One Fact About Social Security Nearly Everyone Misunderstands

Photo taken from Twitter via @cafeapatame, juliesimba.com

There is generally only one broadly accepted fact about Social Security. For the most part, people generally believe that Social Security will pay scheduled benefits until 2034, at which point beneficiaries would get 78 cents of every dollar that they should be receiving.

While that assessment is widely embraced as a fact, it really isn’t true. Given the importance of the program in the lives of our fellow Americans, all of us should probably get this one fact right.

Here is an illustration of the fact:

If no changes are made before the projected shortfall in 2034, Social Security would not have enough funds to pay full benefits to retirees. That would mean beneficiaries at that time would only receive 78 cents for every dollar they should be receiving. ~ AARP

AARP is as reliable as the next source, and it is just one of dozens that describe the situation in similar terms. Yes, the annual trustees report for the Social Security Trust Funds says something similar. Yes, it is a popular belief.

Nonetheless, the fact is wrong and misleading given what the numbers in the forecast actually mean. It is likely best to illustrate the problem with the assessment in terms of real-life events. In 1977, President Carter “guaranteed” that Social Security would be able to pay its bills for more than 50 years. However, in less than five years, the program was within months of insolvency.

Now this legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound. – President Carter (December 20, 1977)

The important point for voters to understand is trustees’ annual forecast is not a guarantee by any means.  It is a warning about what might happen to the program in the future, even in a good economy. Carter didn’t want to mislead anyone. His guarantee evaporated in an economy that failed to live-up to the outsized expectations of the forecast.

Thus, it is possible to say that Social Security should pay benefits until 2034 – in a world where inflation is 2.4 percent. The problem is the latest inflation figures peg prices rising at 8.3 percent on an annual basis. So we do not really know when Social Security might come up short on revenue.

Moreover, we really do not have a firm gauge on how much benefit checks might fall. The amount of benefits paid by Social Security depends upon the amount of revenue collected, which depends upon U.S. economic performance. In order for the program to pay 78 percent of what it owes, the U.S. economy must grow at a robust rate.

Essentially, seniors will continue to spend whether they get full checks or partial ones. If seniors respond to smaller benefit checks by spending less money, the promise of $0.78 cents on the dollar goes out the window.

Even in a perfect world, where the future unfolds exactly as the trustees have predicted, there is no assurance that the individual would get 78 cents of every dollar owed. Believe it or not, no one knows how Social Security would allocate a system-wide reduction to the individual beneficiary. Accordingly, the Congressional Research Service advised lawmakers, “It is unclear what specific actions SSA would take if a trust fund were insolvent.”

There is no reason to believe that a reduction of benefits would be equally divided among those receiving checks.

The estimates we have suggest that someone turning 76 today expects to outlive the system’s ability to pay its bills, even during good economic times. Therefore, we the people ought to know what specific actions the Social Security Administration will take in the event that the trust fund is gone and the system runs short of cash. 

So, to recap, we really do not know when Social Security might come up short of the revenue necessary to pay its bills; how much benefits might fall; or even how the program would survive short-term economic downturns.

There is a fundamental disconnect between policy makers and the public that they nominally serve. The public sees benefit reductions exceeding 20 percent as the problem. Pundits and policy makers tend to express that problem as the solution.

Brenton Smith (BrentonCSmith@yahoo.com) is a policy advisor at The Heartland Institute, with work appearing in nationally recognized publications including Barron’s, Forbes, MarketWatch, The Hill, USA today, and more.

Written By:

Brenton Smith (BrentonCSmith@yahoo.com) is a policy advisor at The Heartland Institute, with work appearing in nationally recognized publications including Barron’s, Forbes, MarketWatch, The Hill, USA today, and more.