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 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 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 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.