The Future Of Social Security

by: John Lindauer

"Popular payroll tax cut will haunt U.S. Later." That was the alarming headline of the Chicago Sun Times Money section on February 20. The article was written by someone (Nancy Savage) the paper identified as a nationally syndicated financial columnist and registered investment advisor.

The article particularly dealt with the recent extension of the payroll tax reduction which, it alleged, would reduce the money available to be paid out in the future to retirees. It went on to warn its readers that the future of Social Security was in doubt and that major reforms were needed if it was not to "destroy our future."

The column repeats today's conventional wisdom about Social Security - that its future benefits are in doubt because Social Security System faces a shortage of funds in the future. The conclusions are obvious - the system needs to be reformed and investors needed to plan ahead in case it isn't reformed.

And it's quite emotional: "It's the next generation - the baby boomers - who will first feel the impact of this current "payroll tax cut," as well as the the impact of longevity on the Social Security system. There's simply no way we boomers will receive the benefits that my dad is reaping from Social Security."

Investors will recognize that the article is merely a rehash of many similar predecessors and the numerous speeches of publicity seeking congressmen.

The problem with such articles and speeches is simple: they are totally inaccurate. Worse, they unneccessarily frighten and mislead people including investors and potential investors.

Such inaccurate statements are not the kind of thing one would expect to find in a major newspaper or other reputable media. Yet virtually every major newspaper and financial talk show in the country has at one time or another in the past few years run multiple stories, discussions, and columns with similar warnings.

Social Security Initially

Social Security was initially set up in the 1930s as a system of retirement insurance for individual working Americans. Each worker and his employer would pay in a small percentage of the worker's income each month into a "trust fund" and those who subsequently retired due to age or disability could then draw a monthly stipend from the trust fund related to how much they had contributed.

Initially, as now, Congress set the percentage of each worker's income the worker and his employer would pay and Congress set the benefits each retiree would receive.

Also initially, as now, the stipend for each individual upon retirement was set to exceed the amount each retire paid in. It was a classic insurance program - those who reached retirement received a share of the money paid in plus the income earned on the payments plus a share of the money of those who died before they could begin drawing payments.

Social Security Today

The Social Security Trust Fund grew rapidly as people paid in before they were eligible for retirement. Indeed, in every year right up to the present more money has been paid in and "earned" each year by the Trust Fund than has been withdrawn.

But what the prophets of doom don't seem to realize is that the Social Security System totally ended in 1969 in every way except the name.

1969 brought major changes. Congress had set the benefits so high that sooner or later the trust fund would indeed run out of money. People and politicians rightly worried. So Congress accepted the reality - that Social Security had, for better or worse, become the nation's safety net for retirees and disabled people and guaranteed the payments would always be there.

Specifically, in 1969 Congress re-established Social Security as a program comparable to other vital federal programs such as Defense, Education, Agriculture, etc etc. In so doing, Congress effectively abolished the trust fund and took control of the size and nature and eligibility of the payouts. Henceforth, all employment tax revenues would go in the general fund and all benefits set by congress would be paid from the general fund.

In other words, Congress in 1969 guaranteed that whatever Social Security payouts it established would never ever run out of money. (Sorry Sun Times)

Fears About Social Security Are Totally Unfounded

The author of the Sun Times article and all those who worry about Social Security make a classic mistake: they think the Social Security Trust Fund still exists, that it functions as it did when the program started, and that it could run out of money. That's not been so for more than 40 years.

Today saying retirees may not get the monthly payments they expect is comparable to saying a serviceman or woman may not get the monthly payments they expect during their enlistment because the money for the next 20 years of military payroll has not yet been collected or created. (or that newspaper columnists and reporters might not be paid because the newspaper does not now have cash in hand to cover their salaries for the life of their employment)

A columnist who writes that a soldier's pay might fall or not be paid in the years ahead because today the military does not today have enough cash in hand to cover the amounts due them each month for the entire term of their enlistment would probably be canned and sent to the funny farm for being totally out of touch with reality.

Should not the same fate befall all writers, pundits, and congressmen who say that very same thing about the monthly payments due to Social Security recipients that are funded in the very same way?

What's in the Future?

Social Security payments, military pay, congressional salaries, etc could be cut. But investors should know that if history is any guide it's more likely they will be increased to keep pace with the private sector and/or increases in the cost of living.

Similarly, employment taxes could be raised (or reduced) if more federal tax revenues are needed for some reason. But so could any other taxes be raised or reduced. In other words, there is nothing special about employment taxes they are just another tax pouring money into the government's general account along with money created by the Federal Reserve.

But one thing is certain - there is no unique problem with any spending program whether it be Social Security or Defense or any other program funded out of the government's general revenues: they are all claimants on the public purse and it's up to Congress to make the allocation.

In other words, if you are an investor and someone suggests something like "Social Security is in trouble" - you should either think they are too stupid and ill-informed to read/elect or be insulted because they think you are so stupid and ill-informed that you will believe them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.