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.