In 1935, when Congress created Social Security, over half of American senior citizens lived in poverty. Today, less than 10 percent of the elderly live in poverty. According to economists Gary Engelhardt and Jonathan Gruber, a $1,000 increase in Social Security benefits reduces elderly poverty by 2 to 3 percentage points.
Americans need those checks now more than ever. Since the end of World War II, it’s never been harder to save for retirement. Jobs are disappearing. Wages are barely keeping up with inflation. Education and health care costs are soaring. Pension plans are becoming a thing of the past.
So it’s not hard to understand why 34 percent of Americans have nothing saved for retirement. Nor is it surprising that 54 percent of retirees say Social Security is a major source of their income — especially because 401(k) accounts only average $98,000, which amounts to $600 per month in retirement, well below the poverty line.
But Social Security is hardly a windfall.
And your leaders want to reduce Social Security benefits.
The powerful Gang of Six in the Senate wants to slow the growth of benefits. Mitt Romney wants to raise the retirement age. Rick Perry wants to allow states to opt out of the program entirely — if he can’t dismantle the whole thing and replace it with…well, he doesn’t say exactly.
They justify these proposals by claiming that Social Security is headed for bankruptcy — and six in ten Americans believe them.
It’s a lie.
Social Security is not a pension fund. It doesn’t invest your payroll taxes until you’re ready to extract them. It uses your payroll taxes to pay benefits to current retirees. When you retire, your benefits will be paid for by the payroll taxes of the workforce at that time.
As a result, Social Security can never go bankrupt. It can run a deficit. Benefits can exceed taxes. But, so long as the government collects payroll taxes, it will never stop paying benefits altogether.
As the Baby Boomers retire, the share of the population eligible for Social Security will increase from 13 percent to 20 percent. If Congress does nothing, benefits will eventually exceed taxes. Fortunately, the Social Security Administration has a trust fund for just such an occasion.
For years, Social Security has been running surpluses and investing the extra cash in government bonds. Every year, the trust fund earns interest on those bonds. That’s why, even though benefits exceeded taxes by $49 billion last year, everyone still received their checks. The interest income of $118 billion more than covered the deficit.
Eventually, benefits will exceed taxes plus interest income, and they’ll need to dip into the trust fund. By 2036, the Social Security Board of Trustees estimates that the trust fund will be exhausted. After that, they’ll have enough taxes to pay 77 percent of benefits.
At 0.8 percent of GDP, the shortfall is roughly equivalent to the size of the Bush tax cuts.
The easiest, fairest, and least economically harmful solution is to raise the cap on taxable wages. Currently, workers only pay payroll taxes on income under $106,800. If they paid payroll taxes on all their income — a change that would only affect the top 8 percent of earners — 95 percent of the shortfall would disappear, according to the Congressional Research Service.
But that might anger politicians’ wealthy campaign donors. They can’t afford that risk. So they call Social Security a “Ponzi scheme” to scare you into believing that you don’t deserve those benefits after all.
Don’t let them manipulate you. You do deserve those benefits.
It would be a Ponzi scheme if the government kept the money for itself and didn’t tell anyone. Instead, it’s giving the money to retirees, exactly as it promised 76 years ago. That’s a long track record of success to throw out the window on account of a lie.
This op-ed was published in yesterday’s South Florida Sun-Sentinel, alongside an opposing view from Prof. Chandra Mishra of Florida Atlantic University. We were answering the questions: “Is Social Security a Ponzi scheme? Does it need reform?”