Just the facts on Social Security

April 18, 2005|by Tom Firey

The past few months' intense debate over Social Security has made clear one truth: Americans worry about the effects of making substantive changes to the system. That concern is appropriate; most senior citizens depend heavily on their monthly Social Security check and they should not be jeopardized.

Another truth has also become clear over the past few months: few people understand how the current Social Security program works and what problems it faces. That's not surprising; like most other government programs, Social Security law and economics are complex and confusing. But we need to work through those complexities because critical decisions lie ahead.

For one thing, people commonly misunderstand why Social Security faces long-term financial problems. Many believe that, as a Herald-Mail reader wrote in a letter to the editor, it's because "Congress is raiding the Social Security trust fund." But, by law, Congress must repay, with interest, any money it takes from the trust fund. The "raiding" has no effect on the program's long-term viability - indeed, the borrowing has had the positive effect of adding interest income to the trust fund.


Other people have claimed that the reason Social Security is in trouble is because benefits are given to, as one Herald-Mail letter-writer phrased it, "all these foreigners." Yet immigrant workers pay far more money into Social Security than elderly immigrants receive in benefits - a trend that will continue in the coming decades.

There are two reasons for Social Security's impending financial trouble: Americans are increasingly long-lived, and American families are having fewer children. Those demographic shifts mean the retiree portion of the U.S. population is growing and the worker portion is shrinking-and that is a serious problem for Social Security.

The current program is a pay-as-you-go system in which the taxes paid by current workers are immediately sent to current retirees as benefit checks. (Any leftover money is put in a trust fund for use when taxes don't cover benefits.) That means the system can only function when the benefits paid to retirees are equal to or less than the Social Security taxes paid by workers.

When, in 1940, the program began distributing monthly checks to retirees aged 65 or older, the average life expectancy was only 65 and large American families meant there were many more workers than retirees. In that era, a pay-as-you-go system could be financially sound. But with the demographic shift of the coming years, the tax money flowing in to Social Security will be less than the money going out in promised benefits. To fix that imbalance, Social Security taxes will have to be raised dramatically (they've already been raised 20 times since 1937), retirees' benefits will have to be cut heavily, or the retirement age will have to be pushed back by several years.

Most people believe Social Security benefits are "guaranteed" by the federal government, and that people who have paid into the system while working will receive their money upon retirement. As a Herald-Mail letter-writer stated last year, "We paid for our benefits and we earned them and they are owed to us."

In fact, none of those three claims is true. No one pays for his or her benefits. As I described above, Social Security is a pay-as-you-go program in which the money paid in by workers is immediately paid back out to retirees. And by law, no one has "earned" Social Security benefits or is "owed" them; in 1960 the U.S. Supreme Court ruled that the federal government is not obligated to pay Social Security benefits to anyone, and the government is entitled to cut - or cut off - benefits at any time.

That is the focal point of the battle over private accounts. Private accounts would give workers - not the federal government - control over at least some of the money they pay into Social Security. Indeed, the only way a person can own his or her Social Security benefits is to hold the funds personally - to have a personal account.

Personal accounts cannot change the demographic trends affecting Social Security - benefits will have to be cut, or taxes raised, or the retirement age increased regardless of whether a private accounts system is implemented. But the accounts do mean workers know that some of their money will be there for them in the future, and workers' ability to earn investment income on the accounts will make the forthcoming benefit cuts and tax increases a little more palatable.

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