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.

One More Time: Social Security

Now that the election is in full swing, the subject of Social Security will surely come up.  Those who want to be elected will swear that they will “protect” the Social Security system, although they are usually vague about how this will be done and no major changes have been made to the system since 1983.  The motive is to persuade seniors that voting for them will somehow guarantee a continued flow of checks.

Another sure way to pull ahead in the polls will be to accuse their opponents of characterizing Social Security as a “Ponzi Scheme” or (truthfully) telling Americans that it stands on shaky ground.  Seniors don’t want to hear this and would prefer to keep their head in the sand by voting for the candidate who helps them deny reality.

The reality most Americans don’t want to face is that the system is based on taxes, not on contributions.  Two arguments dominate.  The first is that it’s “my money” that has been held in some mysterious trust fund.  The second is that it’s a right and not an entitlement.  The first is wrong.  The second is mostly wrong.

Social Security was built on a faulty assumption that there would always be enough workers to support all retirees.  Since then America had a post-war baby boom and a major increase in life expectancy.  More people are retiring and they are living longer and collecting longer.

Previously, everyone paid into the system by the FICA tax.  Some of this money was immediately paid out to retirees.  The rest went into a trust fund for the future.  But in 2016 all of the money coming in is immediately being paid out, and that is not enough.  Money must be taken from the trust fund to make up the difference.  A retiree is not collecting his contributions from some personal account; the money is coming from today’s workers.

Is it really a Ponzi scheme?  No.  A Ponzi scheme is defined as “a fraudulent investment operation where the organization pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.”  Social Security is not a Ponzi scheme only because it is not fraudulent.  The government is upfront about the fact that older folks are paid by a direct transfer from the younger workers.  Otherwise it fits the definition.  Not enough profit/interest is earned to cover current obligations.  It is clearly not anyone’s invested money coming back to him or her.

Some then characterize it as an entitlement.  Is it an entitlement?  No, again.  As I explained in February 2013, an entitlement requires a legal obligation to pay a certain benefit at a given time, but the government states in one of their actuarial notes that it is not technically a liability because there is no such legal obligation.   Since no contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted, it doesn’t fit the definition of an entitlement.  (But I don’t think that’s the explanation most people hoped to hear.)

But what of the trust fund?  The results of my research in February of this year showed that the government also has its own definition of a Trust Fund with more flexibility than anyone would ordinarily expect. They can change the rules whenever they want to and have done so many times in the past (usually to retirees’ advantage, but that doesn’t mean it couldn’t go the other way).

Finally, this recent article tells how most retirees regret their decision about when to collect benefits.  The swing between early collection and waiting until age 70 is from 75% to 132%.  About a quarter wish they had waited longer.   How will they feel when the trust fund is depleted (estimated about 15 years from now) and the payout must be reduced to only the amount covered by current “contributions”? 

Not to worry – the politicians who have not had the courage to address the looming problem for the last 30 years will undoubtedly come up with a solution that keeps voters happy and drives the country further into debt.  That’s the way they “solve” problems in Washington, until they run out of money.

Clarifying the Social Security "Trust Fund"

Don’t you get tired of people arguing that Social Security is not an “entitlement,” that they paid in and it’s their money being held in a “trust fund” for their retirement?  The word entitlement makes it sound like they weren’t paying in, and when politicians refer to the FICA tax as a contribution, that statement reinforces the idea.  But that is not what is really going on.  The contributions of retirees are long gone; and the government has its own definition for the term “trust fund.”  Common assumptions are wrong, and a little research and critical thinking explain why.

Social Security was set up such that the contributions of today, from today’s workers, are used to pay the retirees of today.  They may pass through some imaginary trust fund, but all they do is pass through.  In the past the contributions went partially to the current retirees and partially to build a reserve, but there are no longer enough workers to support the number current of retirees.  Now it takes all the money collected, plus interest from that trust fund to meet today’s obligations.  That’s right, every penny “contributed" by workers today is passed directly to retirees.  There is not an account with your name on it (and there never was).

To defend those statements, here is an excerpt from the 2016 Budget of the United States, page 30: 

As a result of reforms legislated in 1983, Social Security had been running a cash surplus with taxes exceeding costs up until 2009. This surplus in the Social Security trust fund helped to hold down the unified budget deficit. The cash surplus ended in 2009, when the trust fund began using a portion of its interest earnings to cover benefit payments. The 2014 Social Security Trustees’ report projects that the trust fund will not return to cash surplus, but the program will continue to experience an overall surplus for several more years because of the interest earnings. After that, however, Social Security will begin to draw on its trust fund balances to cover current expenditures.

 Note above that the Social Security surplus “helped to hold down the unified budget deficit.”  It’s all in one pool, not a separate, distinct fund.  This situation was confirmed when, during the debate about the raising the debt ceiling in the summer of 2011, the President said he could not guarantee the Social Security checks would go out on time.  Why didn’t Congress counter with:  “That’s just a scare tactic, because the money is in a separate trust fund”?  They didn’t say that, because it’s not true.

Furthermore the government means something different and directly admits it on page 374 of the same document: 

The Federal Government uses the term “trust fund” differently than the way in which it is commonly used…the Federal Government owns and manages the assets and the earnings of most Federal trust funds and can unilaterally change the law to raise or lower future trust fund collections and payments or change the purpose for which the collections are used. [Emphasis added]

So don’t tell me it’s your money that you paid in and you have a right to it.  The money you paid in is long gone.  The money your children are paying in is going out as fast as it’s coming in.  And the government can change the rules whenever they want to and use the money for whatever they want to.  In other words, the trust fund is “simply an accounting measure, specifying how much money the federal government owes the program out of general revenues, not an actual asset that can be used to pay benefits.”

Of course, Social Security could have a real trust fund so that people who pay in get back their money with interest during retirement.  It would be run more like people expect it to be run, but after 80 years running on a pay-as-you-go basis, it would cost almost $25 trillion to retrofit it in that way.

Are We Acting or Reacting?

One week ago I wrote about Social Security, that it was not an entitlement with a guarantee attached.  Despite this lack of guarantee, many people have become overly dependent on Social Security for retirement.  Although seniors resent the idea of an entitlement because it implies accepting charity from a system they actually paid into, the prospect of losing any benefits causes panic.  I concluded that at least part of this over-dependency was related to behavioral failings.

The problem begins as a consequence of poor discipline.  In some cases living from paycheck to paycheck cannot be avoided.  But in others, overspending on wants after the needs are met, an unwillingness to delay gratification, leads to minimal retirement savings.  When they are ready to retire, their primary investment is a house, which is not easy to cash in.  Social Security is a supplement, not able to replace a paycheck, so their lifestyle must be drastically curtailed.

How often, though, do they get to within a few years of retirement before they become aware that a problem exists?  A lack of perspective has insulated them from the realities of the future.  Perspective instills a sense of gratitude, appreciation for what we have rather than longing for more.  It encourages moderation and provides the motivation for the discipline of frugality necessary to save for the long term.

Lack of perspective also warps expectations.  Not so long ago, less than 100 years, retirement was a rarity, enjoyed by only a few.  Most people worked until they died, or if they were incapable of work, they were taken care of by their families.  When Social Security was passed, the life expectancy was less than 65.  Now life expectancy is near 80, and we want to believe the AARP when they tell us that retirement is a right along with affordable healthcare, not something we must earn by saving for it.  Considering the overall cost, this is not realistic.

For lack of discipline and perspective Americans have lost the ability to provide for themselves in old age.  Expectations are skewed.  In this and in many other areas we are reacting, without a plan or focus.  When it looks like Social Security is in danger, we have no Plan B.

Years ago this would not have been such a problem.  Changes were slower, allowing more time to adjust.  The telephone, invented in the 1880′s, took over 40 years to become widespread in America.  The first televisions, in the 1920′s, took nearly 30 years to replace radios as the primary source of home entertainment.  Today we have gone from e-mails and instant messages to texting on our cellphones in only a few years.  The pace of change continues to accelerate.  If lack of perspective keeps us living for today and only reacting as crises appear, the danger of serious problems will only increase.  This applies not only to retirement, but to many other issues, both personal and societal.

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.