Friday, February 8, 2013

Is Social Security an Entitlement?

There are differing opinions as to whether or not Social Security should be considered an entitlement as is stated in this article and elsewhere.  People near retirement age or already collecting Social Security claim that it’s not an entitlement because they paid into the system and deserve their money back.

The issue is really two-fold:  the word entitlement has acquired a negative connotation, and the definition of an entitlement is not clearly understood.

Today we hear about people having a sense of entitlement meaning that they take things for granted, feel that the world owes them, and expect to get things even though they are only willing to do the absolute minimum.  The word conjures up images of spoiled children complaining that the world isn’t fair, whining for more snacks, toys or clothing, and expecting to be praised and rewarded for just showing up.  It’s no wonder seniors, who worked for it, are offended at the thought of Social Security being an entitlement.

Technically, though, is Social Security an entitlement?  I found this rather long definition.   An entitlement is a “government program that provides individuals with personal financial benefits (or sometimes special government-provided goods or services) to which an indefinite (but usually rather large) number of potential beneficiaries have a legal right (enforceable in court, if necessary) whenever they meet eligibility conditions that are specified by the standing law that authorizes the program.”  The site goes on to classify it as an entitlement program, but Social Security does not fit this definition.

Although, an individual may be able to demand the same benefits paid to others in the same status, the group has no legal recourse.  Congress can change the program unilaterally, as they have done at least 17 times in the past.  The most significant change was a 20% increase plus annual cost-of-living adjustments in 1972.  They could, however, as easily reduce or eliminate it altogether.  The 2012 Actuarial Note explains their use of the term unfunded obligation as follows:  “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted.” With no guarantee it can’t be an entitlement. 

Does this really matter?  The estimated unfunded obligation referred to above is $21 trillion, an unbelievable sum!  Sure we all paid in, but technically we paid a payroll tax or a FICA tax, not a contribution to a personal account.  Part of that payment went to current retirees.  The rest was saved in what politicians told us was a trust fund or lock  box – but how do you invest such large amounts?  It can’t be put into the stock market, corporate bonds or a bank account like a university endowment.  That would be too risky and inappropriate.  The only reasonable investment would be government bonds, and government bonds are the source of borrowed funds when the government runs a deficit.  So the trust fund is really IOUs from the government to itself.  Short of declaring bankruptcy, the government must pay back the borrowed money; but when the IOUs run out and the system is no longer able to pay out the promised benefits, they are required to pay out only what they take in.  The fact that we contributed all those years is meaningless.

I am now collecting Social Security retirement and hoping it will continue.  Because I knew it was risky and unwise to trust my retirement entirely to the government, I also invested in IRAs and 401(k)s.  I encouraged others to do the same.  Although it meant spending less at the time, it also helped me develop a more frugal lifestyle, which now costs less to maintain.  (Isn't it interesting the way that works out?)  Unfortunately, these facts were not made clear to many, and “Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty.”  Even if it's not technically an entitlement, far too many people are and will become almost totally dependent on it.  In some cases today's dependence is the consequence of earlier behavior.

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