Debunking the top 10 myths about Social Security

Myth-and-Reality-280pxSocial Security is going bankrupt. It’s a Ponzi scheme. The program’s trust fund contains nothing but a bunch of worthless IOUs.

Those are just a few of the comments we hear frequently from journalists, politicians, and policymakers about Social Security. But they’re all false–and that’s a big problem. Social Security is one of our most important linchpins of retirement security, yet discussion and analysis of the program and its future are remarkably fact-free.

So, let’s dispel the fog. Here’s my list of the top 10 myths about Social Security–along with the facts.

Myth 1: Social Security is going bankrupt

A quick Google search turns up plenty of supporters for this myth–none more prominent than President George W. Bush, who floated it in his 2005 State of the Union address, as he campaigned to replace Social Security with private investment accounts. “The system . . . on its current path, is headed toward bankruptcy,” he said. “And so we must join together to strengthen and save Social Security.”

Facts: The word “bankruptcy” is meaningless in the context of a federal government program. Nancy Altman, an advocate for Social Security and historian of the program, notes in her book The Battle for Social Security: From FDR’s Vision To Bush’s Gamble that “As long as the federal government has, under the Constitution, ‘Power to Lay and collect Taxes’ and the authority to issue and sell Treasury bonds, it and its programs will not go bankrupt.”

Social Security does face a long-term financial challenge. The Old-Age and Survivors Insurance (OASI) retirement trust fund is on course to be exhausted in 2035, and its cousin, the Disability Insurance Trust Fund, will be exhausted around the end of 2016. The Republican-controlled Congress is on course to push for reform of both programs during its current session, perhaps in the lame duck period following the 2016 elections.

Exhaustion doesn’t mean the programs would be out of money, because current revenue would be sufficient to continue paying benefits. But retirement benefits would have to be cut nearly 25 percent in 2035, and disability payments would be slashed 20 percent if no fix is implemented before 2017.

Benefit cuts aren’t a fair or acceptable outcome – and I doubt we’ll get there. It’s difficult to imagine any member of Congress eager to explain cuts of that magnitude to voters—so bet on a fix taking place ahead of these deadlines.

The disability insurance fund’s woes should be dealt with through a simple reallocation from OASI, although it’s not clear Congress will approve that approach. Still, the real question is what to do about the OASI fund. It can be fixed through benefit cuts, injecting new revenue into the system, or a combination of the two.

Still, it’s a fact that Social Security will have substantial assets even after 2035.

Myth 2: Social Security is a key driver of the national deficit

Facts: Social Security lends money to the federal government, not the other way around. It was designed as a pay-as-you-go program, and every penny it receives is credited to the trust funds. Social Security is prohibited by law from borrowing, so it needs some level of reserve to pay benefits whenever cash on hand runs short. Those reserves are at a historical high point as a result of reforms made in 1983 aimed at funding the anticipated retirement of the baby boom generation.

The surplus trust funds are lent via a special type of Treasury note to the federal government, which uses the funds to finance ongoing operations. But Social Security is no more a driver of the debt than China. Both are lenders to a government that chooses to spend significantly more than it levies in taxes–and both have the right to be paid back what they are owed.

Myth 3: The Social Security Trust Fund is nothing but a bunch of paper IOUs

SSTF notes1Facts: This is a favorite argument of Social Security conspiracy theorists, who argue that the government has raided Social Security to fund other programs, and that the money will never be seen again. President Bush in effect amplified the myth during his 2005 privatization campaign by paying a visit to a file cabinet in West Virginia where the aforementioned Treasury notes are kept.

Every year, the report issued by Social Security’s trustees confirm that the surplus funds are invested in “special issue Treasury bonds” and that they are “full faith and credit” obligations of the government. At right, you will find the language from the 2012 report.

Myth 4: Social Security is a Ponzi scheme

Facts: Social Security and a Ponzi scheme are as different as night and day.

The Merriam-Webster Dictionary defines a Ponzi scheme as: “An investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.”

The perpetrators of Ponzi schemes lie to their investors; Social Security is an open and transparent system. Its trustees send a very detailed actuarial report to Congress that projects the program’s finances 75 years into the future. The trustees include three cabinet secretaries, two independent appointees (one Democrat, one Republican), and the commissioner of the Social Security Administration.

It’s irresponsible to suggest that the program is an unethical fraud or swindle. What’s more, Social Security has never missed paying a dime’s worth of benefits, and it will be there 25, 30, and 75 years from now.

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  1. Warren Hall says:

    This is the most egregious white-wash of the declining Social Security program I have ever run across. It is filled with equivocating and misleading statements and does not “destroy” the so-called myths.

  2. Jim VanBeek says:

    Some corrections. (1.) Yes technically Social Security does not go bankrupt. But its revenue stream will be less than the expenditure stream. The difference will start out small, but increase over time. Then some changes will need to made to the program. There are a number of choices. (3.) The social security trust fund is simply paper IOU’s, but they do have the full faith and credit of the United States Federal Government behind them, so it shouldn’t be a big concern. There will be far bigger problems than Social Security if this becomes an issue. (4.) Social security is exactly like a Ponzi Scheme in the way it operates. Just pull out the negative sounding words from the inflammatory definition picked nd it fits well. It has relied on new members to pay off the older members as it continues. It will have problems, as Ponzi Schemes do, when there are no longer enough new contributors to pay off old members (read that as current workers and retirees.) (5.) We are living longer and that is one of the major problems. When started, the retirement age was less than the expected age of the population. Not that many reached retirement age and they tended not to live that long into retirement age. Now it is not uncommon to live twenty or thirty years into retirement. Extending the retirement age is one of the major factors that can be adjusted. Yes some groups live longer than other groups, but this is no different from the inception of the program. This option should not be dismissed summarily as the author does. (6.) The program is it is currently has a shaky future without major changes. In 1940, there were 149 workers per retiree. A small contribution from each retiree would easily provide a retirement income for a retiree. We are now down to less than three currently employed people per retired person. On average, an employee must pay enough in taxes to provide for one third of the income of a retiree. Soon they will be paying 40% of a retirees income. The tax rate will become onerous unless there are more workers, fewer retirees, or a shorter retirement per retiree. (Notice how raising the retirement age helps solve all three of these!) The author is wrong in stating that it is just the fall in the birth rate that causes the problems. It is the increased longevity that is a major part of it. The time that a person spends on social security is greatly extended because the longer life expectancy. Add to this that are more elderly because of the baby boomers. There would be many other problems if we had maintained the birth rate from the height of the baby boom. (7.) The chained CPI would cause a small decline in the rate of increase in Social Security. It would not cause a decrease in the amount and it would not be a big change. The CPI as traditionally calculated has long been known to overcompensate for inflation because it does not take into account the fact that people adjust their spending paters as the price of some goods increase faster than others. (9.) As a group, the elderly are the richest in the economy. They own a substantial amount of the assets. When there is increasing tax pressure on current workers, something will need to give. Either you make payments smaller to retirees or you target the dollars towards those that need it. I suspect that means testing will become the more palatable option at some point. The author of the article is clearly a big fan of social security and takes the positions of its supporters. They don’t want any decrease such as chaining. They don’t want any means testing or increase in retirement age because it will reduce the numbers of supporters. The longer we put off reforms the more drastic the adjustments that will be required later.

  3. Your points fit what I believe to be true, but you omit several gaffes that the government committed. First, the government has lied to the public about social security, and it has lied since 1937. Social Security was, from the beginning, a welfare plan, not a retirement plan, but the federal government told the public that it was both. It cannot be both. It is not a retirement plan because the benefits are not actuarially related to the contributions. Mathematically, higher-earning contributors receive a lower return on their contributions than do lower-earning contributors. Paul Krugman’s eagerness to further reallocate benefits from the higher-wage to the lower-wage participants is characteristic of the traditional deception advocated by his predecessor at Princeton, J. Douglas Brown. The government should have been clear from the beginning that Social Security is a plan of income redistribution, i.e., a welfare plan.

    Second, the plan is intergenerationally unfair. The benefits to those retiring before 2000 were greater in relation to their contributions than those retiring after. The benefits were raised in the early 1970s and then reduced in the early 1980s. Those retiring during the first twenty-five years of Social Security’s existence received subsidies from those retiring later.

    Third, there is no legal connection between the contributions and the benefits. Moreover, the trust fund is unrelated to the provision of benefits in the sense that the plan has always been primarily a pay-as-you-go system. The trust exists only because of imbalances in year-to-year contributions and benefits. Thus, later generations are asked to pay for earlier generations’ benefits. That works if there is demographic growth or stability. It does not work with a shrinking population or a shrinking economy. Yet, economists like Paul Krugman say (1) that we are running out of oil and other resources, so we will be poorer due to limits to growth and (2) there will always be enough to pay for Social Security .

    Finally, and most importantly, Social Security is not voluntary, so even if I don’t want it, I am violently compelled to pay into it by the federal government and its violence-loving lackeys. In concept, Social Security is antagonistic to freedom; moreover, there is no delegated authority in the Constitution that gives the federal government the right to establish a general welfare-destroying program like Social Security. Hence, Social Security is an illegal plan that coercively transfers wealth from later to earlier generations and from the higher to lower earning. It was passed by politicians willing to lie to the voters and willing to violently force the descendants their descendants to pay for a plan that helped them get elected.

    The harm it has done to savings rates, to capital formation, to innovation, and to love for liberty will never be known. America’s population of Social Security-protected serfs will not ask, for they have been educated in government-run schools.

  4. Al Lorentz says:

    Excellent and succinct article that clearly and neatly debunks the lies being told by the detractors of this program.

    The mendacity of those who want to destroy this program is incessant and cynical; they know it is not a Ponzi scheme and know it is not “going broke” yet find it expedient to repeat their lies endlessly.

    The fact that Wall Street and billionaires like the Koch brothers and Pete Peterson are behind this cynical assault on our retirement seems to escape the attention of many who repeat these manufactured lies.

  5. Dieter Joachim Orkisz says:

    Why not just put all state and federal tax receipts from social security into the trust fund.

  6. i don’t have the time or patience to answer the comments above based on sheer ignorance and prejudice. but the facts are these:

    Social Security is not welfare. It is not a Ponxzi scheme. It is simply a way for working people to save part of their inomce insured against inflation and market losses and personal. It also provides a means for the workers to insure each other against lifetimes of wages so low that it is impossible to save enough to be able to retire. There has been a sophisticated campaign of lies funded mostly by the Pete Peterson. The fact is that because people are living longer, having fewer childen and likely to experience lower growth in wages than past generations, they will have to save a larger percent of their wages in order to pay for their higher costs of retirement. The amount that will be required will be about eighty cents more per week each year. This is not a burden. This wouldn’t even be noticeable. And by gradually introducing the needed increase in the “tax” it would fall on people who have more money to pay for it and who will be the ones needing the increased benefits.

    There is no problem with Social Security. There is a problem with a dishonest congress, and a lazy press, and ignorant people.

  7. Coberly, I suggest that you read J. Douglas Brown’s book about the formation of Social Security. If you believe that Social Security is not a welfare benefit, I suggest that you take a look at the benefit bands, which favor the lower wage at the expense of the higher wage. It is not a way to save; it is a way to redistribute wealth from higher-earning to lower-earning taxpayers. The very high wage are free of the compulsion, for the maximum is small for the super rich. See

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