Exploding the Myths about Social Security

On a website maintained by The Century Foundation, 11 aguments are advanced to "explode the myths" that Social Security needs to be fixed before we run out of time. It seems to me that the only way to refute these arguments, are to take them on one-by-one, head-to-head. And so we shall:

The Century Foundation, 3/1/04 This issue brief examines eleven misconceptions about the privatization of Social Security and weighs them against the facts. Contrary to popular belief, Social Security is not, in fact, on the brink of bankruptcy, nor is it weighed down by wasteful administrative costs. Small private accounts are highly unlikely to earn a higher rate of return than Social Security trust funds currently do, and there is always risk associated with private investing. Privatization would not, as its proponents often argue, affect all workers about the same across race, gender, and income groups; results would actually be quite different and not always an improvement for vulnerable populations such as African-Americans, elderly women, and low-income families.

"....MYTH #1: UNLESS WE DO SOMETHING BOLD, SOON, SOCIAL SECURITY WILL GO BANKRUPT.

It is true that the government projects that the Social Security trust funds, now growing by more than $150 billion a year, will be drawn down to zero in 2042. But those same estimates also show that, after 2042, Social Security payroll taxes will be sufficient to finance about 75 percent of the payments that will be owed to the program's beneficiaries. These projections are made using extremely conservative assumptions about economic growth. If our economy continues to perform well, there is likely to be no shortfall at all. Therefore, what we face is a possible shortfall almost four decades in the future, not an immediate crisis or impending collapse. Although the possible shortfall after 2042 is not good news, Social Security has run smoothly with minimal reserves throughout most of its history. In the past, payroll taxes from workers were just enough to cover contemporary payments to beneficiaries. Congress created today's growing Social Security trust funds, financed by the excess of current payroll taxes over payments, in order to partially pre-fund the system in anticipation of the growing future population of retirees....."

Let's examine the argument made above, shorn of it's protective camouflage. The first sentence admits that the Social Security scheme is presently taking in $ 150,000,000,000 more each year than is required to administer the program!!!

And that this additional money is safely "locked away" by handing it to Congress, AS MANDATED BY LAW, through the purchase of federal bonds! Ask to see the vault holding the trust funds! Ask, if that fails, for a list of the assets purchased as investments with this money, these invested "trust funds"! And realize...this overpayment of Social Security revenues has been going on not for one or two years, but for trillions of dollars worth of "trust funds". It is a back door tax, a concealed hoax, that enables the same Congress that set it up to lie to you about how much the government is really in hock.

The argument about the fact that "...even at the present rate of overpayment, it will take awhile for the chickens to come home to roost..." is reminiscent of the arguments about building levies along floodplains. The argument goes "Well, we'll build the levies once we need them. We'll know when it's time to fix the problem, you see, once it rains real hard..." Newsflash, folks. Once it's raining real hard, there will be no time to build levies. If we, like so many who bury their heads in the sand, figure that we'll start planning for the national retirement once we all reach 64 and 7 months...we are well and truely nuked.

Lets go on to argument 2. And I didn't make these up, by the way, these are the actual epicenter of liberal thinking...

"....MYTH #2: WE CAN DIVERT SOME SOCIAL SECURITY CONTRIBUTIONS TO PRIVATE ACCOUNTS WITHOUT JEOPARDIZING THE SOCIAL SECURITY SYSTEM.

The balances accumulating in the Social Security trust funds are earning returns that will help meet future commitments to retirees. If the revenues flowing into the trust funds were diverted into private accounts, there would be fewer resources to pay benefits to future retirees; we would be more likely to face a revenue shortfall in the future. More immediately, we would be unable to use the Social Security surplus to reduce the national debt held by the public. Future debt service obligations would increase. The growing Social Security trust funds reduce the likelihood of a future shortfall of revenue while making it easier for the government to meet future obligations without tax increases or benefit cuts...."

Snip, snip snip. A little more camouflage falls. The above argument continues to reassure the average worker that the "money accumulating in the trust funds..." is safely invested, earning interest. Notice a pattern here? Have YOU seen a list of the investments that this additional money is earning? The cold fact is that a huge virtual drawer of IOU's are waiting to be cashed with interest.

And guess what? The persons who will be paying them are NOT businesses who used the capital to expand, nor cities who used the capital to fund municipal power plants or other revenue generating assets, or even home owners across the U.S. paying trillions to GNMA guaranteed mortgage holders. Assets like these could be identified and quantified.

Where YOUR money went was to fund the liberal excesses of Ted Kennedy who never saw a dollar of yours that he wouldn't be better qualified than you to spend. Let's read on in astonishment...

".....MYTH #3: THE SOCIAL SECURITY SYSTEM WASTES MONEY THAT WILL BE SAVED IF WE INTRODUCE INDIVIDUAL PRIVATE ACCOUNTS.

Exactly the opposite is true. The Social Security system costs far less to operate than private investment funds. Public opinion polls by Roper show that the public guesses the administrative costs of Social Security as a percentage of benefits to be more than 50 percent. In fact, administrative costs for Social Security are less than 1 percent of benefits, compared with average administrative costs of 12 to14 percent for private insurers. Administering millions of small accounts would consume a large fraction of revenues, especially if investors are permitted actively to manage their accounts. To these costs must be added the marketing costs incurred by private funds as they compete for worker's accounts. Net returns on private accounts are reduced by the costs of management fees, account administration, and marketing. Economist Peter Diamond has shown that the administrative costs in countries that have set up individual accounts (Britain, Chile, Argentina, Mexico) reduce benefits by 20 to 30 percent compared to what the U.S. Social Security system would pay given the same resources...."

The above statements expand the hoax that each investor needs to privately invest each dollar, requiring the time of innumerable and attentive SSI administrators to shift each of his individual dollars from IBM to ENRON and back again! This is part of the duping of America.

How many times has YOUR mutual fund manager called you to ask if he should double up in energy stocks? Never? Fancy that...

If the Social Security money that is excess to the yearly needs of the system as it stands now, were used to purchase ONLY: the same home mortgages now guaranteed by GNMA, FNMA ,etc., as well as only municipal bonds rated as safe by Moody's or any other recognized rating agency, (and even leave highly rated business bonds entirely off of the qualified list, if you fear them..), the individual account could consist entirely of an accumulated number of "credits", much like bond coupons, in the total fund.

Only by obscuring the manner that any competent small businessman, like I fancy myself, would employ to structure a safe, low-maintenance-cost portfolio can the opponents of sanity make their case. Will adjustments due to scale be necessary? Sure. Is it better to continue to pour trillions of dollars into IOU's that our kids didn't even get a chance to see, before we signed them for the unborn? You tell me...

How much money would it cost to simply count what money each worker has put into credits? You tell me.....

After all, that's what they ARE doing now! Except that your statement from Social Security now shows you how much concrete Robert Byrd has poured in honor to himself in West Virginia. But read on, the arguments get even better: (or worse, depending on your mood)

"......MYTH #4: SMALL PRIVATE ACCOUNTS WILL GET A MUCH BETTER RATE OFF RETURN THAN THE SOCIAL SECURITY TRUST FUNDS.

One large account can earn exactly the same rate of return as many small accounts. Historically, investors have not been able systematically to do better than to buy and hold a diversified portfolio of the stocks and bonds offered in major markets. Today the Social Security trust funds earns a modest rate of return because it is invested in the most secure and conservative assets: U.S. government bonds. This policy could be changed. If the trust funds were invested in a diversified portfolio, it would raise the expected rate of return but also the risk. The trust funds could hold exactly the same balanced, “passive” portfolio as private investors, with much lower management costs...."

I couldn't have phrased the first sentence better myself. Notice, however, that the sentence doesn't address the fact that one large account, when it decides to spend every last penny of the capital entrusted to it for "good works for the deserving...", will do CONSIDERABLY worse than many smaller accounts. In the private world, the administrator of that "one large account" would be doing the perp-walk in handcuffs. I have more news for the uninitiated...the "modest rate of return" from your "invested funds" is the additional tax, along with repaying the looted-and-gone principal, that your kids and grandkids will have levied upon them.

Calling it a return on investment is the cruelest cynicism around. Let's get even more annoyed at deceit...

All private investing is risky. If a person had acquired a broad index of stocks over his working life, retired and sold these stocks on October 18, 1987, he would have realized 18 percent less income per year in retirement than the person who had behaved exactly the same in every respect, except that he exited the market one day earlier. Private bonds, too, can be risky. In 1982, a thirty year AT&T bond would have been worth barely a third of what it was worth when issued in 1977. Between May 1999 and May 2000, the Nasdaq index has varied by more than 100 percent, and the S&P 500 index by more than 25 percent. Day to day fluctuations can be smoothed by selling stocks over a period of time. But if the market falls and remains low for some time, those who sold before the fall will do much better than those who sold after, even with sales spread over time. A worker who accumulated the stock market steadily for forty years and retired in the early 1970s would have a nest egg almost twice as large as a worker ten years younger who had followed exactly the same strategy (retiring in the early 1980s).

A social insurance fund pools risks, balancing out gains and losses among individuals. Social Security guarantees the level of retirement benefits. Retirees are fully insured against market risk. Our Social Security system also provides life insurance to support survivors of workers who die young, disability insurance for workers whom health forces to leave the labor force, and inflation insurance through indexation of benefits. All of these essential social insurance features of Social Security would be at risk if we directed revenues into private accounts.

Source: Social Security Administration The debate about privatization tends to treat Social Security as if it dealt exclusively with individuals who work and then retire. But the program’s broader social insurance functions are very important to millions of Americans. In January 2004, 29.6 million retirees received Social Security benefits based on their earnings. To this number, we must add 2.6 million spouses and nearly 0.5 million dependent children of retirees. Survivors of deceased workers and retirees are among the people most dependent on Social Security: 4.6 million widows and 1.9 million dependent children of deceased workers received benefits. (These numbers include ex-wives of divorced workers and retirees.) Another 5.9 million disabled workers, with more than 1.6 million dependent children received Social Security benefits. All told, more than a third of Social Security beneficiaries are not retired workers. The risk to retirees’ incomes posed by privatization is small in comparison to the risk to dependents of workers and retirees, whose future is barely mentioned in most discussions...."

Let's pretend that the only possible type of investment that exists is spinning the wheel and then plunking your future down on a random DOW stock. Let's also pretend that we are taking seriously matters that will impact this country like a comet. Same argument as previous, but with more "risky investment scheme" thrown in to further muddy the waters. Next....

"...MYTH #6: PRIVATIZATION WOULD MAKE ALMOST EVERYONE BETTER OFF AFTER SEVENTY—FIVE YEARS.

It is true that “pre-funding”—putting resources aside today to earn returns until we retire—could make almost everyone better off after 75 years. But between now and then, we would feel the squeeze from saving for future retirement. What is more, prefunding is not the same thing as privatization. We could pre-fund future retirement through the Social Security trust funds instead of through individual accounts. The result in either case would be higher saving today and more secure claims by future retirees on the future economic pie.

Today, the great bulk of our Social Security contributions are needed to pay current retirees. If, on top of paying for these retirees, we sought to accumulate large enough balances in the trust funds or private accounts to pay future retirees, current workers would have to pay that bill, too. Like buying a house, pre-funding of retirement looks good after the mortgage has been paid off, but it requires sacrifice in earlier years. The transition from a pay-as-you-go to a fully pre-funded system would take many years to complete. Even the strongest advocates of private accounts – who make very optimistic assumptions about returns to assets – acknowledge that payroll taxes would have to exceed their current levels for nearly 25 years, and would not reach their long-run levels for another half century thereafter. More cautious assumptions about returns on investment suggest that much higher contributions will be needed and the transition will require more time.

Today, the Trust Funds contain assets equal to roughly three years worth of benefits. A pre-funded system would require assets equal to 14 to 19 years worth of benefits (depending on the rate of return, economic growth and demographics). The transition to a fully funded system requires taxpayers to continue providing benefits to retirees under the old system while at the same time building up assets on that scale to support their own retirement. That is why even optimists say it will take 75 years...."

Are you noticing yet that each liberal argument is much the same disinformation as previous, but just worded differently? Ask to see those "Trust Funds". Where's the beef...?

A system of private accounts would shift risk from the government to retirees. But it would not offer opportunities to get rich. There would not be many investment decisions left to workers in a privatized system. The investment options offered to individual investors would have to be strictly limited, for two reasons: First, in order to control administrative costs, the number of investment options for each account would have to be very few. Second, in order to prevent workers from losing their retirement funds, most high-risk and novel investments would have to be ruled out.

Such paternalistic measures are necessary unless we are willing to let people who mismanage their retirement accounts die hungry and cold. The taxpaying public needs to protect itself against workers who may be tempted to gamble with their retirement funds, hoping to become rich, only to require greater public assistance in old age. So privatized accounts will not offer many investment opportunities. In limiting the chance to lose everything, and, on the flip side, the chance to become rich, regulation of private accounts will require all workers to behave very similarly and conservatively...."

"Such paternalistic measures..."? The defenders of the ponzi scheme then argue that, gee we'd have to rule out speculative investment! Well paint me purple and call me a prune. Duh! To control costs we'd have to limit the options to rational investments! Well...that makes their case, all right. Gee, who'd a thunkit? And THAT is advanced as an argument to continue their spending our trillions? Well...they've sure set me straight. Let's continue with, "Hell, you don't need it anyway, or, as they word it:

"...MYTH #8: FOR MOST RETIREES, SOCIAL SECURITY BENEFITS ARE A WELCOME BUT NOT AN ESSENTIAL SOURCE OFF INCOME.

Without Social Security, which in January 2004 provided households an average benefit of $863 a month (around $10,000 a year), about half the elderly in America would fall below the poverty line. A significant proportion of the elderly depend on Social Security to survive: in 2001, more than 60 percent of the elderly in America relied on Social Security for at least half their total income. Largely because of Social Security, poverty rates among the elderly have declined from 35 percent in 1959 to about 10 percent in 2004...."

Since they have assured you that you have no real need of this money, my address is: Ron Pickrell, Columbus,Ohio. I'll be glad to keep it safe for you. Three more sterling arguments to convince us, are:

This argument is based on the fact that African Americans have shorter life expectancy than whites and therefore collect retirement benefits for fewer years, on average. But African Americans also have lower average earnings than whites. Because Social Security’s retirement benefits replace a larger share of past earnings for low-income versus high-income beneficiaries, African Americans receive a higher annual payoff in comparison to their past tax contributions than whites. African Americans also own fewer assets, and have less extensive pension coverage than whites, so they are more likely to be highly dependent on Social Security benefits. Moreover, the flip side of African Americans’ shorter enjoyment of retirement benefits is their greater dependence on the life insurance and disability features of Social Security. African Americans constitute 12 percent of the U.S. population, but 25 percent of the children receiving deceased worker benefits in 1996, and 18 percent of the workers receiving disability benefits.

The claim that African Americans have especially much to gain from privatization overlooks a further feature of privatization proposals: annuitization. Every serious proposal to replace part of Social Security with private accounts includes limits on the way individuals may dispose of their retirement nest egg. To prevent a retiree from mismanaging the nest egg, jeopardizing his or her family, every retiree must obtain an annuity upon retirement, converting the nest egg to an income stream over the rest of the expected life. This process would create a system that is very similar to the present system, from the worker’s point of view. The retiree would receive an income until death, at which time survivors would receive support. There would be no additional bequest from the privatized retirement account...."

Now, we're not going to get racist and imply that we WILL need to keep "certain retirees" from "mismanaging their nest egg. I wouldn't touch that argument with a ten pound Dershowitz...even with gloves on. Next:

"....MYTH #10: PRIVATIZATION IS EQUALLY GOOD FOR HIGH-INCOME AND LOW-INCOME WORKERS.

Privatized accounts would carry into retirement income inequalities among workers. Unlike the Social Security System, which replaces a larger proportion of the income of low-wage than high-wage workers, there would be no redistribution of income to low wage workers in a privatized system. In 2002, 40 percent of American families earned total incomes of less than $35,000, and 12.1 percent of all Americans—34.6 million people—lived below the poverty line. People with such low income from work would be unable to save enough to finance their retirement under a privatized plan and a disproportionate amount of whatever they salt away in individual accounts would be consumed by administrative expenses. In a giant step backwards, they would become dependent on whatever welfare system were devised for the elderly poor. Privatization would create winners (those who command high wages and salaries during their working years) and losers (those who don’t)...."

The trump card comes out. Just in case you "lower income workers don't realize...", we'll be re-distributing some of the ill-gotten gains of those full time workers to you to even out the playing field. We just won't explain to you that only the first $ 89,000 dollars or so of Social Security wages are even taxed. And that the higher income people already weigh for themselves, in a manner denied to you, whether they should put the untaxed remainder of their savings into Federal Bonds and thereby guarantee an uninterrupted flow of increasing government, or whether they will "squander" their savings on actual investments.

You see, it just one more good reason why we should take that extra money from the enterpreneur and dish it out to the ones who sleep till noon. I'm sold, anyway...

Privatization would penalize women because they earn less, live longer, and interrupt their working careers more frequently than men.

A Widening Gender Gap. According to one study, if male and female workers invested 5 percent of their payroll taxes in private accounts for forty years, the current gender gap between men’s and women’s benefits would actually widen, based on women’s lower incomes and more frequently interrupted careers. Because women also tend to invest more conservatively than men, another study estimates that after thirty-five years in a retirement plan, the value of the average man’s investment portfolio would be 16 percent greater than the average woman’s.

A Longer Life Means Smaller Benefits. A woman who turned sixty-five in 2002 had an average life expectancy of 19 years, compared to 15.9 years for men. Therefore, when she retires and converts her accumulated savings into an annuity, nearly every woman would receive a smaller monthly benefit than a man who has earned the same amount of money in an equally long career. Social Security guarantees the same earnings-based benefits for life, regardless of life expectancy. COLAs, which privatization would reduce, are also more important to women because inflation takes a greater toll on the dollar’s value over longer periods of time.

Unpaid Leaves. Every worker who takes time out to raise a child or care for an aging parent would suffer reduced benefits upon retirement, because she or he would not have contributed to a personal retirement account during that period. The lion’s share of such discontinuous workers will be women. Experts estimate that only 30 percent of women but 60 percent of the men retiring in 2021 will have worked for thirty-eight or more years.

A Penalty for Marriage. Social Security guarantees a retired woman who has been married for ten or more years her own working benefit or half the amount her husband (or ex-husband) receives, whichever is larger. But many privatization proposals would impose a “marriage penalty.” The National Commission on Retirement Policy plan, for instance, would cut the spousal benefit significantly, reducing the benefit from half the husband’s benefit to one third, hurting many women, especially those who stayed home to raise children.

A Demerit for Divorce. Privatization would hit divorced women particularly hard, because most plans make no provision for ex-wives to receive a portion of their former husband’s savings. Social Security, on the other hand, entitles a former wife to some of her ex-husband’s benefits if their marriage lasted ten years or longer...."

This last one actually takes my breath away. Of all of the stupid reflexive arguments I have ever heard any idiot use to defend an untenable position, this one truely takes the cake. In a word, it is critical that no one be allowed to actually expect any reasonable earnings from their "retirement" account, because that would mean that someone, somewhere, might end up with more than you. The only safe way to insure that everyone ends up with the same is to all wear unisex clothing, instantly penalize endeavor, and homogenize every remaining functioning brain in the country. Sounds kinda new-age and progressive to me!

If I even attempt to counter such logic, my head would explode. I'll leave that to the comments of the Freepers, if they so desire.

The above arguments are the distillation of the concepts of two different approaches to investment. We argue...you decide...

And that this additional money is safely "locked away" by handing it to Congress, AS MANDATED BY LAW, through the purchase of federal bonds!

This is like trying to pay your mortgage by writing an IOU to yourself and then endorsing it over to the bank.

The problem is, that though your eyes are open, some of the 50 million Democratic voters are simply not understanding that Social Security will not provide a retirement for them.
Will they receive some check? Yes. Will they be able to live on it? No. Our debt will be inflated away when it becomes unserviceable. Watch what happens then to fixed-income elderly. It has happened to too many countries to pretend that it can't happen here in the future.

And when the dupes hit retirement age in great numbers, they will demand a return of the welfare state with a vengeance. And then watch the system stagger under the voting power of folks who are now being intentionally misled. Even though, as you point out, anyone should know this by now. And even though, some of us acted to provide a buffer for our families.

By watching the number of them who are now buying into the gathering Democratic dupeline that "Social Security must be protected!", I greatly fear that a staggering number of them, once they figure out that there is no Santa Claus and there is no Tax Fairy- oops. {hand claps over mouth...}

Oh...dear. Oh, I'm so sorry- I didn't realize that many of you democrats didn't realize- Oh my!

I'm sorry. Forget what I said. Choke back those tears, picture Elvis in your mind, tap together those Blue-State Shoes three times, close your eyes and repeat with me:

"There IS a tax fairy! There IS a tax fairy...there IS a tax fairy!"

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