Myths About Social Security

August 1st, 2011
in econ_news

Social-Security-card Econintersect:  In an article entitled “5 myths about Social Security” MSM Money conducts a fact find that reveals some of what is heard about Social Security, from both ends of the political spectrum, simply isn’t true.  For example, conservative activist The Heritage Foundation (at its website Social Security Reform – SSRC – in a 2005 assessment) implies the Social Security System will be out of money in 2017.  The NBER (also in 2005) completed a study which concluded that full SS benefits were covered through 2042.  Liberal spokesman The American Prospect has declared that there is essentially no SS problem as far as the eye can see.

Follow up:

It’s worth looking at some statements made by the various sources.

The statement SSRC shows on their website, obviously made in 2005, that leaves the impression that 2017 is when the Social Security System will fail, is:

In 2017--just 12 years from now--Social Security will pay out more money than it takes in. This difference will have to be made up by dipping into other government spending, raising taxes, or cutting benefits. Over the next 75 years, Social Security faces a $27 trillion shortfall.

From The American Prospect (in 2009):

[A statement like “Social Security is projected to run out of money by 2041”] implies that at some future date, elderly recipients of Social Security will receive checks in the amount of $0, all the money having disappeared.

This is simply bogus. The truth is that the system is quite healthy and can meet all its future obligations with only minor adjustments or perhaps no adjustments at all, depending on what happens to the economy over the coming decades.

A study by NBER (Jagdeesh Gokhale and Kent Smetters), the same year as the SSRC statements (2005), determined that Social Security was fully funded through 2042.  The difference from the SSRC was that the NBER study recognized that past Social Security taxes that have not yet been paid out remain an obligation of the U.S. Government, the so-called Social Security Trust Fund.  This “trust fund” is essentially a stack of IOUs for Social Security funds that have been diverted to other uses and, short of government debt default, must be repaid or replaced with other debt.

As a point of fact, Social Security is already paying out more benefits than money being collected.  This is a result of the temporary payroll tax reduction, part of economic stimulus.  This started in 2010, as pointed at the time by The New York Times.

And, of course, continued high levels of unemployment will reduce Social Security tax revenues as long as it continues.  This is combined with the tendency of people to retire sooner when they reach an age where benefits can be received and they are unable to find work.  Economic distress is a double whammy for Social Security.

The five myths listed and discussed by MSN Money are:

Myth No. 1: Social Security won't exist when I retire.

Myth No. 2: The trust fund assets are worthless.

Myth No. 3: Congress doesn't pay into Social Security, so it doesn't care about fixing the crisis.

Myth No. 4: Illegal immigrants are draining the system.

Myth No. 5: I could earn better investment returns on my own.

One thing that doesn’t seem to be a myth, even to The American Prospect, is that Social Security will be a dynamic program and there will be adjustments and modifications over time.

Sources:  MSN Money, Social Security Reform Center, The American Prospect and The New York Times

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