Flashback – Social Security Myths

[Here is a brief excerpt from a long rant on Facebook about how unfair the Social Security system is and looking for support. 

“This is NOT a benefit. It is OUR money, paid out of our earned income! Not only did we all contribute to Social Security but our employers did too! It totaled 15% of our income before taxes. (This should be enough for you to forward this message, If not read on.)”

Despite my posting only 6 months ago the following full explanation of why this idea is complete hogwash, the misunderstanding continues. If you pass anything along, this should be it, because it is the truth.]

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “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. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Social Security Myths

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “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. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Flashback – Perspective and Gas Prices

[In the fall of 2011 I published a piece with that title. At that time, eight and a half years ago, people were looking forward to prices dropping to about where they are today. The point of the discussion was how short memories are, how easy it is to complain when things change for the worse and how quickly we take benefits for granted. Here it is again for your consideration.]

A couple of days ago the AP published an article on lower gas prices. The price has dropped significantly since summer and some people were amazed and thrilled to find prices below $3 a gallon.  If things go well some parts of the country could see prices as low as $2.50 in the near future (or not).

What does this have to do with perspective? To me it’s a reverse example. Here we have people very happy with prices below $3 and possibly headed toward $2.50, whereas not too long ago we were hearing cries of pain and anguish at prices as high as $2.50. But compared to $4.00 it seems like a bargain. People tend to have short memories and get used to things as they are, reacting with some discomfort to changes. In this example it is joy rather than discomfort, but because we have experienced such economic and technological growth and improvements throughout our lives, our expectations are set and any loss or reduction causes discomfort.

Perspective should remind us that how things are today is not the way they always were. Gas was not always three or four dollars a gallon, but televisions were not always digital, with 50-inch screens, surround sound, 200 channels, or even in color (and we had to get out of our chair to change the channels). Less than one hundred years ago most Americans had to live without radios, a second car, a washing machine, a vacuum cleaner, in-door plumbing, Social Security or any expected retirement, Medicare or any health insurance. More recently people got along fine without home computers, dishwashers, smartphones, moon roofs, garage door openers and home air conditioning. But it’s easy to take these things for granted and feel we could not live without them, when, in fact, people lived for all of history without them. Recognition of this makes it easy to understand how Greek citizens can march in protest over loss of benefits while their country teeters on the edge of bankruptcy.

Perspective is about values, values that keep our wants from morphing into needs (and needs into rights), values that remind us what is vital vs what we can really live without. It’s nice to see the price of gas turn around, but it should also remind us to be grateful for what we have and to consult our core values when we decide how to spend the extra cash. Martin Luther King, Jr. put it very bluntly in his 1964 lecture at the Nobel Peace Prize ceremonies: “Yet, in spite of these spectacular strides in science and technology, and still unlimited ones to come, something basic is missing. There is a sort of poverty of the spirit which stands in glaring contrast to our scientific and technological abundance. The richer we have become materially, the poorer we have become morally and spiritually.” I think he was talking, in part, about perspective, and I wonder if we have been progressing or declining since then.

Medicare For All?

People who are excited about the idea of “Medicare for all” obviously have as meager an understanding of Medicare as they do of Social Security. In fact Medicare is much more complicated than Social Security. It’s not a matter of walking into the doctor’s office, showing an ID card, receiving services and leaving without a bill.

When Medicare was passed in 1965, the government tried to follow a private insurance model. As a result they came up with two parts. Generally speaking, Part A covers hospitalization, and Part B covers regular visits to the doctor. But just like private insurance there are many details about what is covered and what is not.

In most cases Part A has no premium, but it does have a deductible of $1,364 for the first 60 days of Medicare-covered inpatient hospital care. Note that it’s the same for one day as it is for 60 days, so several short hospital stays can become quite expensive. From the 61^st through the 90^th day a $341 per day charge applies. 

The standard monthly premium for Medicare Part B enrollees is $135.50 for 2019. Some pay less and some pay more depending on an income scale. The annual deductible for all Medicare Part B beneficiaries is $185.

This government website gives more details of both parts, but it is clearly not free healthcare with the government picking up the tab.

But there is more. “With Part B coinsurance you typically pay 20% of the Medicare-approved cost of most services, after your deductible is met.” The bill comes from the provider showing the standard charge, Medicare reduces it to the Medicare-approved charge and pays 80%, then the remaining 20% is the patient's responsibility.

But there are also three classes of doctors. The 20% applies to participating doctors. “Non-participating doctors have not signed an agreement with Medicare and therefore might not ‘accept assignment’ for all of their services. A non-participating doctor may take the payment…for 80% of Medicare’s approved cost. But he or she can charge you 15% of the approved cost on top of the 20%.” Doctors who do not accept Medicare assignment can charge in full at the time of the visit.

Part D was added early in this century to cover prescription costs. It is a nightmare of private insurance options, premiums and differing formularies (a list of what drugs are and aren’t covered at different levels by each insurer). And what is available differs by location.

Because Medicare doesn’t cover everything, private companies sell supplemental insurance, sometimes called Medigap plans. There are 10 plans available in most states. “These plans are labeled Plan A, B, C, D, F, G, K, L, M and N, and each plan covers a different set of basic benefits.” How’s that for an additional headache?

Besides the complexity and added costs, two additional problems arise: reimbursement levels and funding.

The Medicare reimbursement to doctors and hospitals is typically lower than private health insurance and much lower than the actual billed rate. (One of my recent bills for a simple annual checkup came in at 60% of the billed rate.) This can discourage providers, who must cover their costs. This source, for example, is not as current as I’d like but “a Kaiser Family Foundation analysis found that 93 percent of non-pediatric primary care physicians were participating providers with Medicare in 2015, but only 72 percent were accepting new Medicare patients.” In addition, a recent change to a flat rate payment program may discourage doctors from accepting Medicare for more challenging medical conditions. Will it soon become difficult, even under the current system, to find a participating doctor? Will fewer young people be inclined to study medicine if the program is expanded, further squeezing doctors' ability to earn an adequate living? All the insurance in the world does not help if you can't find a doctor.

Finally, there is the problem of funding. The money taken from each paycheck (with a matching amount from the employer) pays 88% of the cost of Part A, but the Part A trust fund is projected to be depleted in 2026. This may result in the institution of premiums for Part A. Premiums paid for Part B contribute only 26% to the cost with the rest covered by general government tax revenue. “Medicare spending was 15 percent of total federal spending in 2018, and is projected to rise to 18 percent by 2029.” (This website has some excellent graphs showing current and projected costs with no change to the system, particularly in Figures 6 and 7.)

As it is today the system is complex, and anything but free. It has many of the drawbacks of private insurance systems including waiting months for the paperwork to arrive. Already, many wonder how the government can afford to keep it up. 

This rather long explanation only scratches the surface. “Medicare for all” is easy to promise, but extremely difficult to explain. And, as I wrote years ago, the only way to reduce the cost of healthcare is to address the cost directly in ways that introduce transparency and competition, not by making it easier to pay ever-increasing prices.

Opinions, Opinions…

It happened at the beginning of this week. James Holzhauer broke a 32-game winning streak on Jeopardy after winning nearly $2.5 million. 

Many people were puzzled and suspicious by his totally explainable final wager. Some thought he threw the game. Some neighbors agreed with and passed along an idea being circulated on Facebook that another win would move him into a higher tax bracket.

First, his wager in Final Jeopardy made perfect sense. Since he had not hit any of the Daily Doubles, he was unable to risk large amounts at a time, a tactic that led to insurmountable leads on previous shows. This was a bit of bad luck. His opponent was quick on the button, hit the Daily Doubles and managed to have a small lead going into the final question – 26,600 to 23,400. She only needed to risk enough to finish one dollar ahead of him in case he risked everything, which is what she did. He understood that his only chance to win was for her to get the answer wrong. If they both got it wrong, he needed to risk enough to still be ahead in case the third place contestant got it right and doubled his score of $11,000. That is exactly what he did – 23,400 minus his “conservative” wager of 1, 399 would have been 22,001. The amount he bet, conservative or not, was the best decision.

People who didn’t understand this jumped right to a subject they likewise don’t understand, tax brackets!

The US has a progressive income tax; the tax rate increases as the taxable amount increases. The tax rate on the first taxable dollar is the same for everyone whether you make one dollar or $2.5 million. The tax on the first $100,000 is exactly the same for everyone $13,874. That is about 14%. Anyone making another dollar pays 22% of that additional dollar. Anyone who makes $110,000, for example, pays the same as everyone else on the first $100,000 and then pays 22% on the additional $10,000. That’s how it works as the brackets change. The rate goes to 24% at $165,000, to 32% at $315,000. The highest bracket under the current system is 37% from $600,000 on up. (All examples are for the status of Married Filing Jointly.)

There is no bracket issue in the $2.5 million range. Taxes would be 37% for every additional dollar.

Note how this misunderstanding lets politicians get away with something that is not quite a lie, but is at least a misrepresentation. As the system works, if they lower the rate for the middle class, it lowers the rate for everyone who makes under $100,000, but it also lowers the rate on the first $100,000 for everyone else who makes more than that – even those evil rich people. Fiddling with the lower tax rates to help the middle class, helps everybody, the rich too. It can’t be helped. It’s how the system is set up! 

Now those same politicians have the power to change the system and make it work differently, but they don’t, they just propagandize.

But the biggest takeaway from the Jeopardy story is not the wager or the tax implications. The biggest take away is how inclined people are to form an opinion, defend that opinion, post it on line and spread the word on subjects they don’t understand and apparently are too lazy to do a little bit of research to find the truth. They are so confident that their opinions are right, because they have been constantly reinforced by others with the same degree of ignorance. Bad information spreads like the plague.

Everyone pretends to understand taxes, but they are too complicated for most people to do themselves, which allows politicians to demonize opponents and tax preparation companies to stay in business. But many other more important and complex subjects fall into this same category of confidently held opinions grounded in a woeful lack of understanding: Social Security, Medicare, the healthcare system, economics in general – such as minimum wage and the comparative virtues of socialism vs. capitalism, government spending and the National Debt and the proliferation of deceptive advertising and junk science.

Many Americans can’t even figure out Jeopardy wagers, yet on issues vital to their personal and to the national success they participate in protests and demonstrations, post nasty comments and cartoons on social media and go to the polls to vote for politicians who are often equally mistaken about how the world works.

Is Social Security Doomed?

This CNN article tells how Social Security is in big trouble – “Social Security won't be able to pay full benefits by 2035,” but there is more to learn here than the woes of the government-run retirement program.

It goes on to say that according to the latest annual report from trustees of the program, Social Security's trust funds will be empty by 2035. “The new projection doesn't mean retirees will no longer get checks in 16 years. But [unless Congress acts] the program will at that point only have enough revenue coming in to pay three-quarters of promised benefits through the end of 2093.” 

CNN rightly points out that “lawmakers have long punted on addressing Social Security problems, which would likely entail raising payroll taxes, curtailing benefits or some combination of both.” That is very true. There were articles and op-eds dating back to the mid-80s making this point only to be ignored by Congress. When anyone hints at changing Social Security, instead of working together to fix it, the opposite party tries, usually successfully, to use misinformation to terrorize voters with images of themselves or their parents starving on the streets.

This political "third rail" that is Social Security is not mentioned in the article, and here is where the story begins to go astray. The next two paragraphs read: 

“During the 2016 campaign, President Donald Trump said he wouldn't touch Social Security. He didn't believe he'd need to since his plan to boost economic growth to at least 4% would take care of Social Security's long-term solvency.

"The strong economy has not mitigated the entitlement's fiscal issues. And the federal government's deficit has grown, in part because of the 2017 Republican tax cuts.”

With no reference to the political sensitivity, they seem to blame the President for not taking a stronger stance. That he has a lot of company was omitted.

Earlier in the story they admit that the 2035 date is “one year later than last year's report projected.” So the strong economy may have had some impact on the situation. In fact, I wrote in 2016 that the trust fund projection was 15 years at that time. Now, 3 years later, it’s projected at 16 years. That’s a 4-year difference.

The strong economy has not solved the problem, but "mitigate" means to reduce or diminish. There is some strong evidence of such mitigation.

Why, in the same paragraph, jump from a discussion of Social Security problems to a critique of tax cuts? Those two are not related. Social Security is funded by a portion of the FICA tax that was not changed. 

They then return to the subject with, “Social Security's total cost is expected to exceed its total income in 2020…. This is two years later than projected in last year's report.” Again, in their own words, this sounds like some degree of mitigation.

The story then digresses to Medicare, which has even a worse funding problem. That change probably explains why a big picture of Senator Sanders is placed right below the headline about Social Security. There can be no other explanation. Senator Sanders has been mute on Social Security.

On the other hand, this MarketWatch story gives a much more objective treatment of the Social Security trustee report. It also says that “there would be sufficient income coming in to pay 80% of scheduled benefits” rather than three-quarters and does not try to associate the President or tax cuts with the problem.

The obvious lesson is that Social Security continues to be in trouble with little hope of a short-term fix but is a little better off than it was a few years ago. The second is that the various media outlets manage to blend in their political biases by tone, by choice of what to report and what to leave out, by adding unrelated side comments and by shading the facts. This is just a single example of a single media outlet, but it is no wonder so many people, including those collecting Social Security, have such a poor understanding of the program (and of so many other issues). Skepticism and critical thinking are our only defense.

To get the full story, enter Social Security in the search box in the upper right to read all previous posts with Social Security in the title.

Lower Tax Refunds, Not Bad News

Despite what CBS and others tell us, the report from the IRS that “tax refunds are about $170 lower than last year” is not bad news. The fact that “the average refund so far this year is $1,865, down from $2,035 in 2018” is only a timing issue. People who think otherwise are forgetting how income taxes work.

Employers are required to withhold taxes from each paycheck. These are sent to the federal and state governments. It is better to have them withhold a little more to avoid being hit with penalties and interest for not paying enough up front. But traditionally, taxpayers have jacked up their withholding on each paycheck to ensure a large refund. It makes up for lacking the discipline to voluntarily put aside a little each pay period. 

At the beginning of each year they experience what seems to be a windfall. But it’s not some gift from Uncle Sam; it’s really just a matter of getting their own money back after it has been withheld from them throughout the year. Withholding and the refund are not separate, unrelated pieces. They are each part of the whole. Changes in one lead to changes in the other, but the total paid in taxes is exactly the same whether you get it today or next March.

Getting a smaller refund leads some to believe that the tax cut was not real. (See the CBS piece for examples.) But they have only themselves to blame. “According to payroll processing firm ADP, only a small fraction of workers bothered to change their withholding” as the IRS urged them to do after their employers adjusted their withholding. They were happy to get more in their paychecks, but want to complain later about a smaller refund.

If they looked at total taxes paid, it would be obvious. When someone else files the tax forms and people only sign at the bottom, it’s so easy to ignore the total tax and only care about the size of the refund check. 

Then the news media stir things up by airing the complaints and making a big deal of it while only explaining the details in the last part of the report (if at all). And Bloomberg predicts that Democrats will intentionally promote this misunderstanding to their political advantage. 

As one expert told CBS, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul." The story is the same with taxes, tax refunds and other related issues, such as Social Security and Medicare. Many Americans don’t want to take the time to understand the details. They just want to complain. The frightening part about democracy is that someone who doesn't pay attention has the same number of votes as someone who does.

Another Look at Retirement

Last time I wrote about the inability of most Americans to cover a $1,000 emergency from their savings. What will they do when they decide to stop working?

This article from CBS puts it bluntly. “The vast majority of older working Americans don't have sufficient savings to retire full-time at age 65 with their pre-retirement standard of living.” Most haven't even been saving at the rate they should have been from the start and sixty percent of those between 55 and 64 are not participating in company retirement plans like a 401(k). The facts that people are living longer and social security is on shaky financial ground only compound the problem. The obvious solution is to dramatically reduce their standard of living, continue working or both.

Similarly this promotional piece from Merrill Lynch reports “most American Baby Boomers under-save [for retirement] by about 20%, but almost two-thirds believe they can retire with a comfortable lifestyle.” They over-estimate how much their contributions will increase in the future and under-estimate how long they will be living in retirement. Most don’t even consider the additional heath care costs that may not be covered by Medicare.

This warning is backed up by an opinion piece on the Bloomberg site. “Too Many Americans Will Never Be Able to Retire." The solution suggested by this author is to increase the number of babies and immigrants, hoping to develop enough workers to support the aging population.

The article argues that this situation where many Americans can no longer look forward to a comfortable retirement and must continue to work is blamed in part on the financial crisis, but the above survey report belies that idea.

On the plus side, some see as a positive trend that more and more older people are still working, “because it adds to the economy.” But others see it as a sign that many will never be able to retire at all.

So his main argument comes down to the problem that the fertility rate in the US “has fallen to 1.8 in 2016, implying long-term population shrinkage.” This will lead to “fewer young workers to support an increasing population of retirees” through Social Security and Medicare contributions. That's why we need cheaper housing, generous child-tax credits and universal pre-K education, in order to bring down the costs of having children. 

Unfortunately, there are a couple of serious flaws in this approach. First, a lower birth rate is characteristic of advanced economies. As the BBC reports: “There has been a remarkable global decline in the number of children women are having.” The global fertility rate has dropped from 4.7 in 1950 to 2.4 children per woman by 2017. Three factors contribute to this drop: fewer deaths in childhood, greater access to contraception, more women in school and working. It’s not just the US, and it’s unlikely that encouraging more children or more immigration will have any effect on a worldwide trend.

Second, the idea of having more children to help support the older generation seems strange. Why should we reward the negligent behavior of parents by placing extra burdens on their children – more Social Security contributions and more taxes to support those "needed" government programs? Within families, grandparents only want the best for their grandchildren, but inter-generationally, they seem to have no problem dumping the cost of their extravagance and their inability to plan onto everyone else's grandchildren.

Is Social Security Really "My Money"?

It’s a common argument among retirees, encouraged by organizations like AARP, that Social Security is my money and the government cannot be tinkering with it. It’s strange how this argument never came up years ago when the government decided to add an annual cost of living increase. Tinkering in the positive direction is fine. 

But advocates take advantage of retirees lack of perspective, critical thinking and economic understanding by pushing all kinds of myths and untruths to get them riled up enough to vote in a particular way.

Lack of perspective is evident when the announcement of the year’s cost of living adjustment is routinely met with complaints  that it is not really enough to keep up with inflation. They don’t understand that it was never in the original plan and any increase should be greeted with gratitude.

Lacking critical thinking, most don’t even make the effort to do a little simple research to find out how Social Security works. It’s clear that it’s not your money simply by the fact that when someone dies before retirement age, the SSA does not treat it like an inheritance to be divided among next of kin. No, the money was paid into Social Security and will be used for Social Security purposes.

There is also the lack of understanding about the government having “robbed” the Social Security trust fund and spent all the money on other projects. Consider this. Social Security since its beginning and up until this year has been collecting more money than it was paying out. The surplus had to be invested somewhere.

They can’t put it into a commercial bank or credit union. That would be an unfair windfall for that bank relative to its competition and would likely involve political favoritism. Investing in the stock market could not be justified, seen as “gambling with my retirement,” and equally problematic from the favoritism standpoint. Likewise corporate bonds are out of consideration.

What’s left? Government bonds. And what are government bonds used for? They are used to borrow money for the government to spend! The government has not been robbing from the “trust fund.” They have been borrowing the money with an obligation to pay it back, just as they must eventually pay back other bonds they sell to raise money when they spend more than they have. (They face that obligation now, as contributions are no longer sufficient to cover promised benefits.)

Finally, Social Security does not favor the rich. It is skewed in the opposite direction. Taking a look at the generic benefit calculator on the SSA website shows the difference. In one case, a person born in 1958, earning $50,000 per year, and planning to retire at 66 years old will receive $1460 per month (estimated). Leaving all assumptions the same and only changing the earnings to $100,000 gives an estimated monthly payment of $2276. Double the earnings and the benefit increases by only 56%.

 This is not my first tirade about Social Security (see here, here and here) and will probably not be my last. I just get very frustrated when people continue to fall for all those lies without doing a lick of work to investigate.

Why Do We Work?

On Labor Day it’s probably appropriate to ask yourself the question: Why are you working? Popular culture will tell us “Everybody’s working for the weekend,” but there must be more to it than that.

In reality we work to pay the bills, to put a roof over our heads, to eat and be comfortable most of the time, to pay for education and to afford transportation. (In the last two instances, many pay them off after the fact.) One important, less obvious reason – we work so that some day we can stop working. It’s called retirement. It’s not something that just happens by magic, and it’s getting to be more and more challenging. 

Although for ordinary people it is a fairly recent development, less than 90 years old, with the help of organizations like AARP, most of us take it for granted. But it’s not a right; it’s something that must be earned and planned for.

Social Security has been in place since 1935. We see the deduction from every paycheck. It’s easy to assume that retirement is taken care of. This Motley Fool article warns that is clearly not the case. Some struggle to get by on Social Security alone, however one emergency can put a senior behind financially with little hope of catching up; healthcare costs continue to rise, especially for older people; and the annual COLA doesn’t keep up with real cost increases. “Social Security benefits are clearly insufficient to live on under the current system – but things could actually get worse. Social Security's trust fund reserves are expected to be depleted by 2034, and if no steps are taken to fix funding shortfalls, Social Security will only be able to pay 77% of expected benefits.”

This is not because the government is stealing from the so-called trust fund. It’s a feature of the original design that did not account for the baby-boomer generation or for the trend toward fewer workers. (For those still stuck on the myth that “it’s my money and they owe it to me,” here is a clear explanation from about two and a half years ago of why that’s not the case.)

Another article from Yahoo Finance tells the stark reality of the current situation: “Despite the fact that it was never meant to act as a main source of income, nearly one in five married retirees and one in two unmarried retirees say they rely on Social Security for the bulk of their income, according to the U.S. Social Security Administration.” To make ends meet, they must rely on Food stamps and other government programs.

With traditional pensions disappearing and Social Security an inadequate replacement, retirement savings cannot be considered a luxury. No one can afford to wait.

On average Americans are far behind. To be on track, by the age of 30 workers should have saved the equivalent of one year’s pay. Most are behind but have time to make it up, unlike their parents. “According to the research, the average retirement savings for families aged 50 to 55 is $124,831. For families aged 56 to 61, it's $163,577. Those figures are far less than the $1 million that many experts recommend as a target for retirement savings.” The one-million-dollar figure may be high, and this site, complete with calculator, recommends only $480,000 – still a lot more than the average of $163,000.

The answer then is simple. You are working to some day not have to work any more. But it’s not automatic. It takes planning, perspective and discipline. Without it anyone could end up in the category described in this CBS report: Broke and Bankrupt in Retirement.

Not Enough Babies!

Oh, no!  We're running out of people!

The Washington Post, along with several other news outlets reported a few weeks ago that the birth rate in the US is down. It fell 1% from 2015 to 2016. Why is this news? Is it a problem?

 Apparently it is. The article says we are “in the midst of what some worry is a baby crisis.” The birth rate has been declining for years and is now at a historic low according to the Centers for Disease Control and Prevention. Some predict it will result in “economic and cultural turmoil” and that “there's a danger that we wouldn't be able to replace the aging workforce and have enough tax revenue to keep the economy stable.”

The workforce issue could be a worry if the birthrate falls and stays below the replacement level, unless robots fill some of those jobs that the aging workforce leaves. Of course, the idea of robots taking jobs is another of the worries that the news media presents as a potential crisis! But maybe it would be a good thing.

With robots doing the work, there would not be enough human workers to pay into the Social Security fund that the retirees draw from. But that is already a problem, a flaw in the design of the program rather than a crisis brought about by not enough babies. It is compounded by the inadequate savings of many older Americans, but fewer children would cost parents less and with a little more discipline the may be averted.

Then there is the fact that as economies strengthen and the standard of living improves it is natural for parents to have fewer children. Populations migrate from farm to city, and the childhood survival rate improves as healthcare improves. It happens in every country, not just here. According to the article countries that already have low birthrates are fighting this trend by putting “pro-family policies into place to try to encourage couples to have babies.” 

That smacks of yet another government attempt to sway individual decisions – there is already a tax break for having children and assistance payments are calculated on a per child basis.  Now should programs like mandatory parent leave be added? Do we have people in Washington (or anywhere) capable of fine-tuning the birthrate by turning on and off programs and regulations? Even if we did, is it politically realistic to expect that such benefits could easily be turned off? 

At the same time we have a distress call every summer that children are out of school and will be going hungry because they no longer get free breakfasts and lunches. Charitable organizations are putting together programs to address this problem.  Would more babies compound this problem?  

Finally, since everyone is worried about climate change, isn’t having fewer people burning fossil fuel, otherwise adding to greenhouse gases by eating meat and generally using up the earth’s resources a good thing? Technically, your children and grandchildren are part of your carbon footprint. Maybe this is another case of wanting to clean up the planet by letting someone else do it.

The news media are always eager to pick up on the worries of certain experts even if they seem to conflict with the worries of other experts.  This sounds like another crisis where the experts have already made up their minds about the problem and course of action without looking at the many trade offs and contradictions – puzzling.

Misunderstanding Social Security

Every few months it pops up on social media:  “I paid into Social Security and the government is using my money without my permission!”  It’s listed as “Fun Facts” and says that it’s your money, politicians are using it without your permission, and they are lying about insolvency because it is running a huge surplus.  Let’s take a look at the validity of that outrage.

The first person to claim Social Security was Ida May Fuller.  She paid in a total of $25.75 over the three years of working in the 1930s and had collected $22,888.92 by the time she died at age 100.  How could that all be her money merely held in a lock box and paid back to her?  NO.  Social Security is a tax, set up like an insurance policy or annuity.  Everyone is required to pay the “premiums” to get in return an agreed amount upon retirement.  All the money goes into a pool and is paid out to retirees as promised.  It is workers’ money going in, retirees’ money coming out.

Initially with more workers than retirees, that pool grew.  The Treasury doesn’t keep it hidden in a mattress or invest in gold.  They don’t put it in the local credit union or bank; nor do they buy stocks or corporate bonds.  They are required to invest it in government bonds, considered one of the safest possible investments.  But those bonds are the vehicle for the government to borrow money when it spends more than it has – which is most of the time. 

So yes, the government spends that money, but it has an obligation to pay it back to the Social Security Trust with interest, the same obligation it has to anyone else that buys government bonds.  This isn’t raiding the trust fund; it’s spending money that was borrowed.

Why are we worried as long as there is this huge surplus ($2.85 trillion) in the fund?  With more people retiring and a smaller workforce contributing – more going out than coming in – soon that huge surplus will be gone.  Here is what the government writes in the press release announcing the 2017 annual report:  “The year when the combined trust fund reserves are projected to become depleted [i.e., all gone]…is 2034…[after that] there will be sufficient income coming in to pay [only] 77 percent of scheduled benefits.”  What could extend that date is a continuing strong economy with high employment with good paying jobs.

Once we pay the tax, it is no longer our money.  Politicians are not robbing the Social Security bank, but are treating the money as they would any other borrowed funds.  The surplus is large now but could easily disappear in less than two decades – in other words, if you are 45 years old today, expecting to collect full benefits at 65 is iffy.  When nothing is done and the fund runs out, it is highly likely that Washington will avoid the unpopular action of cutting benefits, thereby adding costs.  That will impact the debt.

So most of what is posted is neither fun nor is it facts.  It’s mean and nasty, a scheme in support of a political agenda to get people all upset – and it works!  Critical thinking is impossible when people fail to do even a little research.

Those are the basics.  For a more in depth explanation of Social Security issues, see here, here and here.

Unpredictable Consequences

The premise that behavior has consequences and that the nature of those consequences usually follows from the wisdom of the behavior is accepted by almost everyone (and is common to most religions).  Most consequences are predictable in this way, but some people need to learn the lesson the hard way and many do.

A recent example was the man who had to be rescued two days in a row from Wildcat Creek in Indiana.  On a Thursday he and three others were rescued when their boat capsized on the flooded creek.  The next night he returned to the same spot to try to retrieve belongings that had been left behind, and he drowned.  The consequences of his Thursday misjudgment were not enough to deter him from repeating the risky behavior.  Consequences can be cruel.

More troublesome are those consequences that are harder to predict because the decisions are based on faulty information or grounded in fear.

I read a book a few weeks ago by Gene Stone called The Trump Survival Guide.  In it he criticized the idea of private Social Security saying the stock market might yield a higher return (most of the time) but the Trust Fund was invested in government-backed securities, so although the return was lower, the investment was safer.  Fine, but individual Social Security returns are not based on the investment vehicle of the Trust Fund.  They are based on a set formula that rewards at a higher rate those who contributed less. (See the graph here.)  This assumption also perpetuates the myth that the money you paid as F.I.C.A. taxes are invested in a “lock box” or trust fund and are waiting for you to collect them.  This is absolutely incorrect.

One week earlier I read a book by David M. Smick called The Great Equalizer.  At one point he tells of the difficulty of raising the Social Security cap to get the rich to pay more, thus extending the time before the Trust Fund is depleted (an estimated 15 years from now).  He gives the example of a husband and wife who together earn more than the current cap of about $120,000.  (I couldn't believe an author with his credentials could be so mistaken.)  The Social Security cap applies to individuals.  You can’t file jointly to try to reach the cap sooner.  That’s not how it works.  That couple would not have been affected by such a change unless they were each expecting a huge raise!  Yet such misinformation could easily get them writing anxious letters to Congress.

These may be fine details, but how can voters make intelligent decisions when well-educated people from both sides of the political spectrum (not to mention AARP) don’t seem to understand a system that affects so many?  Faulty information leads to poor decisions, which in turn may lead to poor outcomes we all must live with.

Decisions grounded in fear are also problematic.  I also read in the Trump Survival Guide how the prospect of a Trump presidency was characterized as horrific.  This is simply a kind of fortunetelling, anticipating and worrying about a destructive future that may or may not play out.

As a demonstration of how unpredictable that kind of future can be, consider this scenario.  In 2012 Mitt Romney wins the election.  In 2016 instead of having a 16-way debate among Republican candidates, Romney is running for re-election against Hillary Clinton.  Donald Trump would have no way to throw his hat into the ring.  There is no working class backlash against the establishment and Mrs. Clinton has Romney's 4-year record to run against.  Whatever the result of the election, there is no Trump presidency and no potentially horrific outcomes.

Now if Romney had run on a platform:  If you don’t vote for me, Donald Trump will become President of the United States, people would have called him crazy.  No one would have believed it, no one!  So today we are in a situation no one could have predicted a couple of years ago, yet so many people are stressing about and making decisions often based on wild predictions of future disasters.

Decisions based on inaccurate information or motivated by fear also have consequences.  Inaccurate information may lead you in the wrong direction.  Decisions based on fear of possibilities leads to highly unpredictable consequences and can have a detrimental effect on your health.  Is it really worth panicking about the pessimistic speculation of people with their own agendas who bank on such an emotional reaction from their followers and contributors?  (We know had the election come out the other way,  the same dynamic would be happening on the other side).

For the record:  I supported neither of the major party candidates as was clear from an entry on this page last November.  I still contend that America deserves better.