Is AARP Lying to Seniors?

AARP is spending millions of dollars to “educate” the public about President Bush’s proposal to reform and strengthen Social Security. But is AARP telling seniors the truth about Social Security and the reform proposals?

The following are direct quotes from AARP publications, followed by quotes from government publications and people who actually know what they’re talking about. You can judge for yourself.

AARP Claim #1:
“Well, the fact is, the Social Security trust funds aren’t just sound, they’re building a surplus.”

Social Security is a pay-as-you-go system. The money workers pay in from their 12.4 percent payroll (FICA) tax goes right back out to pay retirees. Currently, workers pay in more than the government needs to pay benefits, leaving a surplus, which is loaned to the federal government and used to pay other expenses. According to the trustees of the Social Security trust fund:

    Under the intermediate (i.e., best guess) assumptions, the OASDI (the acronym for the Social Security trust fund) cost rate is projected . . . to increase rapidly and first exceeds the income rate in 2018, producing cash-flow deficits thereafter. Despite these cash-flow deficits, beginning in 2018, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2042, when the trust fund will become exhausted.

Translation: Social Security will have enough money coming from current workers to pay benefits until 2018. After that, it will need to redeem money from the trust fund (actually there are two Social Security trust funds, but for this paper we will consider them as one). But the federal government has borrowed and spent that money. To repay the trust fund it will have to find the money somewhere else, perhaps by drawing on other government tax revenue or borrowing it, or by cutting benefits.

The problem is exacerbated by the fact that Social Security does not exist in isolation. The other large federal entitlement program for seniors is Medicare, and it is facing even worse financial problems than Social Security. The status-quo crowd wants to say that these are two different programs and that the problems of Medicare don’t affect Medicaid. True in a sense, but both programs will soon be drawing on tax dollars concurrently, putting a double strain on Congress to keep both funded. Just listen to Texas A&M University economist and Social Security trustee Dr. Tom Saving:

    Some have argued that the financial problems of elderly entitlements will not arise until the distant future. In reality, we are dealing with those burdens right now. This year (i.e., 2004), for the first time in recent memory, Social Security and Medicare combined will spend more than the programs take in. This will require a transfer from the Treasury of 3.6% of federal income tax receipts. That figure will grow rapidly. In just 15 years, in the early stages of the baby boomers’ retirement, we will be transferring more than 25% of federal income tax revenue to cover the funding needs of Social Security and all parts of Medicare. By 2030, more than half of all federal income tax revenues will be required to pay projected benefits of these programs under current law.

Now go back and re-read AARP’s rosy scenario and ask yourself if it comes anywhere close to resembling the truth as explained by the trustees.

AARP Claim #2:
“Last year, the Trustees invested what was a $165 billion Social Security surplus, buying special Treasury Bonds that are earning interest in the trust funds.” and “For over two hundred years, in good times and in bad, these government bonds have paid off.”

Yes, there are “special Treasury Bonds” created by the Social Security legislation. However, what AARP wants to do is convey an impression-by-association. The public is generally familiar with the Treasury Department’s Series E bonds, and there are other types of government bonds. These bonds are backed by the full faith and credit of the U.S. government, and they can be can be redeemed by the holder and sold and traded on the open market.

But not Social Security’s “special Treasury Bonds.” They are by law “non-negotiable.” No one but the government can buy and hold them. Here is how the Congressional Research Service (a government entity) explains them (1998):

    When the government issues a bond to one of its own accounts, it hasn’t purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.

Here’s the point: AARP wants to convey the impression that the treasury bonds issued to Social Security are essentially the same as the bonds the government has been issuing for 200 years. They aren’t, but that is not to say that the government won’t make good on these bonds. However, redeeming them is going to cost taxpayers and the economy a lot of money. Institute for Policy Innovation Senior Fellow Peter Ferrara estimates that beginning in 2018, when Social Security starts paying out more than it takes in, until 2042, when the trust fund officially runs out, the government will have to come up with more than $5 trillion (in today’s dollars) it doesn’t have to in order to keep paying promised benefits.

Because of the heavy burden of meeting all those bond obligations, the government may effectively renege on the bonds through the back door by reducing promised benefits. Then it wouldn’t have to cash in so many bonds.

AARP Claim #3:
“Future generations must be able to rely on the same rock-solid guarantee of benefits that present retirees enjoy.”

Does Social Security provide a “rock-solid guarantee”? The Social Security trustees have said — indeed, have repeated their warning annually — that the system cannot provide the current level of benefits past 2042. “Present tax rates would be sufficient to pay 73 percent of scheduled benefits after the trust fund is exhausted in 2042 and 68 percent of scheduled benefits in 2078.”

So, the trustees say that the current level of benefits is unsustainable in less than 40 years, and that is assuming the government is willing and able to find the money to pay back the special bonds that must be redeemed to finance the funding shortfall between 2018 and 2042. Is that what you call “rock-solid”?

In fact, the most pressing current debate over Social Security reform is whether Congress should change the way Social Security indexes future benefits.

Currently, Social Security calculates an increase in benefits each year based on the rate of growth of average wages, known as “wage indexing.” But there is a growing call — including some from the Bush administration — to switch to “price indexing,” which would calculate future Social Security benefits based on the rate of growth of prices (i.e., inflation). In an economy where inflation is low and productivity continues to climb, wages grow faster than prices. So, indexing benefits to prices means that future retirees would get less money than they would under the current wage-indexing system.

How much less? USA Today recently ran a comparison from 1990 to 2004. The “maximum starting monthly benefit” in 1990, according to the article, was $1,085. By 2004 under the current system, the monthly benefit was $2,111. Had price indexing been imposed in 1990, that senior would have received only $1,587 in 2004 — more than $500 a month less than under wage indexing (note: most current price-indexing proposals would not start until the future). If Congress did nothing to reform Social Security but change from wage to price indexing, future seniors will receive lower monthly benefits. Does that sound like a “rock-solid guarantee”?

Finally, the public should understand that, according to the U.S. Supreme Court, no Americans — not seniors, not current workers — have a guarantee to anything from Social Security. In Fleming vs. Nestor, the Supreme Court said, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.”

Moreover, here is how the Social Security Administration explains it in its section discussing Fleming vs. Nestor: “Entitlement to Social Security benefits is not (a) contractual right. . . . There has been a temptation throughout the program’s history for some people [read AARP] to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. Congress clearly had no such limitation in mind when crafting the law.”

So, were Congress to decide to switch to price indexing as a way to cut benefits and preserve the system, no one could legally stop the action by claiming that they had a property right to the money. Of course, political pressure would make if very difficult for Congress to significantly cut Social Security benefits, much less eliminate the program. But it has the power to tinker with or even slash the benefits for some or all if it chooses.

Does that sound like a “rock-solid guarantee”?

AARP Claim #4:
“The changes don’t have to be drastic, and the guarantee Social Security provides is one worth strengthening, not replacing.”

Well, the veracity of that statement depends on what one calls “drastic.” According to the trustees, the current 75-year projection of Social Security’s financial status shows a deficit.

    This deficit indicates that financial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent (for employees and employers combined) to 14.29 percent. Alternatively, all current and future benefits could be immediately reduced by about 13 percent. (Emphasis added.)

For example, according to USA Today, the maximum starting monthly benefit in 2004 was $2,111. Reducing it immediately by 13 percent, or $274, to $1,837 a month might not strike the highly paid executives at AARP as drastic, but a lot of seniors would see it as a big reduction in their monthly income. And that 13 percent reduction in benefits assumes the changes are implemented immediately. If Congress dallies on Social Security reform, the cost of fixing the system will rise and the cuts will have to be even deeper.

AARP Claim #5:
“Some people have recommended taking some of the money people pay into the system and diverting it into newly created private accounts. Because less money would be flowing into Social Security, the guaranteed and inflation-adjusted lifetime benefits would have to be cut.”

In fact, as the previous quotes from the trustees demonstrate, the benefits will have to be cut if Congress does nothing. Ironically, the only way to avoid either cutting benefits or raising taxes is to move to personal accounts. The reason is simple: the market pays significantly higher rates of return than current workers will receive from Social Security. Under the Ryan Sununu bill, as in any personal account plan, trillions of dollars of new funds are put into an expanded and modernized Social Security framework that includes the personal accounts, to ensure that all promised benefits are paid. These funds come from the much higher investment returns that would be earned through the personal accounts and from Federal general revenues not now used for Social Security.

By allowing workers to put roughly half of their 12.4 percent payroll tax into a personal account, the other half — what might be called “old-program” funds — remains to pay current retirees’ benefits. That amount won’t be enough to cover current benefits, so the government will have to borrow the difference.

But Congress has the power to cut what AARP calls “the guaranteed and inflation adjusted lifetime benefits” if it chooses, regardless of whether it implements a system of personal accounts. And it has the power to ensure that there are no benefits cuts even if it does reform Social Security.

AARP Claim #6:
“Most of us would have to pay twice to create this new system — first to keep our commitment to current retirees and again to pay into these private accounts.”

Since the first generation of Social Security beneficiaries never paid once into the system, this claim sounds reasonable. But AARP knows that not one of the major reform proposals has anyone paying twice. They all propose to use only the current 12.4 percent payroll tax.

Suppose Congress passed legislation that allowed workers to redirect roughly half of their current payroll tax into a personal account, as the Ryan-Sununu bill would do (a proposal originally proposed by Peter Ferrara of the Institute for Policy Innovation). Six percent of a worker’s income growing at market rates of return — say, an average of 7 or 8 percent annually over the long term — leaves the worker with more money at retirement than the whole 12.4 percent growing at 1 or 2 percent (which is about what Social Security will pay future retirees, if that much). According to the official score of the bill by the chief actuary of Social Security, after just the first 15 years under the Ryan-Sununu bill, workers would have accumulated $7.8 trillion in today’s dollars in their personal accounts.

As time passes and those using traditional Social Security pass away, the money being paid into the system will pay off the debt. But no one will have to pay more than they currently pay in payroll taxes. And at some point in the future, when the trillions of dollars in unfunded liability have been paid, Congress may allow workers to keep the whole 12.4 percent or reduce their payroll taxes, or some combination thereof. Either way, it will be the largest tax cut in history.

Of course, doing an interest-rate comparison between the current Social Security program and what the market would provide is a little misleading, since the money workers pay in payroll taxes doesn’t actually go into an account that earns interest. That’s because Social Security is social insurance, not a retirement account. Workers pay in what Congress tells them, and they get what Congress lets them have.

But the point is that by using the power of the market over the long term, the current 12.4 percent payroll tax is enough to provide those who voluntarily choose the personal account system with more retirement money than they would have had under Social Security’s scheduled benefits and pay off the $11 trillion unfunded liability.

AARP Claim #7:
“In addition, private accounts are expensive. Just to switch to this new system could require $2 trillion or more in benefits cuts, new taxes or more debt.”

Maybe it “could require” benefits cuts, new taxes or more debt, but it sure doesn’t have too. Currently, the Social Security trustees say the program has an $11 trillion unfunded liability. That is money that the government will have to pay in benefits that it will not be getting in taxes. The government owes that money, whether it is actually on any accounting books or not. Moving to a system of personal accounts will not create any new debt; it simply accelerates the time the government will have to pay what it owes. That creates a cash flow problem in the short term, not “transition costs.” So the country borrows that money and pays it back in the future with old-program payroll tax funds. No benefits cuts, no new taxes and no additional debt — at least there don’t have to be.

AARP Claim #8:
“We should not be creating a system where some people win and others lose when it comes to Social Security.”

Excuse me, but what planet does AARP live on? The current system is replete with winners and losers, and it is often because of their race.

Black and Hispanic Americans tend to live shorter lives than whites. Asian Americans tend to live longer than blacks, whites or Hispanics. Women tend to live longer than men. Higher-income people tend to live longer than the poor. If you live longer than average, as white women tend to do, you will be a Social Security winner. If you die early, you will be a Social Security loser — especially if you die before retirement, because the money you have paid into the system does not become part of your estate (though you do get a paltry $255 death benefit, and you may get survivor benefits if you still have young children).

Of course, the first Social Security retirees were winners — really big winners. They paid very little into the system and yet received years of retirement funds. Like Ida Mae Fuller. After paying the Security payroll tax for two years — a total of $24.75 — she received the very first Social Security beneficiary check in February 1940. It was for $22.54. Ida Mae lived to be 100 and received about $20,000. She was a Social Security winner.

But future generations won’t be so fortunate. They will be paying in more and more and getting less and less. Part of the reason is the growing life span. But most of it is simple demographics — the U.S. is not producing enough people to pay the promised level of benefits. According to Social Security trustee Dr. Tom Saving, “Due to the changing demographic structure and rising expenditures on medical care, the share of the nation’s output consumed by the elderly will rise. It is this rising share of the economy, financed in large part by Social Security and Medicare transfers that will drive a growing tax burden.”

Sounds like we already have a system that has produced winners and losers — albeit, up till now, more winners than losers. Unless Congress acts soon, in the near future there will be more losers than winners — a lot more losers. Either workers will have to pay in significantly more, making them losers, or seniors will have to settle for much less, making them losers. Or the country can move to a system of pre-funded personal accounts, so that everyone can be a winner.

AARP Claim #9:
“At AARP, we have a number of good ideas on how to make the adjustments needed and would be glad to share them with you.”

The fact is that AARP has really suggested only three ideas — and not one of them is good.

  • Raise taxes on current workers. It is becoming a commonplace in the public policy community that those with no new ideas fall back on raising taxes. AARP fits that description. It wants to raise the current cap on earnings from $88,000 to about $140,000. But why stop there?

    AARP wants to increases taxes on upper-middle income workers but leave high-income workers — that would include AARP CEO Bill Novelli and the other AARP executives — untouched above the $140,000 cap.

    Bold move there, Bill. Ding all of those middle-income workers, but let yourself get a free ride.

  • Invest some of the current payroll tax surplus “so that it earns higher returns than those offered by U.S. Treasury bonds.” AARP likes to point out that the special Treasury bonds discussed above “aren’t only safe; they’re earning approximately 7 percent in annual interest.” Here’s an investing tip for AARP: if Social Security is earning a guaranteed 7 percent, that’s about as good as the government would get in the stock market over the long term — with no risk. So why change?

    If AARP really believes that by investing in the market the government can earn more than the current 7 percent guaranteed rate, why is it so opposed to letting individuals have that option with their own personal accounts?

    Or better yet, why not just encourage Congress to up the interest rate it pays to, say, 9 percent or 10 percent? Or 15 percent for that matter? As discussed earlier, no actual money changes hands in these transactions. So paying 10 percent on the money the government borrows from the trust fund will, on paper, postpone the day when the trust fund will be depleted and cost the federal government nothing, just as the current 7 percent actually costs the government nothing.

    But besides the blatant duplicity in AARP’s proposal, there is a very good reason why allowing the government to invest that much money is a bad idea: The money will inevitability become a political rather than an economic tool. There would be tremendous political pressure on the federal government to invest in certain companies and industries that promote popular political goals, or to pull money out of companies and industries that don’t toe the current political line.

    How do we know this? Because well over half of the states have already tried Economically Targeted Investments (ETIs) with state employee pension funds — with very poor results.

    But if Congress really thinks it can create some type of quasi-public organization that can invest billions of dollars without problems, it might want to contact Franklin Raines, the recently fired CEO of Fannie Mae, the nation’s largest mortgage finance company, for some advice.

  • Make Social Security “truly universal” by forcing all current workers who are outside of Social Security into the federal system. This is what might be called the misery-loves-company reform. There are some 5 million workers outside of Social Security. In most cases they are state employees or public school teachers and are part of a separate state- or municipal-sponsored retirement fund. Liberals have had their eyes on these funds for years, hoping to absorb their assets in an effort to postpone Social Security’s financial day of reckoning. But state employees have repeatedly resisted such recommendations. And rightly so. Why should their retirement security be hijacked by Social Security just so politicians can avoid dealing with the crisis?


    AARP has a lot to say about Social Security reform. The question is whether the organization is telling the truth. You have seen AARP’s comments, along with those who really know what they are talking about. I know I have made up my mind. How about you?