Investment Policy Magazine  

Here’s a bit of personal history to illustrate how Social Security works – and why it has been so successful.

My father was born in 1898. When he was 14 years old his father died, and he and his sister went to work to support the family. Social Security survivors’ benefits were decades in the future.

In 1937, when my father had already been working for over 20 years, he and 40 million other working Americans began for the first time to pay into a new Social Security system. The initial contribution rate was 1% of their first $3,000 of salary; their employers contributed a matching amount. For three years, millions of dollars accumulated in a Trust Fund, all of it from payroll contributions. No money was added by the government.

In 1940, the first Social Security retirement benefits were paid out of the Trust Fund. Recipients were only those men and women who had been working and contributing since 1937 and then retired. By 1945, the number receiving Social Security retirement benefits had grown to over 1 million; 46 million working Americans were paying into the system.

When my father retired in the mid-1960s, he was one of 20 million former contributors receiving benefits; 80 million working men and women were paying into the system. By that time, my sister and I had also begun working and paying into the Social Security system. The contribution rate, determined by actuaries to keep the system solvent, was then 3.9% on $6,600 of salary. My father continued to receive benefits until his death in 1986, and we continued to pay into the system.

By 1990, the contribution rate we paid had increased to 6.2% on $51,300 of salary. Also by 1990 my son and daughter had begun working, and for the next 11 years all three of us were contributing to Social Security. In 2001 I retired, having paid into the system for all of my working years, and I began to collect my promised retirement benefits. I continue to receive a monthly check. My son and daughter continue to pay into the system, at the same 6.2% rate. They’ll continue to work and contribute to Social Security until they retire some 25 years from now. By the time they begin to receive retirement benefits, their sons and daughters, my grandchildren, will be working and contributing to the system.

As for my grandfather, if he died a century later, his wife and children would be supported by the Social Security system. At the end of 2008, 51 million Americans were receiving Social Security benefits; 6 million of them were survivors of deceased workers.

That’s how Social Security works.

That’s also why it works. As Franklin Roosevelt imagined Social Security in 1935, and as Americans of every generation still believe, it is a self-funded, inter-generational retirement system. Its money is contributed by working men and women and their employers. The money is paid into a Trust Fund during their working years, and the money in the Fund is used only to pay benefits to contributors when they retire. No one who has not contributed to the system receives any benefits from it.

Maintaining the proper amount of money in the Trust Fund – that is, keeping contributions and benefit payments in balance – is the complex job of Social Security’s actuaries. It requires them to monitor, and forecast, not just economic and population shifts for the whole country, but individual financial accounts for many millions of Americans. Yet for 70 years the actuaries have succeeded admirably. Since 1940 all promised benefits have been paid to all Social Security contributors, and today the Trust Fund holds enough money to pay baby-boomer benefits for as far into the future as anyone can forecast.

The way Social Security works means that it is independent of general government revenues, and independent of the Federal budget. It is a closed system that impacts only its participants. As one of over 210 million participants, I can truly say: It’s our money.

Unfortunately, Social Security’s independence is under attack today. Members of Congress, administration officials, and economists are trying to convince working and retired Americans that Social Security is part of the Federal budget. Worse, they propose that any rebalancing of contributions and benefits should, in the words of one prominent official, “enhance the overall performance of the economy.” In these times of economic turmoil, the last thing we want is to have Social Security sucked into the whirlwind.

Social Security Watch will continue to expose the attacks. You can help. Circulate our postings. And use the Congress.org link on our home page to tell your Senators and Representatives that you know Social Security is an independent financial system, and you want to keep it that way.

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For anyone who thinks that our Social Security system is secure against fundamental harm, the Senate Finance Committee’s proposal for stimulating job growth should be a wakeup call. The proposed law would exempt employers from paying their 6.2% share of the payroll tax if they hire workers this year who have been unemployed for at least 60 days.

The rationale for exempting employers from the tax, rather than offering them a tax credit (the usual incentive), is the immediacy of the exemption. “No business wants to wait until 2011 to receive a tax credit,” wrote Senators Charles Schumer and Orrin Hatch, who jointly proposed the exemption in a January 26 New York Times Op-Ed. Apparently the Senators forgot that any employer enticed by the exemption would still have his savings spread over 52 weeks. An employer who adds a $50,000 employee would be able to save $60 in the first week – if he’s willing to spend $900 more. That’s not an incentive likely to create many new jobs.

The danger to Social Security, however, is not an inconsequential loss of revenue, even should that occur. The danger lies in the way the Senators propose to replace any loss: “The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget [my italics] between now and 2015.”

This not-so-subtle suggestion that Social Security is part of the Federal budget is a falsehood that has been so widely broadcast over the years that many working and retired Americans have come to believe it. Payroll taxes are presumed to be government revenues, and Social Security benefit payments government expenses, so that if benefits are raised, there will be less money to be spent elsewhere in the budget. The truth is that all of Social Security’s inflows and outflows are separated from the rest of the government budget and have no impact on the budget, neither to increase nor decrease the deficit. No piece of legislation passed by Congress has ever authorized shifting money from one to the other.

Quite to the contrary, three pieces of legislation that Congress did pass between 1983 and 1990 placed Social Security legally “off-budget.” The reason for the legislation was to prevent administrations from masking real government deficits by including Social Security’s surpluses in their annual budgets.

Of course successive administrations have skirted those laws, presenting misleading annual budgets to the public by distorting the structure and finances of Social Security. The reality is that the purported government surpluses from 1998 to 2002 never happened, and the accumulated sum of past government deficits – our $12.3 trillion national debt – is 85% of current GDP, not 53% as the administration claims. (More on that story later.)

Pursuant to law, the budget that Congress actually passes each year does treat Social Security, but separately. Congress sets the level of payroll taxes and the formulas for retirement benefits, and it allocates payment from the Trust Fund for such things as administrative expenses. It is guided in this process by Social Security’s actuaries, whose good work has kept the system’s revenues and benefit payments in balance for 70 years. When Congress turns to the rest of the Federal budget, it leaves Social Security behind.

This process ensures the continuing independence of Social Security, as Franklin Roosevelt envisioned it in 1935. FDR insisted that the system had to be self-funded, that revenues were to come from working men and women and their employers, but, most importantly, not from the government. That independence has long been under attack from enemies of Social Security, for whom the system smacks of collectivism and cooperation – both of which charges are true and help to explain not only the system’s financial success, but also its immense popularity through generations of Americans.

Social Security’s independence is now under attack from its apparent friends as well. Should the Schumer-Hatch proposal become law, with Congress promising to repay the system in the future, it will be the first ever authorization to transfer money from the government’s general budget to Social Security. The first step toward integrating Social Security into general government operations will have been taken, and the mischief that ensues, when an administration really can save money by cutting retirement benefits, will be unbounded.

There are other ideas floating around Washington for transferring general government revenues to Social Security, which would similarly destroy its independence. But the Schumer-Hatch scheme is the first to be actually proposed for legislation. FDR cannot be resting easily.

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