NCPA - National Center for Policy Analysis

Facts About Social Security

September 26, 2000

Social Security reform has emerged as one of the defining issues of the 2000 election, but a number of myths and half-truths have clouded the dialogue.

Fact #1: The System Is in Trouble. Social Security is structured as a pay-as-you-go system. That means today's workers pay the benefits for today's retirees. In 1940, there were 42 workers per retiree; today there are three. By 2040 there will be only two. This means higher taxes for future workers.

Fact #2: The Social Security Trust Fund Cannot Pay Benefits. The trust fund only exists to perform a record-keeping function. Technically, it holds interest-bearing bonds that represent the accounting surplus of payroll taxes collected minus benefits paid. But the only way the Treasury can redeem them is if it first collects taxes or borrows money.

Fact #3: Benefits Are Not Guaranteed. In two major cases, Helvering v. Davis (1937) and Flemming v. Nestor (1960), the Supreme Court ruled that individuals have no legal claim to Social Security. As a result, Congress can reduce Social Security benefits at any time. Indeed, it already has by raising the retirement age (leading to fewer benefit checks) and imposing a special tax on benefits. Workers have no projected right in Social Security benefits simply because they have paid Social Security taxes.

Fact #4: Social Security Is a Poor Investment. In general, workers born before World War II paid significantly less in taxes than they will receive in benefits - and can expect a higher rate of return than subsequent generations. By contrast, baby boomers can expect a rate of return of less than 2 percent, and Generation Xers can expect less than 1 percent. Children born today can expect a rate of return from Social Security of almost zero, assuming that the program can pay full promised benefits.

Fact #5: Reform Works. A system that divorces us from the pay-as-you-go system, such as one with personal retirement accounts, could provide future retirees with a benefit that could provide them choice, control and security in their retirement, while protecting the government's long-term solvency.

Source: Matt Moore, "Facts about Social Security," Brief Analysis 341, September 26, 2000, National Center for Policy Analysis.

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