6 Common Myths about Social Security

By Jonathan Peterson

Copyright © 2018 by AARP. All rights reserved.

Rumors swirl about the state of Social Security’s finances, hidden meaning in the numbers, and other topics that find fertile ground on the Internet and are spread through social media. Unfortunately, myths can be harmful because they undermine public understanding of Social Security and confidence in the program at a time when the nation needs a constructive, fact-based discussion. Here, six common myths are dispelled; see also Four Outrageous Myths about Social Security.

Myth: Social Security Is a Ponzi Scheme

This is a claim made by critics of the program who really are saying that Social Security is inherently unbalanced and doomed to fail. Their charge is based on a superficial comparison of Social Security with a type of fraud associated with Charles Ponzi, a charismatic con artist in the early 20th century.

Ponzi’s infamous scheme involved speculation in international postal coupons. He lured his victim investors by promising returns of 50 percent at a time when banks were paying around 5 percent interest. Early investors were paid with money from later investors, a hallmark of Ponzi schemes. Such frauds may work for a little while, but inevitably they collapse. (Just ask Bernie Madoff.)

The misleading comparison of Social Security to a Ponzi scheme is based on the fact that Social Security does require one group (workers) to help support another group (retirees and other beneficiaries). This system is sometimes described as a pay-as-you-go system or a transfer payment.

The Ponzi label falls apart, however, when you think it through. For one thing, Social Security doesn’t rely on a soaring base of contributors, as Ponzi schemes do. Instead, it requires a somewhat predictable relationship between the number of workers and beneficiaries, along with adequate revenues. A lower U.S. birthrate starting in the 1960s, combined with increasing life expectancy that has resulted in an aging of the population, is the cause of Social Security’s expected shortfall.

Social Security has other fundamental differences from a Ponzi scheme. Importantly, it’s transparent. Each year, the Social Security Administration (SSA) releases information about its financial state in exhaustive detail, along with projections 75 years into the future, based on different economic assumptions. Scams, by contrast, thrive on secrecy and deception. And unlike a Ponzi scheme, the money not used to pay current benefits has built up a surplus of almost $2.8 trillion.

Another basic difference between Social Security and a Ponzi scheme is in the goals. A crook hatches a Ponzi scheme to get rich at others’ expense. Social Security provides social insurance to protect people. Money goes from one generation to help support another generation. Your tax contributions help support your parents. One day, the contributions of future generations will help support you.

Myth: Social Security Is Going Broke

People have heard so much talk about Social Security’s finances that it’s easy to see why they may think the program is going off the cliff. That’s not the case, however.

Social Security can pay full benefits until about 2033 — and it can continue to pay about three-fourths of benefits thereafter, according to the program’s trustees. The gap is caused by the fact that a relatively smaller number of workers will be supporting a relatively higher number of retirees (mainly because of lower birthrates since the 1960s).

The large number of Baby Boomers retiring, combined with the smaller number of individuals paying into the system through the payroll tax (because of lower birthrates), has caused Social Security benefits to surpass the amount of payroll taxes coming in. To make up for this shortfall, Social Security will increasingly draw down its trust funds of almost $2.8 trillion to supplement the revenues that will continue to pour in (primarily through payroll taxes).

The funding gap can be closed through a combination of modest tax increases and/or phased-in benefit cuts for future retirees. Although it has been difficult for lawmakers to make a deal, various policy options show that it’s possible.

Assertions that Social Security is running out of money erode the confidence of younger people, who will need Social Security one day. Polls have shown, for example, that substantial numbers of future beneficiaries — as high as 80 percent — expect nothing from Social Security when they reach old age. This undue pessimism helps reinforce the next myth.

Myth: The Social Security Trust Funds Are Worthless

Social Security revenues stream into U.S. Treasury accounts known as the Social Security trust funds. One trust fund pays benefits for retirees and survivors; the other pays benefits for disability. (The revenues come from the payroll tax and some of the income tax paid by higher-income retirees.)

Most of the trust-fund money is used quickly to pay benefits. But a big surplus has developed over the years — almost $2.8 trillion. Under the law, Social Security is required to lend the surplus funds to the federal government, which is then obliged to pay it back with interest. This lending takes place through investment in special-issue, medium- and long-term Treasury securities that can always be redeemed at face value.

This sanctioned lending, by the way, is the reason you may sometimes hear claims that the government “raids” the Social Security trust funds.

Those who contend that the trust funds are worthless are really predicting that the federal government won’t make good on that debt — even though the bonds are backed by the full faith and credit of the United States, just like other Treasury bonds held by the public. Investors throughout the world retain confidence in this nation to make good on the debt it owes, as demonstrated by the ongoing demand for U.S. Treasury bonds, even at a time of government deficits and budget battles.

In the coming years, Social Security will rely increasingly on income from bond interest and actual bond sales to pay benefits. That means the U.S. government faces a large and growing bill to pay Social Security back for the money it has borrowed over the years.

Myth: You’d Be Better Off Investing in Stocks

You hear this myth more often during boom times, but for the average person, it’s highly dubious at any time. To be clear: It’s important for people to save as much as they can, and stock investments may be an important element in your savings.

But the notion that you’d be better off without Social Security usually doesn’t hold up. For one thing, Social Security and stock investing aren’t substitutes for each other. Unlike stocks, Social Security provides broad protections for you and your loved ones, including benefits for disability, survivors, and dependent family members. These benefits may be payable if tragedy strikes at an early age, before you’ve had the many years needed to build up a nest egg.

Also, Social Security shields retirement income from risks that are inherent in the financial markets. Although stock returns may be greater, stocks are more volatile. If a market collapses at the wrong moment, your holdings can be hammered. Social Security, by contrast, provides a guaranteed benefit.

If you truly want to save for yourself, it helps to consider how much of a nest egg you need to match the protections you get from Social Security. You could buy an annuity to provide monthly income under certain circumstances. But what would it cost? Suppose you were trying to equal the average Social Security retirement benefit (about $1,360 a month in 2017). You would need hundreds of thousands of dollars to purchase a survivor annuity that matched the benefit, starting at age 66 and protected for inflation. A higher-paying annuity meant to equal Social Security’s family maximum for top earners (more than $4,000 a month) would cost more than a million dollars. Annuity price tags vary as interest rates change; also, insurance companies charge different amounts, so you can’t find one lasting dollar figure.

Neither of the products described here equals Social Security’s protections. They don’t cover family members while you’re alive, including a spouse or children, nor do they offer child survivor benefits when you die.

Could you save half a million bucks? Suppose you had 40 years to build up the nest egg. At a 3 percent rate of return, you’d have to set aside about $6,500 per year. Most people don’t save that much. Many people have nothing left over by the time they pay the monthly bills. Of those who do save, many could set aside more. Also, many people take money out of their nest eggs when needs arise. Unfortunately, such withdrawals can do lasting harm. Saving requires long-term discipline and possibly short-term sacrifice.

About one in three adults who have yet to retire report no retirement savings or pension, according to a Federal Reserve study in 2015. While savings do increase with age, millions of older workers lack adequate nest eggs. Imagine how much more insecure your retirement would be if you had to depend completely on yourself to save for retirement. Maybe you could pull it off, but most people are better off with the guarantees of Social Security.

Myth: When Social Security Started, People Didn’t Even Live to 65

This observation shows how the “facts” can be misleading. Its underlying point — that Social Security was designed to pay little in benefits because people wouldn’t live long enough to collect them — isn’t true.

Back when Social Security was created, life expectancy was shorter; a high rate of infant mortality meant that many people didn’t reach adulthood, and life expectancy at birth was especially low. (In 1930, it was about age 58 for men and 62 for women.) If you survived childhood, though, you could expect to live many more years. Among men who lived to 21, more than half were expected to reach 65. If you reached 65, your life expectancy came to about 78. (Women lived longer than men, as they still do.) Life expectancy at 65 has increased since the 1930s, to be sure, but much less dramatically than life expectancy at birth.

The architects of Social Security knew the program would serve many millions of beneficiaries as time passed. They concluded that age 65 fit with public attitudes and could be financed through an affordable level of payroll taxes.

The notion that Social Security was designed to cost little because people died early is simply not true.

Myth: Congress Keeps Pushing Benefits Higher Than Intended

Commentators sometimes assert that, over the years, generous lawmakers have hiked Social Security benefits far beyond the intention of the program’s founders. These heaped-on benefits, the story goes, explain why Social Security faces a future shortfall.

It’s true that Congress has enhanced benefits on several occasions since the program’s initial approval in 1935. But such changes were consistent with the intent of Social Security as a social insurance program for all Americans.

By the important measure of replacement rates (how much of your pre-retirement income you get back in benefits), Social Security has been stable over the decades. In fact, replacement rates are now declining because of the gradually increasing age for full retirement benefits that Congress approved in 1983.

When Social Security first began, benefits were limited to payments to retirees. The intent of the program, however, was to provide meaningful social insurance for certain risks in life and to extend such protections to dependent family members. Family benefits (including for survivors) were added in 1939, followed later by coverage for disabled workers and their dependents. Automatic annual cost-of-living increases took effect in 1975 to replace the ad hoc approach to inflation adjustments that had been followed previously.

The fallacy is that these reforms undermined Social Security’s long-term stability. Studies have shown that the addition of survivor and auxiliary benefits was offset to some degree by slower growth in benefits paid directly to workers. The anticipated shortfall reflects the fact that relatively fewer workers (because of a lower birthrate since the 1960s) will be supporting a bigger population of longer-living retirees in the coming years.