Social Security Exposed – A Recap

Social Security is the most important and most misunderstood program affecting American’s retirement. And yet a recent survey indicates that 70% of younger Americans believe Social Security benefits will be cut or even eliminated by the time they retire. Neither is true.

Knowing the facts about Social Security is important because basing retirement decisions on misinformation can be harmful. Misinformation causes us to develop perceptions and support changes that may not be the best alternative.

Have you heard that Social Security is going bankrupt? Nope! As long as there are incoming payroll taxes, Social Security can’t go bankrupt because there is a steady revenue stream.

The program’s financial problems are caused by politicians “stealing” the trust fund money. Oh my. The fact is Social Security has been funded the same way since it was enacted. Nobody has stolen the money. Excess revenue over current expenses is (was) used to purchase special interest paying US Treasury bonds. They generate about $80,000,000,000 a year for the trust, every penny of which is needed to pay current benefits. Just like with any bonds, including US Savings bonds, the seller is free to use the proceeds as it sees fit. In this case it’s the federal government.

The Social Security trust has several sources of revenue. Payroll taxes, the interest on its bonds and from the incomes taxes paid on up to 50% of the Social Security benefits being paid. Taxes paid on the additional 35% of benefits are used for Medicare funding. Surveys indicate 50% of retirees pay income taxes on their benefits.

And while we are talking about the trust, the words “surplus” and “reserve” are inaccurately used interchangeably. The trust is a reserve, that is gradually being depleted. If there were a surplus, the trust would contain sufficient assets to pay current and future benefit liabilities. It doesn’t. In fact, the unfunded liabilities for Social Security are estimated at $21 trillion dollars.

Many retires feel they paid for their benefits. Well, no they didn’t. There are no individual accounts and there is no relationship between the taxes paid and the benefits received. Don’t believe me? Consider that your benefits don’t stop when you have received payments equal to all payroll taxes paid. Also, take two workers with the same earnings, one being married and one not. The married family will receive 50% more in benefits. A worker can marry only twelve months before retirement and receive the same benefits as another married 50 years. How about a worker, a spouse and an ex spouse or two all collecting benefits on one earnings record? The fact is most people receive in benefits all they and their employer paid in taxes within eight years of payments beginning.

Payroll taxes are just like any other tax. Benefits are determined by the law which can be changed at any time by Congress. Social Security is funded by payroll taxes in a 1930s attempt to keep the program out of political wrangling over general budgets and spending, to be self sustaining. It used to work, but that’s now questionable.

Just waiting for the next deposit

Many retirees feel they are being shortchanged when it comes to the annual COLA they believe doesn’t accurately reflect spending by seniors. As an alternative, consideration may be given to using the CPI-E (E for elderly) to reflect spending more relevant to the elderly. But the expectations for higher COLAs this creates may not be realized. The difference between the CPI-W, the current measure, and the CPI-E is often only one or two tenths percent and there are some years the CPI-E is lower.

Undocumented workers receive Social Security benefits thereby helping to deplete the trust. No they don’t. Actually the latest figures show undocumented workers pay about $13 billion a year in payroll taxes, but are not eligible to collect benefits.

Finally we have the DIYers who believe that Social Security is not a good investment. They claim that if they had that tax money to invest, they could do better and have a big pile of cash at retirement. In theory, I bet they are right, but there is a big gap between theory and reality. Two things get in the way. The discipline to follow a prudent investment policy year after year until retirement is not all that easy as evidenced by the state of 401k account balances. Second is the many variables such a early death, forced retirement, disability, divorce, etc. And still at the end there is no guaranteed annuity.

Here’s is the bottom line. Social Security is not going away, benefits will not be cut (quite the opposite actually), taxes to support it must go up in some manner and nobody should plan for a retirement living only on Social Security.


  1. “Cut” is an interesting word. How would you describe the 1983 Social Security Amendments Act? Was that an improvement? How would you describe the new taxes in that legislation and subsequent legislation – such as increases in FICA, the new Medicare Part B and Part D IRMAA, the Medicare surcharge that was part of Health Reform, the 1993 change in Hospital Insurance FICA-Med tax (removal of the wage base limiter)? Aren’t those, in effect, “cuts” – by increasing the taxes individuals must pay?

    You mention that misunderstandings might prompt individuals to support changes that are not the best alternatives. But frankly, no one gives a care about what you think, nor about what I think, nor any other of your readers think. Congress will make changes – likely using alternatives that they think will buy them the most votes.

    Technically, Social Security IS bankrupt (you don’t have to file under the bankruptcy code)! When you look at the assets and the income and compare it to the liabilities, if Social Security was run as a business, a business person would have declared bankruptcy long ago and reorganized the debts. In fact, that is what many young people believe – not that the system will stop, but that it will be reorganized in such a way as to further increase the net, net cost to Millennials and future generations relative to the benefits they will ultimately receive. Why would they think that? Let’s see, whose gonna pay the increased taxes when the trust fund reserves are exhausted in 2026 (or earlier, Medicare Hospitalization Insurance) and 2034 (or earlier, Social Security). Whose gonna pay the increased taxes to continue to fund 75% of the ever increasing cost of Medicare Part D and Part B. Not only are there $100+ T in unfunded liabilities (for benefits already promised – depending on who you ask to do the calculation), but they are also “inheriting” $28+T in national debt, and the (soon to be) octogenarians running the place are adding $1 – $2 Trillion a year for as far as the eye can see or the CBO cares to predict. Do you think the French will pay? Or maybe Mexico will once they pay for the wall!

    “Stealing” is an interesting word, too. Wonder how people came to believe that the word “trust fund” meant a trust or fiduciary relationship with respect to their taxes (or contributions)? Remember, your paycheck doesn’t say “taxes” it says FICA – Federal Insurance Contribution Act. If you want to make the argument that the bonds are simply just another investment, fine, however, if the relationship is one of “trust”, or one of “insurance” (a contractual relationship), or a fiduciary relationship, investing everything in government debt kind of violates the requirement to act “solely in the best interest of the beneficiaries”, doesn’t it? Do that in a private pension plan subject to ERISA and they can send you to prison. Of course, it would be quite unfair to suggest that American taxpayers hold Congress to the same standard as an ERISA fiduciary.

    As Mark Twain once said: It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.

    You note that many retirees feel they paid for their benefits. Where did they come up with that idea? Who told them that? Oh, yes, it was the same folks who promised more than they were willing to tax – shifting the burden to future generations. You note it yourself when you say that you received more than you paid in (I disagree unless you are adjusting for employer paid taxes, general revenue taxes to fund Medicare Part B and Part D, and the time value of money on those taxes). Get all you are “entitled to” sounds like “earned” to most Americans. They think they “earned” what they are “entitled to”. Of course, no one stops any of the current beneficiaries receiving benefits from disclaiming a portion or all of the benefits they are receiving … so, why don’t they? It’s the same reason why progressives who want to tax others more don’t make voluntary payments to the Treasury.

    And, when they change the definition of what you and I are “entitled to”, such as in 1983, well, no problem, right?!

    Dick, compare this to your long ago comments about employers who scale back or freeze defined benefit pension accruals. How about those who made multiemployer pension plan commitments and failed to fund them? Taxpayers just bailed them out – most of those taxpayers won’t receive any pension benefit themselves.
    And, it is not as if Congress didn’t know about the issue. It was President Jimmy Carter who signed into law a prior Congressional proposal to fix funding shortfalls in multiemployer plans – the Multiemployer Pension Plan Amendments Act of 1980! Compare this to employers who did not fund their commitments for retiree medical but instead reserved the right to amend, modify and change (as well as discontinue) employer-sponsored retiree medical – and who then did so. Those future accruals weren’t earned! That coverage wasn’t “paid for” or “earned”! They were always contingent upon the employer continuing the program (this ain’t Europe). And, so it is with Congress and Social Security and Medicare – when the time comes, just like multiemployer pension plans, Congress will be looking for someone to fund the bailout, to buy votes. .

    Finally, reconsider your “good investment” argument – which focuses, in part on average account balances in 401k plans. In fact, if you look at EBRI data for those age 60+ with 30+ years of tenure, you’ll find an average account balance that is quite significant. That is, the averages can be misleading as they ignore individuals who have participated in many different 401k, 403b and IRAs during their working careers. A few years ago, I would have been a 62 year old with seven different account balances where only one was a substantial amount. And, oh yes, my spouse, then age 61, had three accounts, only one of which was substantial in size.

    I certainly agree that no one should rely solely on Social Security if they want to enjoy a financially secure period of retirement. However, “cuts” and “stealing” and “good investments” are all in the eye of the beholder.

    Best to you. Stay safe.


  2. “no relationship between the taxes paid and the benefits received”

    Nor so. Giving a few cases where taxes paid do not determine benefits does not show there is no relationship.

    “Also, take two workers with the same earnings, one being married and one not. The married family will receive 50% more in benefits.”

    No. My wife and I both had careers with similar earnings. We each get SS now with almost the same benefit, the same as we would it we were not married.


    1. There is NO relationship between taxes paid and the benefit collected. The law determines the benefit formula and the rules. Taxes are like any other taxes collected. Taxes which, by the way are inadequate to pay the promised benefits. In addition, the benefit formula intentionally provides a higher benefit based on income. Of course the examples show there is no relationship. You can pick and choose. Will your benefits stop when you have received all you and your employer paid in taxes? I reached that point three years ago and I’m still collecting. How is it people can collect benefits not having paid a penny in taxes?


      1. I worked mostly low wage jobs never making more than $17.50 per hour from 1971 to 2006. I have done the math and adjusted for inflation myself and my employer paid in $87,000, in 2018 dollars. I started SS benefits at age 62 and my wife gets a small spousal benefit. Our benefit started at $1,288 per month. $87,000 / $1,288 = 68 months, to get all FICA taxes back.
        If my wife and I live to 85, we will collect $355,488. Those numbers are without colas, because colas are just to keep your dollar value equal, not produce a gain. I figured the same thing for my older sister, total FICA taxes paid from 1968 to 2017, $. Total monthly benefit $2,700. She started SS benefits at age 66, but continued to work, and retired in 2017, her husband started SS spousal benefits at age 62, in 2018, because it was $100 more than his own SS benefit. $195,000 / $2,700 = 72 months. Total benefit to age 85 = $631,200. Anyone looking at these numbers can see it is a very good payback, since half of the taxes were paid by the employer, for most workers.

        Why Social Security works –
        1. It is a lifetime benefit
        2. It provides disability payments if you can no longer work
        3. It provides survivor benefits to widows, widowers, and dependents of eligible workers. This benefit is particularly important for young families with children.
        4. There is no guaranty that if an employer did not have to pay FICA tax on each worker, that they would include the savings in increased wages. So you cannot look at total FICA taxes paid and ever say you could of done better investing on your own.
        5. The wage base is inflation adjusted for determining benefit amounts for new applications and benefits are inflation adjusted each year, when warranted. Prior to 1975 raises in benefits were determined by Congress.


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