Social Security For Dummies
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Something about Social Security stirs the popular imagination. Rumors and phony stories have attached themselves to the program from the start. Sometimes you can identify the grain of truth that sprouts into a tall tale. Other times you can’t.

Before Social Security got off the ground in the 1930s, newspapers in the Hearst chain spread the story that people would have to wear dog tags stamped with their Social Security numbers. (The dog tag idea actually was proposed but never approved.) Many people continue to believe that Social Security maintains an individual account with their contributions in it. The reasoning is easy to see, but the story isn’t true.

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.

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.

Social Security is not a Ponzi scheme © Amir Ridhwan /
Social Security is not a Ponzi scheme.

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.

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 and increasing life expectancy that has resulted in an aging of the population are significant causes 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 $2.9 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: Your Social Security Number Has a Racial Code in It

The nine-digit Social Security number has long fascinated people, because it is a unique, personal identifier in a nation that cherishes individuality. One myth is that the number contains a code that identifies the race of the cardholder. According to the myth, the code can be found in the group number, the fourth and fifth digits, in the middle. In one version of the rumor, a person’s race could be determined by whether the fifth digit in the Social Security number is even or odd. (Group numbers range from 01 to 99.)

One explanation for this myth is that people have misinterpreted the meaning of the term group number, wrongly assuming that it referred to race. This rumor has caused some people to worry that their Social Security number makes them vulnerable to discrimination by potential employers or others who may spot the racial code in an application.

According to the SSA, however, the term group number refers simply to an old system of numerical grouping that traces back to Social Security’s early days, when everyone’s records were stored in paper files. Employees used the two-digit group number to help organize the files.

If you want to find possible meaning in your Social Security number, look to the first three digits — the area number. Before 1972, the first three digits were based on the state where the card was issued; after that, they were based on the mailing address on the application. This is no longer true, however. In 2011, the agency began assigning the first three digits randomly, as part of a strategy to protect people from identify theft.

Myth: Members of Congress Don’t Pay into the System

This myth gets its strength by combining two rich symbols, Social Security and Congress. Variations of the myth include the idea that lawmakers get a special break on Social Security payroll taxes and that they’re allowed to collect benefits at an earlier age than the rest of us.

In the past, Congress and the rest of the federal government were covered under the Civil Service Retirement System, which was created years before Social Security. Under a 1983 law, however, all three branches of the federal government were steered into Social Security. As a result, since 1984, members of Congress, the president, the vice president, federal judges, and most political appointees have been required to pay taxes into the Social Security system like everyone else. And the same rules apply to them as apply to you.

Vestiges of the old setup endure for some federal employees. Those hired before January 1984 aren’t required to participate in the Social Security system. All federal employees hired since 1984, however, make Social Security payroll tax contributions like everyone else. That includes lawmakers.

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 2035 — and it can continue to pay about 80 percent 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.

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 $2.9 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 — worry Social Security won’t be there for them 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 people with disabilities. (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 — about $2.9 trillion. Under the law, Social Security is required to lend the surplus funds to the federal government, which is then obliged to pay the loan 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.

There are no recommendations here on how the government should pay its bills. But if you consider those matters, just remember that Social Security isn’t the cause of the nation’s current deficits.

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 retired worker benefit (about $1,500 a month in 2020). 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 $4,500 a month) would cost nearly 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 four adults who have yet to retire report no retirement savings or pension, according to a Federal Reserve study in 2019. 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: Undocumented Immigrants Make Illegal Social Security Claims

Tales that undocumented immigrants are soaking up Social Security benefits pick up steam periodically. As one popular version has it, Congress is about to consider a bill making benefits legal for workers who are in this country without authorization. This notion makes a lot of people angry. It’s also possible that the myth is spread when people stand in line at a Social Security office and make assumptions about others around them.

Whatever the cause, the myth isn’t true. Plus, the myth obscures an irony: Undocumented workers actually add revenue to the system through the Social Security taxes that are taken out of their pay, while most never claim benefits.

Under the law, undocumented immigrants are prohibited from claiming Social Security, as well as most other federal benefits. (Certain exceptions to this ban are allowed, such as for emergency medical treatment and emergency disaster relief.)

In reality, some undocumented workers use fake Social Security numbers to get jobs. Payroll taxes are then deducted from their pay, just as they are from everyone else’s, and credited to the Social Security trust funds. Generally, these workers don’t collect benefits. In fact, SSA estimates that undocumented immigrants contributed $12 billion net — that is, revenue paid into the system over benefits paid out — into the Social Security funds in 2010.

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.

Myth: Older Folks Are Greedy and Don’t Need All of Their Social Security

As some tell it, most older Americans spend their days being pampered in posh retirement villas or country clubs. According to the stereotype, these misers have no concern for young people — they prefer to take advantage of Social Security benefits they don’t need.

Talk about myths! Over half of older Americans depend on Social Security for at least 50 percent of their retirement income. The benefits keep more than one-third of older Americans out of poverty, often by a thin margin.

Are benefits too generous? The average monthly payment for a retired worker is about $1,500 (as of 2020). That’s about $18,000 a year. Not only do many millions of people struggle with poverty and near poverty, but recent estimates paint a bleaker picture than had previously been thought.

A U.S. Census Bureau alternative poverty measure in 2018 found a 13.6 percent poverty rate among Americans age 65 and up. Without income from Social Security, the poverty rate for older Americans would nearly triple — soaring to nearly 40 percent. Such figures make clear what common sense may tell you: A great many older people rely on Social Security to survive.

The myth of greedy seniors is further contradicted by the interdependence of generations, which may be growing. An increasing number of older people are helping to support their adult children and grandchildren, and studies have shown a big rise in the number of interdependent, multigenerational families. A U.S. Census survey found that slightly more than 7 million children — nearly 10 percent of all kids — live in families that include a grandparent.

Sometimes commentators try to argue that retirees and young people are at odds economically, as if older Americans are grabbing benefits they haven’t earned and don’t deserve. Think of the older people you know personally, people in your own family, and ask yourself: Does that ring true?

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