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I RECENTLY DISCUSSED Social Security with a friend. After trying to explain the program’s funding, I gave up when his reply was, “The facts are that the Social Security money was misappropriated and there’s no way it can be tracked after all these years. People die before they collect one Social Security check, and others get very few checks. You will never convince me otherwise.”
Yes, that’s the one thing we do agree on: I will indeed never change his mind.
It’s hard to counter all the misinformation I hear. Still, I keep trying. Here are seven persistent myths about Social Security that I encounter, and my response to each:
1. If the Social Security trust fund had been invested in the stock market, all would be well. When I use the Committee for a Responsible Federal Budget’s reformer tool, investing the trust in publicly traded stocks and bonds only closes about 6% of the funding gap, so the trust remains insolvent.
2. It’s my money—I paid for my benefits. Actually, you didn’t. In 2023, my wife and I will collect $56,940 in benefits based on my earnings record, and it’ll be our 15th year of collecting benefits. From 1959 until I retired, my employers and I together paid $266,000 in payroll taxes, far less than the benefits that my wife and I have since received. Did I pay for all the benefits we have and will collect? No.
3. I would be better off if I could have invested the taxes I paid. Perhaps some HumbleDollar readers could make that work—provided there were no disabilities, deaths, divorces or lack of discipline along the way. But one glance at the saving, investing and spending patterns of the typical American says this is a red herring.
4. The payroll taxes I’ve paid determine the ultimate benefit received. Not true. Benefits are entirely based on earnings and the Social Security benefit formula. Many Americans—spouses, survivors, children, disabled individuals, ex-spouses—collect benefits having never paid a penny in payroll taxes. Keep in mind that two households with workers who paid the same payroll taxes can receive very different benefits if one is married.
5. Social Security is a ripoff because some people pay in and never collect. According to the Social Security Administration, that happens to only about 5% of taxpayers. Just like a pension or annuity, Social Security will always have actuarial gains that offset the losses—the latter being the benefits paid to individuals who live longer than expected. Social Security’s longevity calculator says I have 9.2 years to go. I’m striving to be a significant actuarial loss.
6. My Social Security benefits should never be taxed. Why not? If you had an employer-funded pension, the benefit would be taxed. If you purchased an income annuity, payments in excess of your after-tax contributions would be taxed. As noted earlier, beneficiaries have not paid in full for their benefits. In fact, the taxation of benefits is capped at 85% because, in aggregate, beneficiaries only pay for about 15% of the benefits they collect. Those taxes paid on Social Security benefits help pay for both Social Security and Medicare.
7. The government misappropriated the Social Security trust fund. I often hear folks claim that this or that president stole Social Security’s money. Not true. The trust fund is dwindling for more mundane reasons. The working population relative to retirees has declined, life expectancy at age 65 has increased and benefits have risen over the years. All this means that payments are outpacing the trust fund’s revenues. Despite repeated warnings by Social Security’s trustees, Congress has failed to address the issue.
If the 6.2% payroll tax was increased to 7.7% on employer and worker alike, and pretax premiums under employers’ cafeteria plans were subject to payroll taxes, the program would be solvent for at least 75 years. Regular, modest future funding changes would keep the whole program solvent.
And guess what? Workers wouldn’t even notice the changes. Don’t believe me? Ask employees how much they pay in health insurance premiums.
Richard Quinn blogs at QuinnsCommentary.net. 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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A good book on Social Security and its myths is The Big Lie by A. Haeworth Robertson, former chief actuary for Social Security. At the 1997 Enrolled Actuaries Meeting, soon after this book came out, he agreed to autograph my copy if I wore a pin around the conference promoting his book.
I think the debates below are another scenario where HD Nation thinks it’s the norm, when it’s the exception.
According to a 12/12/2020 online article by Zippia.com (citing SSI statistics), 40% of American retirees rely solely on Social Security for their income; another 21% of retired married couples, and 45% of single retirees, rely on SSI for 90+% of their income.
I’m sure the HD crowd could do well skipping the Social Security taxes and bearing their own risk for retirement funding, but the overwhelming majority of Americans? Not a chance.
“2. Did I pay for all the benefits we have and will collect? No.”
Wrong. It’s nice that you made out. But I paid and will continue to pay far more than I’ll ever collect from this unfairly designed program. As a gig worker, those of us choosing to make our own way earning a living vs rely on an employer are double taxed. We pay 2x the SS everyone else does – for what?
Your point of view and this program’s taxation rules are outdated. Tens of millions work 1099: the classification is no longer unusual or an outlier. It should be illegal to double tax us.
You will note I said I collected more. Much more than I and my employer paid in taxes. While you may be the employer and employee, you are still most likely will collect more than you paid in taxes.
i have to agree with you. as a self employed 65 yo. i paid both sides and either i got 1099’s for corporate work or entered every hand written mom and pop check i received into my ledger. my one man shop was/is the gig economy of my day.
Thanks for this thoughtful article. What I keep wondering is this: why isn’t income over $160,200 taxed? Wouldn’t that solve the problem easily? And perhaps help with the inequity of the less wealthy or less savvy paying more taxes proportionately?
Raising the taxable wage and providing higher benefits accordingly would help the trust a bit, but keep in mind relatively few workers earn at that level. Adding new bend points in the formula adjusting the benefit above certain earnings would also be fair, but avoid turning SS into a welfare program as some propose.
If income over $160,200 is taxed, then SS would also have to pay out more benefits.
They could reduce payouts for benefits above that amount.
In addition, the social security check is supposed to offset about 40% of your income needs in retirement. That’s it, the other 60% you were/are responsible for through either a pension, IRA, 401k, 403b, SEP IRA, Roth 401k, Roth IRA or personal investments. It was never intended to replace your paycheck but only to supplement your retirement. Same for Medicare, it ain’t 100% medical, dental, vision, or Rx coverage.
While I agree with the point that most people get more out of SS than they put in, you analysis is too simplistic. You can’t compare 1959 dollars with 2023 dollars. You need to adjust for present value. Also, by definition in order for a pension plan to be solvent it needs to collect contributions equal to the amount of promised payouts adjusted for present value with a discount rate equal to the expected return on the portfolio.
I am supportive of SS because people need a guaranteed income, especially less well-off people. But there is no real money set aside for SS. It is an usecured liability of the government. They will print money to pay their obligations or increase taxes or reduce benefits depending upon whichever is politically easier.
Think conceptually, the government takes money from workers/companies and then spends it. They write a promissory note (Bond) to themselves and call it a trust fund. That is an economic farce.
Your comment got my curiosity up so I looked to see what has happened to my SS benefit over the years. Since I began collecting it has increased by 33% and I didn’t pay for a penny of that.
The US has trillions in unsecured liabilities and debt secured only by the credit of the United States. There is no real money set aside for any government program, including Medicare.
‘’When the liability changes indeed to meet it other changes should be made. If that had prudently happened over the years, most of this discussion would not be necessary.
What alternative do you offer to this “farce” called government?
I can’t think of a better way for me to check out of the HumbleDollar than to let it sink into the cesspool of politics.
I would draw a distinction between partisan politics and economic/financial policy debates. I would hope the HumbleDollar community can discuss public policy without descending into the silliness of promoting one set of policies and bashing another out of blind political allegiance.
And, another political opinion piece on tax policy from Humbledollar. With reader & site owner comments about immigration policy, too.
What a joy.
Please point out what I wrote that was political opinion.
Point #2- You state the SS taxes paid by you and employer is $266,000. Have you ever calculated the Net Present Value of the contributions using a simple compounding interest of 5% (5% is the average interest rate of cash investments during your working years) to determine what your “real” contribution would be worth if SS was invested by yourself ?
I agree that most worker’s would not notice an increase in the payroll taxes and the ones that did would adjust. We adjust one way or the other to increases in gas, food, utilities, housing costs, etc. Small incremental changes over the last several decades would have done the trick as you say, but Congress just seems incapable of doing what needs to be done. I work for a small local government entity in the finance office and oversee the payroll for about 300 employees. To help close the pension shortfall at a state-wide level, they have been increasing the employee and employer contribution rates in small amounts over the last decade or so and in my six years here, I have not fielded one question or complaint about the increase from an employee.
I for one was well aware of my and my employers contributions to both SS and Medicare, but yes, most are probably unaware.
Its refreshing, and rare, to see an article wholly devoted to reality. I know more people than I should who can’t save even 10 percent even though it would be a paltry sacrifice. Ideology should never get in the way of dispassionate analysis, but unfortunately, a lot of humans succumb to their emotions.
I get myself in a fair amount of trouble because of my penchant to focus on reality over emotion.
The SSA says 3.5% of legal US residents over 60 never receive Social Security benefits. Of those, nearly all are late-arriving immigrants or infrequent workers with too few credits. Very few die between 60-62 before collecting and have no spouse to collect their benefits. As you say, it’s a pretty small group.
One thing anti-immigration politicians never mention is the importance of illegal immigration to Social Security’s solvency. Undocumented workers pay about $13 billion a year in Social Security taxes and very few collect benefits. People who advocate “deporting all the illegals” don’t talk about the hole it would leave in the Fund.
i would LOVE to see that 3.5% [or the 5% cited] displayed
as an actual number. that would carry more relevance.
Many illegals work off the books. Just schooling of illegals in California costs twice the 13B.
Citation please?
You make the following assumption that all illegal immigrants work. That assumption may/may not be true. For every working illegal immigrant who works, there’s possible another illegal immigrant who doesn’t work and milk the US welfare system. it’s a zero sum game.
Where do you see an assumption that all illegal immigrants work? Give us a list of welfare plans illegal immigrants are milking given they are only eligible for emergency medical care.
RQ…Illegal Immigrant children, as well as anchor babies, cost states millions annually for mandated K-12 Education, as well as emergency medical care, the most expensive kind of health care.
This is what I love about the complaints about illegal immigrants: Either they’re stealing our jobs or they’re mooching off welfare. The anti-immigration chorus would have more credibility if they sang a single tune.
Jonathan:
There is not single tune, because depending on the state elected, the costs vary, so therefore, so does “the tune.”
Have you noticed how open armed the “Blue States/sanctuary cities” are, now that they are faced with the situation that has afflicted border states for decades?
They do drive wages down, and you have to admit the education level of most illegals does not provide a living wage for their families. If you think otherwise, you should consider getting off the drugs.
They also perform jobs most Americans don’t want to do.
at 65, with an english degree from d.u. and a 30 year
career as a landscaping house cleaner, i will have to disagree w/u.
Excellent point. Not that I encourage illegal immigration, but that $13 billion shows their earnings are valuable not only to SS but other forms of taxation.
is 13B the going rate for a nation’s sovereignty and soul?
not interested.
From what I can tell, the Reformer Tool only estimates the extent to which various changes would close the funding gap going forward. Thus, it doesn’t address the argument that SS wouldn’t be underfunded if the trust fund had been invested in the market from the time it was created.
Yes, you are correct. But I think to myself, would we really want the federal government investing a few trillion dollars in the stock market? Talk about the possibility of an active investor.
I agree that having the gov’t invest in the market would create all sorts of problems.
heck, they can’t even balance their checkbook.
I think the whole notion of investing the trust fund in the financial markets — or allowing individuals to do so with private Social Security accounts — is a huge distraction that ignores the fundamental economic problem. Stocks and bonds, like dollar bills, are just mediums of exchange. What happens when any of these instruments are exchanged for goods and services? Unless we have the necessary workers to supply those goods and services, we potentially end up with high inflation. The fundamental problem is that we’ve entered a period, both here and abroad, where we have too few workers and too many folks dependent on their labor. Investing the trust fund in the financial markets doesn’t address that crucial economic imbalance.
and i would add, WAY too much government funny money blowing
through the system.
I agree. My comment was only intended to point out that Richard didn’t refute the argument that SS would be better off today if it had been invested in the market in the past.
Hi Richard, very interesting read. I had an eclectic college economics professor who really preached on points 1, 3, and 5. He was adamant he could prove your third point right. I’ll admit, outside of headline news I really don’t pay attention to social security, being in my mid 20’s. I remember getting my first paycheck as a teenager and being baffled by the subtractions from my gross earnings. To me, your second point is the most intriguing.
Pay attention – to all things financial and your future, it will pay off. I paid my first SS tax in 1959. Perhaps even your parent weren’t alive😃
Good article. It’s not a myth, but I am amazed at the number of people who fail to research/understand how delaying SS benefits can impact their future income. That’s especially true for the folks who automatically start taking it at age 62.
One of my favorite topics, but if I got into here – again – Jonathan would probably ban me from HD 😪
I wouldn’t ban you from HD for discussing the decision of whether to claim benefits early or late. I’d only object if it turned into some sort of political rant.
Never fear, it was a joke. In any case, I don’t see the matter as political at all.
“Workers wouldn’t even notice the changes. Don’t believe me? Ask employees how much they pay in health insurance premiums.”
This statement confuses me. I work for a very large (largest?) employer and EVERYONE knows what they pay per pay period for health insurance premiums. Its on all our pay stubs, during the almost three months of open season plans are compared with pricing. Maybe not the norm for companies that only offer a handful of plans, but with ~20 plans that are options for us, price is the one thing that helps differentiate them for us and is tracked very closely.
A lot of info is on a paystub. Go ahead, walk up to a fellow worker and ask. They should know the deduction for income tax withholding too. Ask that too.
I also bet price is NOT what differentiates your health plans and if that’s the basis for choosing, I bet a lot of workers make the wrong choice.
Trust me I managed all the benefits for a group of 13,000 employees and 5,000 retirees for many years. The typical employee does not pay attention to such things.
I would add that the medical insurance premium most employees see on a pay stub is just the employee portion of the total premium cost. Typically employers cover approximately 70 to 80% of the employee portion of the monthly premium and a lesser portion of family coverage. Neither the employer or the employee pretax elective premiums (under IRC 125) are included in the employee’s taxable income for income, social security or medicare tax purposes.
Good point. There is no hope the employee will know the true cost or that they may be paying tax free. One of the factors in my retiring was that I was at the limit of frustration trying to communicate all this stuff.
I was once giving a presentation to a group of workers in a small company we had acquired. When I explained the payroll deductions for health benefits there was a near riot over what I told them. The old owner stepped in and said, “hey guys, what he said is half of what you are paying now.”
I agree with most of your Myths. I do not agree that the only way to save the program(actually an insurance program) is with increased taxes on everyone and their health insurance benefits. Lets start with raising the maximum to be taxed to an unlimited amount without raising the tax amount. Let’s reduce the cola amount to no more than 3%. No increase in benefits in some areas of the program to buy more votes. I pay premiums for my life insurance and if I die before paying in enough premiums to cover the payout, does that also mean that life insurance proceeds should be taxed? Can we just allow the
amounts(32,000 and 44,000) that determine taxes on Social Security to be adjusted with inflation as the rest of the tax code allows. Just raising taxes is not always the best solution.
Dan, I agree with you that eliminating the max income from which SS tax is withheld is a better solution than raising the tax overall. My reasoning is that will be far less recessionary, because higher earning individuals are less likely to change their sending habits because of the relatively modest reduction in their take home pay, whereas lower earners are more likely to be forced to do so. I’m not sure our economy can take the hit of any tax increases.
You are correct, my examples are not the only way to fix SS. The Social Security 2100 Act had a combination of ideas that was fair and got the job done- it was ignored. Here’s more on that https://quinnscommentary.net/?s=2100
Now progressives have ideas to raise benefits, add a new 12.4% tax on investment income as defined by the ACA, raise the taxable wage cap and tax all earnings above $250,000, but provide no comparable benefits. That changes the very concept of SS and IMO, it’s wrong, not to mention unnecessary.
That sounds kinda political, don’t you think?
SSA was never intended to be the only basis for funding one’s retirement. Then again, people didn’t live as long back then, and DB pensions were much more common.
Neither of those are true now. If benefits aren’t increased, how do you propose to keep people off of welfare, or off the street?