spouse or two all collecting benefits on one earnings record? The fact is most people receive in benefits all they and their employer paid in taxes within eight years of payments beginning.
Payroll taxes are just like any other tax. Benefits are determined by the law which can be changed at any time by Congress. Social Security is funded by payroll taxes in a 1930s attempt to keep the program out of political wrangling over general budgets and spending, to be self sustaining. It used to work, but that’s now questionable.
Many retirees feel they are being shortchanged when it comes to the annual COLA they believe doesn’t accurately reflect spending by seniors. As an alternative, consideration may be given to using the CPI-E (E for elderly) to reflect spending more relevant to the elderly. But the expectations for higher COLAs this creates may not be realized. The difference between the CPI-W, the current measure, and the CPI-E is often only one or two tenths percent and there are some years the CPI-E is lower.
Undocumented workers receive Social Security benefits thereby helping to deplete the trust. No they don’t. Actually the latest figures show undocumented workers pay about $13 billion a year in payroll taxes, but are not eligible to collect benefits.
Finally we have the DIYers who believe that Social Security is not a good investment. They claim that if they had that tax money to invest, they could do better and have a big pile of cash at retirement. In theory, I bet they are right, but there is a big gap between theory and reality. Two things get in the way. The discipline to follow a prudent investment policy year after year until retirement is not all that easy as evidenced by the state of 401k account balances. Second is the many variables such a early death, forced retirement, disability, divorce, etc. And still at the end there is no guaranteed annuity.
Here’s is the bottom line. Social Security is not going away, benefits will not be cut (quite the opposite actually), taxes to support it must go up in some manner and nobody should plan for a retirement living only on Social Security.