Five Big Myths About Social Security

[dajoki]

Five Big Myths About Social Security
by Kathryn Baer September 09, 2010 07:10 AM (PT)
http://uspoverty.change.org/blog/view/five_big_myths_about_social_security

For some months now, bloggers and advocates of a liberal persuasion have been engaging in preemptive strikes against the President's Commission on Fiscal Responsibility and Reform.

They've dubbed it the Catfood Commission because they expect it to recommend changes in Social Security that will leave low-income seniors unable to afford anything to eat except pet food.

Perhaps this will prove to be much ado about nothing. The executive order that established the commission requires 14 of the 18 members to agree on any recommendation it issues. The split between Democrats and Republicans will make that challenging — but for Social Security, not impossible.

Just about everyone from far right to left seems to agree that some changes will be needed. The danger is that decisions will be driven — or at least sold to us — by myths that have been floating around for quite awhile now. Fortunately, we've also got some expert mythbusters on the scene.

So here are the leading myths and the truths I've been able to glean.

Myth #1: Social Security Spending Will Increase the Deficit

One would certainly think it would. Why else would the President's commission be dealing with it? Well, not because it will, in and of itself, drive up the long-term deficit.

Social Security is, by law, self-financing. Benefits don't come out of the general pot of tax revenues. They're paid for by payroll taxes, plus the interest on Treasury bonds in which the surplus is invested. So if the system runs short, it will have to reduce benefits or get a supplement from Congress. The latter could, of course, add to the deficit. But it's merely hypothetical.

However, there's another, more likely way that Social Security spending could affect the federal budget. As I said, the surplus is invested in government bonds. So if current payroll taxes, plus interest, aren't enough to cover the benefits the system owes, it will have to, in effect, start cashing in the bonds. The government will have to find the funds to cover the debt.

Myth #2: Social Security Will Go Broke

This is an old warhorse. It's frequently been used to argue for dismantling the system. And it's technically true, assuming (as we shouldn't) that the federal government does nothing until the surplus that's been deliberately built is altogether depleted.

This surplus, often referred to as the trust fund, is currently about $2.5 trillion. As the New York Times reported in March, the trustees have projected that it will be down to zero in 2037. Even this doesn't mean the system will be broke. Workers and their employers will still be paying Social Security payroll taxes. Left unchanged, they'll be enough to cover about 78 percent of benefits.

Myth #3: The So-Called Trust Is Just a Bunch of IOUs

This is true, but not the way people who say it want us to think. All bonds are IOUs — promises to pay back the principal that's been lent at some future date. The bonds the Social Security trust fund holds are the securest kind — backed by "the full faith and credit of the U.S. government." This is the same guarantee that many country's national banks and other large investors rely on. Would the government risk losing their trust by defaulting on its debt to the Social Security system?

Myth #4: We've Got to Raise the Eligibility Age for Retirement Benefits

This seems to be the most talked-about "fix." House Minority Leader John Boehner got a lot of heat when he talked about raising the eligibility age to 70. But some leading House Democrats have mentioned it as well. Also, among others, the liberal-leaning Urban Institute.

The notion here is that Social Security wasn't set up to pay out for many years of retirement. People are living longer than they were in the mid-1930s, when the system was created. This is true, but not nearly so true as some would give us to believe.

Life expectancies were much shorter then, but mainly because infant and child mortality rates were much higher. MSN Money's personal finance expert gives us the details. Briefly, if men survived to 65 — the original retirement age — they could look forward to an average of 12 more years. Women who lived to 65 had, on average, 13 years to collect benefits.

Today, average life expectancies beyond 65 are greater. A report (pdf) by the Center on American Progress shows that, by 2002, men who lived to 65 had gained, on average, 4.6 years and women 6.5 years. Increases indeed, but not dramatic — and greater for high-income than for low-income people.

In any event, the system has already been revised to raise the age at which workers can become eligible for full benefits. If you were born after 1942, you've got to be 66 to receive them. Those born in 1960 or later will have to be 67.

What this means, says the Economic Policy Institute, is that the ratio of work years to retirement years will be no greater in 2022 than it was in 1983, when Congress passed the phased-in age increase. In other words, workers may be living longer, but they're also either paying into the Social Security system longer or receiving permanently lower benefits.

Today, you can start receiving benefits at 62, but they'll be reduced according to a formula based on how many months before full retirement age that is. For example, if your full retirement age is 66, your benefits will be cut by 25 percent. If you were born after 1959, the cut will be about 30 percent.

Raise the eligibility age even higher and there are bound to be more people constrained to claim early benefits — especially low-income people, who often have physically demanding jobs.

Myth #5: We've Got to Cut Social Security Benefits

The idea here, as with raising the retirement age, is that we've got to bring spending on retirement benefits down. In fact, many experts, including the Economic Policy Institute, argue that raising the retirement age is itself a benefits cut because workers will get less before they die.

But anyone who's ever had to plan for some future new or higher expenditure knows you don't necessarily have to cut other spending. You can increase income instead. It might not always be possible for us as individuals. But it's a slam dunk for Social Security.

Under the current system, the amount of earnings subject to Social Security payroll taxes is capped. When benefits are increased to keep pace with inflation, the cap is adjusted based on average national wages. The benefits you're ultimately entitled to are based on a formula applied to your average monthly earnings during the 35 years you earned the most. But the only earnings that count are those that were subject to the payroll tax.

The cap this year is $106,800 of earnings. This means that lots of people — even some we're not accustomed to thinking of as high-salaried — will have earned income not subject to Social Security payroll taxes. However, only a fraction of them will have earnings above the cap for most of their working years.

Say there were no cap. The Congressional Research Service looked at the results under several scenarios. As blogger Ezra Klein's research shows, eliminating the cap and increasing benefits accordingly would just about take care of the projected shortfall. Eliminating the cap but using the existing base to calculate benefits would actually produce a surplus.

Taxing all earnings without adjusting benefits would be politically problematic. Maybe any fiddling with the cap would be. Maybe, as Klein argues, we should leave Social Security alone and, I infer, use general revenues to make up for the shortfall when it comes.

What's clear as day is that we don't have to cut benefits to "fix" a program that now safeguards nearly half of all seniors from dire poverty— and cat food dinners.

[NoNothing]

1. Would the government risk losing their trust by defaulting on its debt to the Social Security system

The government doesn't have to default on those bonds to avoid paying it, because the SSA is a part of the government.

[truedelphi]

5. But by having Social Security fallout of favor,

Especially among the younger people, then it may be abolished.

Businesses would love to not have to pay that 7 + percent that they now pay on each worker.

And young RW people I talk to are being told that we seniors will be "given" the money. One young woman I spoke with was amazed to find out that I was totally willing to not collect Social Security - just get the Federal Government to pay me back every sent that I have paid in since 1969.

She had no idea that people PAY INTO the fund. Apparently she never closely examines her own paycheck, but just believes what she is told by the RW mentors that sponsor her brain.

And the Federal Government would love to keep that money as that would definitely help Bernanke and Geithner balance the totally scrambled deficit due to our endless offerings to the Big Bankers and Financial Institutions.

[dajoki]

10. The stupidity is amazing

"She had no idea that people PAY INTO the fund. Apparently she never closely examines her own paycheck, but just believes what she is told by the RW mentors that sponsor her brain."

[truedelphi]

11. Every day of the week, it appears that Mencken was right.

And you really can fool all the people all the time.

Who was it here on DU that had put up some poll that showed most Americans believe that their household is in the upper six percent of households income wise??

[OneTenthofOnePercent]

2. Myth #6: "Catfood Commission" is a misnomer. Petfood is more expensive than basic human foods.

Staple food purchased in bulk are MUCH cheaper than cat (or any other pet) food. Bulk rice, corn, flour, pasta, and meats are relatively cheap when compared to pet food on a weight/nutrition per dollar basis. A well rounded diet may be verily easily obtained eating people-food rather than pet-food.

[RaleighNCDUer]

4. Of course, you do know that the 'catfood' comparison comes from the

price of a 6oz can of tuna ($1.09) to a 6oz can of tuna catfood ($.65).

But that's ok - you made your point.

[earth mom]

6. Sorry but when you are down to your last couple of bucks, you can't buy any of that stuff

on your list.

You go for whatever you can buy with the last bit of "chump" change you have in your pocket and buy a few cans of cat food.

You know, Friskies tasty "turkey & cheese" or "tuna & egg".

That's some 'Hope & Change' we've all been sold-NOT. :puke:

[leftstreet]

3. K&R

[earth mom]

7. Cat food is on the menu for sure if those bastards are allowed to do whatever they want.

NO doubt about it! :grr:

[alc]

8. no one should be allowed to talk about the trust fund

without giving the details of the assets in it. At least this article tells us it is bonds. But they don't tell us any specifics. Sure all bonds are IOUs, but not all IOUs (or bonds) are the same.

What's the maturity date? What are the rules/penalties to cashing in before the maturity date? Can they be sold to a 3rd party. Are they currently counted in the federal debt like other bonds? The answers to these questions make a HUGE difference on the state of the fund. And the questions have been constantly avoided since Al Gore brought up the lock box (and probably long before that). The most likely answers from various slips and a few honest answers are

* no maturity date. or more accurately the treasury can wait as long as it wants to decide when to pay them back. defaulting is not really at issue since there is no date when they are guaranteed to be paid even though there are dates when SS guarantees benefit payments.
* no penalties since the owner (SS) can't cash them in early
* cannot be sold to a 3rd party
* not counted in the federal debt (i.e. the federal debt would go up if they are paid back)

It's kind of like telling myself I will transfer $10,000 from my savings to my checking account at some point in the future; then telling you I have $10,000 in my checking account so my $10,000 check is good even though my savings account is empty. I can even show you the paper with the promise to myself if you want.

They need to be honest about the situation. Then tell us that they've been cheating and now they're caught. But they have a commitment to the people so they need to raise the debt to cover the $2.5 trillion and they will stop cheating and let SS work like it is supposed to.

[customerserviceguy]

9. Thanks for putting that out there

I use the term "IOU's" every once in awhile, because I get tired of typing "Specialized Treasury Securities" every once in awhile. Furthermore, the Congress has no intention of raising taxes and cutting spending enough to have the budget surpluses that would be needed to redeem them.

[galileoreloaded]

12. Correct. There is no "there" there....

The bonds only exist because we collectively agree that they exist. We all believe the idea of their existence.