Among public policy issues, Social Security is especially beset by myths and urban legends. These myths inhibit the enactment of legislation necessary to close its substantial financing shortfall. Press, public and policy makers alike would do well to disabuse themselves of the following widely circulated canards.
Myth #1: Social Security is not an entitlement. Social Security is not only an entitlement program, it is the largest and most prototypical federal entitlement program. Virtually any credible glossary of federal budget terminology will point to Social Security as the leading example of an entitlement (specifically, an entitlement is a program in which payments are obligated to beneficiaries according to eligibility criteria set in law, without requiring annual legislation to appropriate funds).
Myth #2: Social Security wouldn’t be in financial trouble if politicians hadn’t stolen and spent its money. Social Security trust fund reserves are by law invested in U.S. Treasury securities, which finance federal government spending. But this phenomenon has nothing do with Social Security’s shortfall. Social Security still owns all that money and earns interest on it. Whenever Social Security tax revenues fall short of its benefit obligations, as they have since 2010, Social Security taps both interest and principal of its trust funds to pay benefits. Social Security’s shortfall exists despite the government’s repaying those funds to Social Security, not because it won’t.
Myth #3: Participants have paid for their benefits. Workers covered by Social Security contribute payroll taxes, which establish an entitlement to benefits for themselves and certain dependents. However, this does not mean they have paid for the full amount of their scheduled benefits. Social Security has a shortfall precisely because in the aggregate, workers have not paid for their benefits: total scheduled benefits well exceed what workers’ tax contributions, plus interest, can finance.
Myth #4: Social Security is solvent until the 2030s, so there is still plenty of time to fix it. How soon Social Security’s trust funds run out, and how soon we must act, are two entirely different things. By the time its trust funds are depleted, annual income and costs will be so far apart that there is no realistic chance of legislation closing the shortfall. The window of opportunity for correction is closing now, if it hasn’t closed already.
Myth #5: Because Social Security is self-financing, it doesn’t add to the federal budget deficit. Since 2010, as Social Security’s costs have exceeded its tax revenue, the federal government has been running larger deficits to fund the payments it owes to Social Security. The fact that the federal budget benefited from Social Security surpluses in the past doesn’t make its ongoing deficit-worsening outlays, during the years it pays Social Security back, any less real.
Myth #6: Taxing rich people more by raising the cap on taxable wages will fix the problem. There’s a statutory cap on each worker’s annual earnings subject to Social Security taxes — $128,400 this year and indexed to grow automatically in most years. Raising the taxable maximum from today’s level all the way to about $350,000 in 2022 would only eliminate about 14 percent of the structural deficit, in part because a worker’s benefits are linked to his tax contributions and thus the tax increase would generate higher benefits for the well-off. That cost increase could be prevented by changing the benefit formula on the high-income end; but without benefit changes, a tax-cap increase by itself doesn’t accomplish very much.
Myth #7: Social Security privatization is a live option. Many years ago, when Social Security was running surpluses, presidents such as Bill Clinton and George W. Bush suggested that workers be given the option of saving them in personal accounts. None of those proposals involved privatization, but instead would have allowed for individual saving within a publicly administered system. That opportunity vanished in 2010 when Social Security began running cash deficits. Since then there have been no surplus Social Security contributions to save, and every program tax dollar collected now goes out the door to pay current benefits. Despite the fact that this has long been a dead issue, occasional “privatization” fear-mongering continues.
Charles Blahous is the J. Fish and Lillian F. Smith chair and senior research strategist at the Mercatus Center, a visiting fellow with the Hoover Institution, and a contributor to E21. He recently served as a public trustee for Social Security and Medicare. This article was originally published on economics21.org.