Social Security Myths and Lies

I recently stumbled on a WordPress blog, the Social Security Media Watch Project, which was refuting several “myths” about Social Security.  The reasons I feel this subject is of importance to my readers is twofold.

The first is that Social Security, despite reassurances on the Social Security Media Watch Project site and from various politicians, will not be there in 20 years, at least in a form that will provide anything close to significant benefits for those who are currently under 50 years of age.  I feel assured of this because current benefits are already fairly insignificant and because the government simply can’t afford to continue even the current modest level of benefits, given the current demographics with a large number of retirees and a smaller number of workers.  There are various proposals to increase the taxes collected for Social Security and raise the age at which one becomes eligible to collect benefits.  Both of these actions reduces cost-to-benefit ratio even more that the current level.  You end up “saving” Social Security, but what exactly is saved?  Why not raise the age at which you receive benefits to 100 – the program would be solvent, even running a significant surplus, but the program would not serve any real purpose.  I therefore want to make sure those reading these pages aren’t planning for Social Security to be part of their retirement income.  You need to save yourself if you want to retire in dignity.

The second is that Social Security is a terrible program with a terrible, terrible rate of return that could be so much better with one subtle change – have funds deposited in individual accounts that are invested in a wide array of assets.  Currently the funds are collected by one government department, the Social Security Administration, and then are “lent” to another government department, the US Treasury, which then spends the money as directed by Congress.  The ability for the Social Security Administration to pay future retirees therefore relies upon the group that they are lending the money to, the US Treasury, to have sufficient funds in the future from tax collections to pay back the loans with interest.  With a $14.3 T deficit projected to grow by $2T per year for the forseeable future, this does not seem possible.  Even if the program remains funded, which seems mathematically impossible unless a flood of new, highly skilled workers and entrepreneurs arrives on our shores quickly to replace the current hole in the population, the return would still be awful when compared to the returns from investing.  For example, if a minimum wage worker saved and invested the money he currently contributes (with his boss) into Social Security, he would be able to withdraw more than $10,000 per month in 2011 dollars for life during retirement.  With Social Security, he’ll be lucky to have $1,000 per month.

I attempted to comment on the Social Security Media Watch Project site, but surprisingly my comments were not accepted; therefore, I will repeat my comments here.  Here are some of the myths being perpetuated about Social Security on that site and elsewhere, along with the truth:

Myth:  There is an enormous Social Security trust fund that holds government bonds, which are considered to be among the safest investments in the world.

True, but fallacious.  Yes, there is a trust fund and true, it holds US Government bonds, and true, US Government bonds are considered among the safest in the world (at least up to this point).  While technically true, the statement uses equivocation in saying that the fund “holds” government bonds, treating the trust fund just like any other buyer of bonds.  If an individual put his savings in government bonds, the bonds would be an asset to him because he could always go down and cash the bonds in, assuming the government remains solvent.  In the case of Social Security, however, the trust fund is the holder of debt from another part of the same government.  The money that is used to repay those bonds comes from the same source as the money that is used to pay Social Security benefits, current taxes.  If the government does not have enough revenue to pay for current expenses and Social Security benefits, it will not be able to repay the bonds.

To offer an analogy, let’s say that a wife works and her husband takes care of the kids.  Let’s then say that the husband takes money that is supposed to be used for their son’s college education, but instead issues a “bond” to the wife, payable when the son goes to college, and uses the money for golf.  Now the husband might have very good credit, always on time with bill payments.  That will not matter when the son is ready to go to college.  Because all of the husband’s income comes from the wife’s job, it will not matter that there are lots of bonds in the college fund and that the total is worth enough to send the son to Harvard if the wife’s income is not sufficient to pay for the bonds when the tuition bills come due.  Likewise, if the revenue generated by the US Treasury through taxes is not sufficient to repay the bonds and other obligations when retirees are expecting benefits, the fact that the Social Security Administration has the bonds will not matter much.

Myth:  Social Security does not add to the national debt.

True, but again misleading.  Up to this point the amount taken in by Social Security has exceeded the amount paid out in benefits.  This has allowed the government to spend the surplus, thereby making the deficit look smaller than it really was, so Social Security has not added to the national debt in the past.  Currently and in the future, however, because the number of retirees is increasing, the amount paid in benefits will exceed the amount taken in.  The Trust Fund will then start cashing in those “bonds,” which the US Government will only be able to repay with borrowed money unless spending in other areas is cut dramatically.  Spending cuts seem unlikely unless a balanced budget were required; therefore, continuing to pay Social Security benefits at the current rates will add to the national debt.  Note that it is true that Social Security did not cause the debt to rise, it was the spending in the past that will be exposed as the bonds are cashed in to pay Social Security benefits that actually caused the debt to rise – the debt already exists if the government actually pays the benefits it is promising.  It remains to be seen if the debt will rise as benefits are paid, benefits will be cut, or other spending will be cut.  In any case, expecting that Social Security check to be a significant part of your financial plan would be foolish unless you plan to live with relatives or someone else paying most of your expenses in retirement.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.comor leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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