Here's a little true/false quiz to see how well you understand our Social Security crisis:
T F Raising the retirement age or reducing benefits would help reduce the federal deficit.Social Security and the Deficit
T F Social Security pays out more money than it takes in every year.
T F The money current workers pay into Social Security is paid out to current retirees.
T F Everyone pays the same rate (percentage of income) into Social Security.
T F The Baby Boomers will receive a windfall from Social Security, leaving little for their children.
Perhaps the biggest myth is that payments from Social Security contribute to the deficit. In fact, Social Security is a creditor of our national debt. One quarter of US government debt is actually money owed to the Social Security trust fund. In the 1980s, President Reagan supported legislation allowing the government to borrow from Social Security. Two trust funds -- Social Security and Medicare -- today hold one third of government bonds. $4.7 trillion has been borrowed from Social Security and Medicare to pay for other programs.
Money In, Money Out
While it's true that payments are made from current revenues, revenues have exceeded expenses and the trust fund still holds $2.7 trillion, none of which has been tapped for benefits. Keep in mind that if the fund instead wrote checks from savings, it would need to cash in treasury bonds every month to pay recipients while also purchasing new bonds every month with payroll taxes received -- a rather cumbersome and foolish process.
The following chart from the Social Security Administration shows revenue and expenses for the past two years.
|Calendar year and trust fund||Income||Outgo||Fund
|NOTE: Totals do not necessarily equal the sum of rounded components.|
Note that Disability Insurance (DI) pays out more than received while Old Age and Survivors' Insurance (OASI) is still well in the black. Much more oversight is needed in the Disability portion of the program. Most of us can name at least one DI beneficiary of questionable need.Revenues consist of both payroll taxes and interest on the national debt paid back to the fund. Currently interest rates are near zero but are expected to rise as the economy continues its recovery.
It is true though that very soon recipients will need to be paid from the savings, in other words from the money they themselves paid in over the years. Current projections are that the savings will cover benefits until 2036. After that, revenues will only cover 75% of projected benefits, requiring either an increase in the tax, a reduction in benefits or removal of the cap.
Who Pays More?
The Social Security payroll tax is 6.2% of income (plus 6.2% paid by employers), taken before any deductions. Most workers pay that portion of every paycheck. But there is a cap on income of $110,000. Workers earning above that amount pay a lower rate: 3.1% for those making twice the cap, 1.55% for those making four times the cap and so on. Also, only payroll income is subject to the tax. If (like Mr. Romney) your income is classified as carried interest, dividends or capital gains, you owe no money to Social Security.
Eliminating the cap would fully fund Social Security for the next 75 years (no one tries to project further than that).
Greedy Baby Boomers
In the 1980s, payroll taxes were increased substantially. Prior to that, the taxes had been quite low. The following is from Social Security and the Boomers:
Let's look at an American born in 1920 who worked from age 20 until age 65 and then retired and collected Social Security. We'll call him George, Sr. Assume that George, Sr. paid the maximum FICA rate and earned the maximum benefit. During his 45 years of employment, he paid about $20,000. After retiring in 1985, assuming he lived another 20 years, he received the maximum benefit of $172,000. This worker of my parents' generation received more than 8 times what he paid in. Where did that come from?Answers to the Quiz
George, Jr. was born in 1945 and also started working at 20. He worked from 1965 until 2010 and has just retired and begun collecting Social Security. George, Jr. paid $179,000 in Social Security. Over the next 20 years (Both Sr. and Jr. are due to die at age 85), George, Jr. will collect a total of $526,000. George, Jr. will receive almost 3 times what he paid in. Still a good deal, right?
Wrong. If both men had invested their contributions and earned 5% per year in returns, Senior could only have had $60,000 when he retired. He did very well indeed with his $172K return on a $20k investment. Junior however would have had $640k at 5% on his investment. Junior actually lost $115k in the deal.
So how did you do? All of the statements were false except the third one.
See also: Punishing Work