Brushing Up On Social Security

"The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year. At that time, the fund's reserves will become depleted and continuing tax income will be sufficient to pay 77 percent of scheduled benefits." - From the 2022 Social Security Board of Trustees' Annual Report.

The above conclusion from the 2022 Trustees' report & the information presented in the graph above from the 2000 Trustees' report show remarkable consistency in the Trustees' calculations - the Social Security Trust Fund was projected on the graph to pay 72% of scheduled benefits after 2037, with further reduction after that, & the 2022 report makes the numbers 77% of scheduled benefits after 2034.

The Medicare Trustees' 2022 report determined the Hospital Insurance (HI) Trust Fund will be able to pay scheduled benefits until 2028, afterwhich "the fund's reserves will become depleted & continuing total income will be sufficient to pay 90% of total scheduled benefits."

The Supplemental Medical Insurance (SMI) Trust Fund (i.e., Medicare Part B - doctors & non physician medical services) is paid for mainly by general tax revenues collected by the U.S. Treasury.  Part B is also financially supported by a monthly premium, paid by recipients, that covers about 25% of the program's costs plus an annual deductible & 20% copayments.  As per this formula the Trustees warn that "SMI will place steadily increasing demands on both taxpayers and beneficiaries" like the 14.6% increase in Medicare Part B premiums this year from $148.50 to $170.10 per month.

Through 2021 the above type of information regarding Social Security reducing scheduled benefits in the not too distant future was found on page 2 in bold print on the document entitled "Your Social Security Statement" (available to everyone online & mailed to people over 60 who do not have an online account).  

As of June 1, 2022 the Social Security administration "redesigned the Statement to make it easier for you to read & find the information you need!" except of course for the warning of the impending shortfall of benefits - that is now euphemistically mentioned with a link not prominently displayed  that tells the real shortfall message.

Clicking on the link starts by letting you know there may be a problem.  See below.

And ends by defining the problem like the old statements used to in bold.

Despite the general feeling that people have, that they know what they are doing regarding Social Security, I have never met one person @ any of my FairTax seminars or radio programs I have been on, including the program hosts, who were aware of the Trust Fund's pending exhaustion & the program's subsequent reduction in benefits. 

A June 2021 Harris poll found that a significant lack of knowledge about Social Security carried over into just about every aspect of the program.

For instance, 53% of those surveyed believed they knew exactly how to maximize their Social Security benefits yet only 7% correctly identified all four of the factors that determine the maximum Social Security benefit someone can receive - factors they had control over during their working life & not factors like life expectancy that nearly one fifth of respondents thought was one of these factors.

The poll also found poor knowledge & misconceptions among those participating in a series of true-false statements presented as follows:

1.  You cannot sign up for Medicare unless you are enrolled in Social Security.

2.  Your income does not impact how much you are charged for Medicare.

3.  Somebody who makes $150,000 (per year) pays as much in Social Security taxes as millionaires.

4.  If I claim benefits early, my benefits will go up automatically when reaching full retirement age.

5.  If I don't work for @ least 35 years, my Social Security benefits will be reduced.

6.  Social Security offers guaranteed income for life.

And I add four of my own favorite true-false statements: 

A.  During your working life your employer pays half of your Social Security taxes.

B.  There is a legal connection between FICA taxes & benefits.

C.  Both workers & retirees have no legal claim to benefits, regardless of how much in taxes they have paid into the system.

D.  Just like the current system, privatized personal accounts, where a portion of FICA taxes are invested in the stock market, will result in a person having an actual account with their name on it for retirement & also will have the ability to leave these assets to their heirs.

Social Security, Medicare, & Medicaid (now with 95 million Americans enrolled) make up the cornerstone of the American welfare state.  Two thirds of seniors depend on Social Security as the main source of their income & for one in five it is the only source of income.  Without Social Security half of all seniors would be living in poverty.

The graph below shows the skewing of the ratio of taxable earnings to benefits in favor of low earners compared to high earners.  For instance, using the numbers from the graph below the maximum earner annually pays 5.37 times ($17,707 versus $3,296) more in Social Security taxes than the low earner but receives only 2.67 times more in benefits ($34,180 versus $12,825).

But the above table & calculation are only part of the real life story of uneven results from person to person.  "Social Security transfers income from people with low life expectancies to people with high life expectancies, from single workers & from married couples with substantial earnings by the secondary earner to married one earner couples, & from people who work for more than 35 years to those who concentrate their earnings in 35 or fewer years."  Source - NBER Working Paper Series, Redistribution In The Current U.S. Social Security System, by Jeffrey B. Liebman, dated December 1, 2001.

With regard to the life expectancy point from the above NBER report I knew a man who paid the maximum Social Security tax every year of his life & died less than one month before his 62nd birthday thereby not collecting one cent from Social Security himself.  His wife collected a survivor benefit & lived to be 93.  Had the man been single all of the potential benefits would have been lost.  These are the uneven situations of life the formula cannot account for.

Nevertheless, FDR's intent when he signed the Social Security Act of 1935 into law on August 14, 1935 was clear - life expectancy was 64 years meaning that someone in their twenties, thirties, or forties who originally paid into the system to help the elderly would actuarially not live to collect any benefits themselves @ age 65.  This not only takes the term "Ponzi Scheme" to another level but shows the fraudulent premise this government program was founded upon.

Because the Social Security benefit formula replaces a greater fraction of the lifetime earnings of low earners than of high earners, Social Security is considered progressive regarding benefit payouts.  It is regressive regarding the payroll tax. 

The following graph shows how someone's monthly benefit is determined using bend points (90%, 32%, & 15%) per the formula once the Average Indexed Monthly Earnings (i.e., average inflation-adjusted monthly wage over a lifetime in today's dollars) are known.  The decreasing slope of each line on the graph illustrates the progressivity of Social Security benefits.  

For instance the benefit for someone with an Average Indexed Monthly Earnings of $6,172 is determined by taking 90% of $1,024 ($921.60) & adding 32% of the difference between $6172 & $1,024 ($1,647.36) = $2,569 per month.  See left side of graph.

There are many suggestions regarding shoring up Social Security's solvency such as raising the full retirement age & the early eligibility age & basing both on 38 years of earnings rather than the current 35, increasing the payroll tax, raising the payroll tax cap, allowing participation in private accounts, & slowing the cost of livings adjustments especially for high earners.

All of these types of suggestions only tinker around the edges of the solvency problem so that they will have to be reimplemented again in the future.

I have presented, on this blog, the permanent long term solution to Social Security's solvency problem several times over the past ten & one half years - namely replacing the average real wage index with the cost of living index (CPI) in the determination of someone's Primary Insurance Amount

(i.e., a person's monthly benefit @ their Full Retirement Age) & phasing it in after ten years without affecting any current recipient of benefits or anyone 55 or over.  This solution was first presented by Susan Lee in November, 2004 & confirmed by Amity Shlaes in November, 2007.

Social Security currently makes up almost 25% of federal spending so it is important for a well informed citizenry to understand it as the number of workers decreases, the number of beneficiaries increases, & benefits increase faster than the cost of living.  

Thanks to a frequent contributor to RTE for sending me this video entitled Social Security Facts.  Readers of this blog should know most of the information but it is a good recap despite having three errors that I found.  I'd be interested to see if anyone picks them up.  Let me know.

If you did not know about the pending Trust Fund shortfall, any of the ways to maximize Social Security benefits, some of the above true-false statements, how to calculate your benefit, or what happens to your benefit if you do not have 35 years of earnings, it is time to brush up, if not for yourself, then to help a friend, an adult child, or grandchild who has plenty of time to plan to avoid bad mistakes & maximize the program's benefits.

French President Emmanuel Macron, referring to France's labor problem, summed up our Social Security solvency problem when he said "We have a strength, which is our social & educational model, & a weakness is that we no longer have the productive model which makes it possible to finance it."