NCPA – Social Security – Facts About Social Security

Social Security reform has emerged as one of the defining issues of the 2000 election, but a number of myths and half-truths have clouded the dialogue.

Fact #1: The System Is in Trouble. Social Security is structured as a pay-as-you-go system. That means today’s workers pay the benefits for today’s retirees. In 1940, there were 42 workers per retiree; today there are three. By 2040 there will be only two (see figure). This means higher taxes for future workers.

Fact #2: The Social Security Trust Fund Cannot Pay Benefits. The trust fund only exists to perform a record-keeping function. Technically, it holds interest-bearing bonds that represent the accounting surplus of payroll taxes collected minus benefits paid. But the only way the Treasury can redeem them is if it first collects taxes or borrows money.

Fact #3: Benefits Are Not Guaranteed. In two major cases, Helvering v. Davis (1937) and Flemming v. Nestor (1960), the Supreme Court ruled that individuals have no legal claim to Social Security. As a result, Congress can reduce Social Security benefits at any time. Indeed, it already has by raising the retirement age (leading to fewer benefit checks) and imposing a special tax on benefits. Workers have no projected right in Social Security benefits simply because they have paid Social Security taxes.

Fact #4: Social Security Is a Poor Investment. In general, workers born before World War II paid significantly less in taxes than they will receive in benefits – and can expect a higher rate of return than subsequent generations. By contrast, baby boomers can expect a rate of return of less than 2 percent, and Generation Xers can expect less than 1 percent. Children born today can expect a rate of return from Social Security of almost zero, assuming that the program can pay full promised benefits.

Fact #5: Reform Works. A system that divorces us from the pay-as-you-go system, such as one with personal retirement accounts, could provide future retirees with a benefit that could provide them choice, control and security in their retirement, while protecting the government’s long-term solvency.

Source: Matt Moore, “Facts about Social Security,” Brief Analysis 341, September 26, 2000, National Center for Policy Analysis.

The Role of Social Security in Your Financial Planning

“Fact 1: Social Security is the guaranteed part of your retirement plan.

There have been lots of questions raised about Social Security lately. And granted, it isn’t perfect. We at AARP know that it was never intended to be the sole solution to financial security in retirement. But it has been the guaranteed component of retirement. And that hasn’t changed.

The fact is, with no change at all, Social Security will be able to pay 100% of promised benefits that keep pace with the cost of living until the year 2042. After that, it will still be able to pay three-quarters of promised benefits.

Getting three-quarters wouldn’t be okay today and it won’t be fair tomorrow. At AARP, we want to be sure you reach your retirement goals. And we know that Social Security plays an important role in getting you there. Think about the role of Social Security in your own retirement planning. Then let’s start thinking about ways to fill that one quarter gap to make sure your financial security goals are within reach when you retire.

Fact 2: With Social Security in your retirement plan, you’re starting at about midfield.

Financial planning for retirement is like a football game. And you’re the one who has to go the distance and carry the ball. Only you’re not starting at zero. Thanks to the years you’ve worked, when you retire, you’re starting with about half the field already behind you.

That’s because Social Security isn’t based on your future prospects, but on your past performance. No matter who you are, Social Security is there for you because it’s based on your work history—and that just won’t change. Social Security promises that when you stop working, you’ll still have a guaranteed stream of income that, for most people, is about 40 percent of the pay you received when you were working.

One nice thing to know is that Social Security follows you wherever you go. It’s not tied to a specific job, again making it something you can count on when you retire.

Plus, it’s protected against inflation. Year after year, Social Security rises with the rising cost of living. And when you choose to retire, Social Security will continue to keep pace with the times, preventing erosion of your purchasing power. That’s why there’s a cost of living increase every year—so 20 years from now, you aren’t stuck trying to make up for the fact that what used to cover a mortgage doesn’t even cover a car payment.

You may outlive your savings, but your Social Security is always there. It gives you a safe, unshakable financial base to complement a private pension, an IRA, a 401(k), or other savings, all of which, together, put you solidly in the scoring position when you retire.

Fact 3: Social Security is on the sidelines, backing you up, while you’re working.

If you’re still working, you probably don’t realize Social Security is protecting you right now. Thanks to Social Security, you have disability and survivor insurance for you and your family. No one likes to think about the unexpected realities life can bring, but we all know bad things can happen to good people. In the event of a worker’s death or disability, Social Security is there to step in and provide for that worker and his or her family.

With Social Security, you’re that much closer to your goals and that much more secure. Today. And every day.”

The 6.2 Percent Solution: A Plan for Reforming Social Security:

“For the past several years there has been a growing consensus about the need to reform Social Security. Now, however, the debate has advanced to the point where it becomes important to move beyond generalities and provide specific proposals for transforming Social Security to a system of individual accounts. The Cato Project on Social Security Choice, therefore, has developed a proposal to give workers ownership of and control over their retirement funds.

Under this proposal:

* Individuals would be allowed to divert their half (6.2 percentage points) of the payroll tax to individually owned, privately invested accounts. Those who chose to do so would agree to forgo all future accrual of retirement benefits under the traditional Social Security system.
* The remaining 6.2 percentage points of payroll taxes would be used to pay transition costs and to fund disability and survivors’ benefits.
* Workers who chose the individual account option would receive a ‘recognition bond’ based on the accrued value of their lifetimeto- date benefits. Those bonds, redeemable at the worker’s retirement, would be fully tradable in secondary markets.
* Those who wished to remain in the traditional Social Security system would be free to do so, accepting a level of benefits payable with the current level of revenue.”

The full text of the argument Tanner makes for this proposal can be found in
SSP No. 32.