For many years now, we've been hearing dire warnings about the long-term problems facing Social Security. And polls consistently show that, despite Americans' strong support for the program, a majority of respondents fear that it will be unable to meet its obligations by the time they retire.
For example, according to a CNN poll from last summer, 60 percent of working Americans answered "will not" when asked, "Do you think the Social Security system will be able to pay you a benefit when you retire?" Among those aged 18–49, 70 percent gave the pessimistic response.
Social Security remains a linchpin of Americans' retirement security. Roughly half of working Americans have no private pension coverage, and an estimated one-third have no money put away for retirement. Consequently, fully half of retired households 65 and older will rely on Social Security for the majority of their income, and a significant proportion of Americans will rely on it almost exclusively. And Social Security has been remarkably successful in producing a dramatic reduction in poverty for seniors, among whom it was once endemic.
This makes it especially important to understand the real state of the program's finances and future prospects. Specifically, certain myths about Social Security's alleged dire state need to be confronted, in order for future debates about America's fiscal policies in general and retirement security in particular to proceed in a productive manner.
So here are five key points to keep in mind about the state of the program.
1) The program is fully funded decades into the future.
According to the most recent report of the Social Security trustees, the program will be able to pay all projected benefits through the year 2037. The Congressional Budget Office projects the full payment date to be 2039. It should be noted that these projections have been depressed significantly by the economic slowdown that began in late 2007. It's very likely that, once the economy starts to improve, those projections will change accordingly (and if they don't, we've got much bigger problems than a projected shortfall for Social Security, decades in the future).
That projection is the trustees' so-called intermediate projection. It assumes a slower rate of growth over the next several decades than the United States has experienced over the past 50 years.
Perhaps that projection is correct. But under the trustees' "low-cost" projection, which assumes a rate of growth going forward much closer to what we've experienced over the previous half century (a period that also included several recessions), there is basically no shortfall over the next 75 years.
2) Even when the trust fund runs out, Social Security will still be in decent shape.
When reporting on the expected date that the trust fund will run out of money, media and Social Security doomsayers commonly and mistakenly use words like "broke," "insolvent" and other adjectives to describe the program.
The trust fund was established in 1983 (under a reform commission headed by Alan Greenspan). Its specific purpose was to ensure that Social Security could meet its obligations when the baby boomers began to retire in about 2013. As the projections suggest, by the time the trust fund is exhausted, it will have substantially done its job—having provided the extra money to cover the costs associated with the retirement of the baby boomers. That the government will begin to use the trust fund in the next few years and that it will eventually exhaust its reserves is by design, not an unforeseen disaster.
In fact, Social Security will always be able to provide benefit levels for retirees at a higher level than retirees receive today, adjusted for inflation, with no changes whatsoever in the funding of the program. This is because Social Security is funded by payroll taxes, and as long as those are being collected, retirees will continue to receive their checks. Nothing will change this fact unless Congress decides that Social Security taxes should no longer be collected, or retirees should no longer receive benefits. In other words, unless Congress decides to abolish the program or deliberately reduce its scope, none of the doomsday scenarios will come to pass.
Many individuals have sensibly suggested that, to ensure the program's viability further into the future, we should raise or eliminate the cap on income subject to taxation (especially since payroll taxes are oddly regressive). In any event, the end of the trust fund is by no means a doomsday scenario.
3) Repeat after me—Social Security is not Medicare (or Medicaid), Social Security is not Medicare (or Medicaid).
One of the common errors in reporting on Social Security's problems is to lump it in with the problems facing Medicare and Medicaid. But those programs are funded separately from Social Security. And their problems are traceable primarily to a simple source—the runaway costs of our highly inefficient health care system. Whether intentional or not, lumping Social Security in with Medicare and Medicaid misrepresents fundamentally the former's future viability.
Discussions about "entitlements" should, therefore, immediately raise a red flag; whatever long-term costs we face in funding health care, these are largely unrelated to Social Security. To his credit, President Obama has been making this distinction recently. He needs to do it more emphatically.
4) To the extent that there is a long-term hole, it's fixable. The Social Security trustees calculate a 75-year projection for the program. So does the Congressional Budget Office. When one projects the potential shortfall over 75 years, one gets some pretty large numbers. As of the year 2085, there will be a roughly $4.5 trillion hole in the program. That sounds like a lot. But as a point of comparison, that is the equivalent of, in current spending, roughly six or seven years of Pentagon expenditures. As another point of comparison, making permanent the Bush tax cuts of 2001 and 2003 for the richest 2 percent of Americans would result in the same long-term shortfall. As Kathy Ruffing and Paul Van de Water of the Center on Budget and Policy Priorities write, "Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."
Furthermore, closing the 75-year hole would require a quite modest increase in payroll taxes, equivalent to a roughly 1 percent increase in workers' deductions (or less). In other words, though the size of the very long-term Social Security deficit looks scary, it's not. And to reiterate Point No. 2—even without any fix at all, Social Security will always be able to produce higher benefits, inflation-adjusted, than it does today.
5) The trust fund is not a "fiction."
Doomsayers insist that the Social Security trust fund is filled with worthless IOUs. President George W. Bush, among many others, tried to make a version of this argument during his ill-fated attempt in 2005 to partially privatize the program. In fact, trust fund assets are invested in special versions of United States Treasury Bills—among the most secure assets in the world. Unless the United States starts defaulting on its debt obligations—again, in which case, we've got much bigger problems than Social Security's future shortfall—there is nothing fictional at all about the trust fund.
On the program's merits, including its long-term fiscal health, there is no reason to doubt that it can continue to perform successfully its designated function decades into the future. The greatest threat to Social Security derives from political forces that, for their own purposes, want to change the program, not from any inherent fatal flaw in Social Security itself.