Retirement Insights
AFSCME separates the myths from the facts.
MYTH: Social Security is going broke.
FACT: Not true. Social Security is not in danger of collapse. Even if no changes are made, Social Security will continue to pay full benefits, on time, until 2029. After this, the system will have a 25 percent shortfall — not empty coffers. In fact, the payroll tax ensures that the system can never go broke. The challenge for Social Security is to find ways to eliminate the shortfall so 100 percent of benefits are paid in the future. There are many potential solutions.
MYTH: In the future, a smaller workforce can’t provide Social Security benefits to a growing population of retirees.
FACT: It’s true that demographics are changing. Today there are almost five people between the ages of 20 and 64 for every person 65 and older; by the year 2030, when most of the baby boomers have retired, there will be slightly fewer than three people in the younger age group for every person over 65.
But these figures don’t tell the whole story. In 1950, for example, the ratio of workers to beneficiaries was 16 to one, yet relatively minor changes over the years have adapted the system to shifting demographics. Now, nearly 50 years later, benefit checks still go out every month, though the proportion of workers supporting the system is well below that of 1950. One reason has been steady growth in workers’ productivity, a trend that is expected to continue in the future.
MYTH: Social Security is a retirement savings plan.
FACT: Social Security was not designed as a savings plan in which individuals invest their money to establish a substantial nest egg for retirement. Instead, American workers pool their resources — with their employers — to protect each other against risk.
Social Security is actually an insurance plan for workers that replaces a portion of lost income due to one’s death, disability or retirement. Benefits are guaranteed by the U.S. government and are meant to complement savings and pensions. The system also meets certain needs of society, such as prevention of poverty and protection for children who lose a working parent. This combination of purposes is what makes Social Security "social insurance."
MYTH: Only retirees benefit from Social Security.
FACT: Of the almost 44 million people who currently collect benefits, only 27 million are retired workers. Others include 6 million dependent spouses and children, 7 million survivors of deceased workers, and 4 million disabled workers. But those who benefit from Social Security far exceed the number who receive checks:
Adult offspring of retirees benefit because they can depend on Social Security to provide a basic income for their parents. As a result, more of a family’s resources can be focused on raising children and other needs.
Taxpayers benefit because Social Security is such a good poverty fighter. Without it, nearly half of all seniors would be poor (instead of the current 10.8 percent). In that case, poverty programs would need more funding, requiring higher taxes.
The economy benefits because Social Security pays out more than $367 billion in benefits annually, which helps beneficiaries pay for rent, clothing and food. That’s very useful in recessions, when fewer people are drawing paychecks. The fact that Social Security beneficiaries still get checks helps keep the economy going, so businesses can stay open and keep more people employed.
American values benefit because Social Security is a key way to show we care about our families and our neighbors. It’s an expression of Americans’ sense of national community and our desire to protect each other against the potential hazards of life.
MYTH: Everybody wins with privatization of Social Security.
FACT: There will be few winners and many losers if the current system is changed from one of shared risk to one in which workers put their payroll taxes into private investment accounts and bear the risks individually.
Beneficiaries will lose. Social Security currently provides benefits guaranteed by the U.S. government. It’s the foundation of retirement income for nearly all Americans. But personal investment of payroll tax dollars in stocks/bonds will expose this basic income to a high degree of risk. Further, young breadwinners, with little time to build adequate accounts, could jeopardize their families’ security in the event of early disability or premature death.
Lower-paid workers often lack investment experience and can’t afford to risk limited funds in a volatile stock market. Many people, particularly older women, could outlive the assets in their private accounts. While Social Security’s administrative costs are low — under 1 percent of benefits paid — privatizing will mean hefty fees to investment firms that will come directly from people’s accounts.
Keep in mind that, while the stock market has risen to new heights recently, economic history shows this cannot go on indefinitely. Eventually, the market will drop and may not come back for years. Stocks did not regain their 1929 highs until 1954, and it took almost 10 years for the market to match its 1973 high point.
Taxpayers would also lose. If a portion of the payroll tax was diverted to private accounts, promised benefits would still have to be delivered to current beneficiaries. This would require a long period in which the new and old systems would need to be supported simultaneously. The result? The national debt could rise to over $2 trillion, requiring not only benefit cuts, but also more federal borrowing and higher taxes.
