NCPA - National Center for Policy Analysis

Social Security: Fact or Fiction?

May 25, 2011

Veronique de Rugy, a senior research fellow at the Mercatus Center, separates three economic myths from economic truths when it comes to Social Security.

Myth 1: There is no crisis.  Social Security will never be insolvent. 

  • Fact 1: Under the best-case scenario, the trustees report finds that the probability of Social Security never becoming insolvent is less than 2.5 percent.
  • The only scenario under which the Social Security trust fund will never go insolvent is based on projections that the Treasury Department itself considers to be extremely unlikely.

Myth 2: Social Security won't contribute to the federal deficit for decades.

  • Fact 2: Starting this year the program will run a cash flow deficit that will add to the federal deficit.
  • In theory, Social Security benefits are self-financing with a 12.4 percent payroll tax, but that doesn't mean the money collected will pay for benefits.
  • This is because when Congress changed the law in 1983 so that in any given year current taxpayers pay more in taxes than the program needs to pay out benefits, Congress also required that the program invest the difference, or surplus, into a trust fund, which can only invest money in special-issue Treasury bonds.
  • Since then, the federal government has spent the money on its daily consumption: education, loan guarantees, wars, etc.

Myth 3: The Patient Protection and Affordable Care Act fixed the funding problems related to Medicare.

  • Fact 3: Under the best economic assumptions, less than half of all future Medicare spending will come from dedicated sources.
  • While Medicare costs over the next 75 years are projected to be 25 percent lower due to the health care law, these cost savings rest primarily on drastic reductions in the reimbursement rates for Medicare services -- reductions in reimbursements that are extremely unlikely to happen in a world where politicians are subject to powerful pressures from their constituencies.

Source: Veronique de Rugy, "The Facts about Social Security," Reason Magazine, May 20, 2011.

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