Not an Investment

Richard Quinn

IN A RECENT TWITTER post, a man claimed that if all the Social Security taxes he and his employers pay were invested instead, he’d accumulate $1.9 million by age 67. That sum could then generate $95,000 in annual income, he added, which is more than his anticipated Social Security benefit. He concluded that Social Security was “theft.”

Claims like these bother me greatly because they’re often widely read and believed—and they’re nonsense.

Social Security is an insurance program, not an investment plan. It provides much more than retirement income to the worker alone. The Twitter commenter’s claim is like me saying that the $196,124 I paid in Medicare taxes was theft because I haven’t collected that much in health care benefits. I hope I never do.

Of the 65 million Americans collecting Social Security, only 47 million are retired workers. The rest are spouses, ex-spouses, survivors and children of contributing workers, plus disabled individuals.

Looking at my own Social Security records, my wife and I have received in benefits every penny paid in taxes—both by me and my employers. In fact, we got it all back within the first seven years. Since then, we’ve collected $200,000 more.

Someone less fortunate may collect for a short period or not at all. That’s why Social Security is insurance that, in some respects, acts like a pension. For each individual, the goal is to be an actuarial loss—but, no, not everybody can live longer than average.

Social Security benefits are based on your earnings and the program’s benefit formula, not on the payroll taxes paid. Many individuals collect benefits without ever paying a penny in taxes, either directly or by an employer on their behalf.

The investment gurus are going to run the numbers and easily prove the $1.9 million claim, or something like that, is accurate. Yup—if everything works out perfectly from day one. Namely, that the individual has the discipline to save every equivalent penny. That the money is invested wisely. And that he or she doesn’t suffer any major vicissitudes of life, as President Franklin Roosevelt called them. If all these conditions are met, sure, then they’re correct.

Call me cynical, but not many Americans have demonstrated that sort of discipline for long-term saving and investing. That may be why there are always calls for higher Social Security benefits and larger cost-of-living adjustments.

The Social Security trust fund is often misrepresented. The U.S. government has almost $29 trillion of outstanding debt. Of that, $6 trillion is held by intragovernmental trusts, including some $3 trillion in Social Security reserves. Those trusts are effectively accounting items within government agencies.

The Treasury does issue special bonds to the Social Security trust fund. It also credits those bonds with interest—$76 billion in 2020. In addition, the trust receives income from the taxation of Social Security benefits—$41 billion more. Social Security will redeem those bonds when the income from payroll taxes is inadequate to fully meet its obligations. Where will the government get the cash? Probably with more debt, charged to another account.

Some people are convinced Congress stole the trust money. They say the trust would have plenty of money if it hadn’t. That’s simply not true.

Your payroll taxes, on average, pay for only about 15% of your total benefits. That’s why it was decided that a maximum 85% of our Social Security benefits would be taxed.

Representing Social Security as theft, a rip-off or a Ponzi scheme is reprehensible, in my opinion. That’s like saying term life insurance is a rip-off if you don’t die within the insured period.

No, the real failure is that Congress has ignored for decades the need to shore up Social Security’s finances. Adjustments are necessary as demographics and other factors change. These could have been gradual and relatively minor—if the costs had been spread over generations of workers. Now, we’re in a bind.

Current and future workers must carry the burden of balancing the books. Either that or Social Security must receive an influx of cash from general tax revenue. That would change forever the very idea of a worker-funded insurance program. It would place Social Security among the many programs competing for their share of the federal budget—something Roosevelt greatly feared.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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