There are a plethora of misconceptions out there regarding Social Security.\u00a0 Some of the more common ones:<\/p>\n
Plus many, many more other mistaken ideas.<\/p>\n
The truth is far different.\u00a0 Regardless of how many people have claimed otherwise, Social Security is in effect the biggest Ponzi scheme ever run.\u00a0 It has the false appearance of a retirement plan by design \u2013 indeed, that was only one of the lies told to get the US public to accept it.\u00a0 But it\u2019s not a retirement plan in any way.\u00a0 If it were done by private industry, it would almost certainly be illegal.<\/p>\n
However, until recently I didn\u2019t know that much about the details of Social Security financing.\u00a0 Yes, I knew it had something called\u00a0 \u201cTrust Funds\u201d (more on why the quotes are there later in this article).\u00a0 But I realized I didn\u2019t know much at all about how they worked.\u00a0 So I decided to see what I could find.<\/p>\n
What follows is the result of that research.\u00a0 This one’s rather long – so if you’re going to read it, keep that in mind.<\/p>\n
Overview<\/u>.<\/p>\n
Here\u2019s a brief overview of how Social Security operates.\u00a0 It\u2019s not complete, and is lacking some details.\u00a0 But it hits the main points. It was also compiled from various documents on the Social Security Administration web site.<\/p>\n
1.\u00a0 Social Security is funded from multiple sources; those will be further identified below, but are generally identified in footnotes and\/or explanatory text here<\/a><\/em> and here<\/a><\/em>. Those funding inputs are mingled and \u201claundered\u201d through two so-called Social Security \u201ctrust funds\u201d – which in reality are general purpose \u201cslush funds\u201d that receive every dollar that Social Security takes in, and from which all Social Security expenses get paid.\u00a0 Thus, everything Social Security receives goes into one of two such \u201cpots\u201d:\u00a0 one called \u201cOld Age and Survivors,\u201d and a second called \u201cDisability\u201d.\u00a0 Everything Social Security must pay out is paid from one of those two common \u201cpots\u201d.\u00a0\u00a0 Anything left over at the end of the year \u201crolls over\u201d and remains in the applicable \u201ctrust fund\u201d.<\/p>\n 2.\u00a0 Those Social Security \u00a0\u00a0slush funds<\/span>\u00a0\u00a0\u00a0 \u201ctrust funds\u201d buy \u201cspecial\u201d Treasury securities not available to the public<\/a><\/em>. These \u201cspecial securities\u201d are always redeemable at face value.\u00a0 They also accrue interest annually.\u00a0 (Being government debts, the interest of course comes out of other Federal tax revenues or from borrowing by Uncle Sam.)<\/p>\n The Social Security \u00a0\u00a0\u00a0\u00a0\u00a0slush funds<\/span>\u00a0 \u00a0\u00a0\u00a0\u201cTrust Funds\u201d buy these special securities on a daily basis. All Social Security expenses are paid by redeeming some of those \u201cspecial\u201d securities.<\/p>\n Since the same fund is used to receive current income and pay current expenses, this means that the \u201ctrust funds\u201d are not<\/em> investment funds.\u00a0 Rather, they’re merely temporary buffers \u2013 just like an interest-bearing checking account (if you can still find one of those these days). \u00a0\u00a0Benefits are still primarily paid from incoming tax receipts, but because these \u201ctrust funds\u201d have a nonzero balance there\u2019s a time lag between receipt of taxes and outlay of those same dollars due to the \u201ctrust fund\u2019s\u201d providing a buffer.\u00a0 The length of this time lag has varied over time and depends both on the fund\u2019s balance and the average benefits dispersed monthly.\u00a0 Currently the Old Age and Survivors \u00a0\u00a0\u00a0 slush fund<\/span>\u00a0\u00a0\u00a0\u00a0\u00a0 Trust Fund has a \u201cbuffer length\u201d of somewhat over 3 years.\u00a0 The Disability \u00a0\u00a0\u00a0\u00a0\u00a0slush fund<\/span>\u00a0\u00a0\u00a0\u00a0\u00a0 \u201cTrust Fund\u201d has much less of a reserve on hand; it\u2019s in serious trouble.<\/p>\n 3.\u00a0 The Federal Government – not retirees – owns these \u201ctrust funds\u201d. Technically, they are financial accounts belonging to the US Treasury.\u00a0 All benefits are paid to qualifying individuals from these \u201ctrust funds\u201d, as are other program expenses.\u00a0 As noted above, it does this by redeeming those \u201cspecial\u201d Treasury securities you or I can\u2019t buy.<\/p>\n 4.\u00a0 Individuals receiving benefits actually own nothing. Since Social Security is a government benefit and not something you own, Congress can change qualification requirements, benefit amounts, or even cancel the program outright if it so desires.\u00a0 Don\u2019t believe me?\u00a0 Well, then you might want to read the SCOTUS case Fleming v. Nestor (1960). \u00a0There\u2019s a link to that case later in the article.<\/p>\n 5.\u00a0 Social Security is primarily (at present, around 88% – and dropping) funded by payroll taxes on income below a certain level. These payments are not \u201cretirement contributions\u201d; they are taxes that are legally mandatory.\u00a0 You do not have a \u201cSocial Security Account\u201d with a calculable balance; all you have is an earning history.\u00a0 That earning history is used \u2013 in a rather convoluted manner, which by design grossly favors career low-income wage earners at the expense of those earning a large income \u2013 to calculate the amount of the benefit the law deems you deserve.<\/p>\n 6.\u00a0 Benefits are paid, as defined by law, to those who qualify to receive them. Federal law defines who qualifies and what must be done to qualify.\u00a0 Qualification requires two things:\u00a0 meeting an age or disability threshold, and having enough \u201cqualifying quarters\u201d of work under Social Security for which you\u2019ve paid your Social Security taxes.\u00a0 Currently, one calendar quarter of coverage credit is given for each $1,260 earned in a calendar year; earn $5,040 in a year, and you\u2019ve got a year\u2019s coverage.\u00a0\u00a0 That number was lower in the past.<\/p>\n 7.\u00a0 Under current Federal law, 40 quarters of coverage over your entire working lifetime – in other words, 10 years – are all that is required to be \u201cfully covered\u201d and receive a benefit when you retire. Benefits based solely on age can be received as early as age 62 if not for disability, and earlier for disability.\u00a0 Nonworking spouses receive benefits based on their spouse\u2019s earning history.\u00a0 These benefits continue should their spouse predecease them.<\/p>\n 8.\u00a0 Those retiring for disability generally do not require as many quarters of \u201ccredit\u201d under Social Security, but must have varying amount of Social Security employment \u201ccredit\u201d based on their age.<\/p>\n 9.\u00a0 Not all income is subject to Social Security taxes. Only the first $118,500 of earned income (the amount changes periodically) is subject to Social Security taxes; this is called the Social Security Wage Base.\u00a0 This is because, regardless of income, there is a maximum possible benefit that can be paid to anyone receiving Social Security Benefits.\u00a0 That maximum monthly benefit is currently $2,639 for someone retiring at their full retirement age of 66 (this will rise to 67 over the next few years).\u00a0 Receiving this benefit requires earning at least the Social Security Wage Base for 35 or more years. In contrast, a person working full-time at a minimum wage job for 40 years at age 66 gets a monthly benefit of $924.<\/p>\n 10.\u00a0 Under some conditions, Social Security benefits are taxable income. When this happens, these income taxes are returned to the applicable Social Security \u201ctrust fund\u201d which paid them the benefit, not kept by the Treasury to pay Uncle Sam\u2019s bills.\u00a0 Don\u2019t ask me why.<\/p>\n OK, that\u2019s a rather long overview.\u00a0 Though it hits the major points, it\u2019s missing a fair number of details.\u00a0 So I think you can see already why there are so many varied misconceptions regarding Social Security.\u00a0 It\u2019s complex as hell \u2013 and we\u2019ve been lied to about it for years.<\/p>\n What Social Security Is Not.<\/u><\/p>\n 1.\u00a0 Social Security is not a retirement plan<\/em>. This is the biggest and oldest lie about Social Security \u2013 right up there with \u201c3% of your income\u201d being \u201cthe most you will ever pay\u201d (see the paragraph here<\/a><\/em> titled \u201cYour Part of the Tax\u201d).\u00a0 While it was sold as a retirement plan by FDR and his cronies, it is not.\u00a0 You do not own anything.\u00a0 Your payments are not \u201cretirement contributions\u201d; they are legally mandatory taxes you must pay to avoid going to jail.\u00a0 You do not have any kind of \u201cretirement account\u201d, nor are your payroll taxes invested on your behalf.\u00a0 Rather, they\u2019re used to pay benefits to others \u2013 currently, with about a 3 year delay between the time you pay them and the time they\u2019re paid out. (In late 1983, that lag was around 2 months.)<\/p>\n What Social Security is is an income transfer program, funded by payroll taxes, that transfers income from those who are working to others eligible by law to receive benefits.\u00a0 Period.<\/p>\n 2.\u00a0 Social Security is not property; you own nothing<\/em>. I mentioned this before, but it merits repeating.\u00a0 Unlike an earned pension, you have no legal property right to receive Social Security benefits because you paid into the system.\u00a0 The SCOTUS ruled that Social Security was a government benefit, not a pension in which you have ownership rights, in Flemming v. Nestor (1960)<\/em><\/a>. (You can read the full SCOTUS opinion here<\/a><\/em>.) \u00a0If Congress wants to change the rules, lower benefits, or terminate the whole Social Security program tomorrow, it can \u2013 and you\u2019re SOL.\u00a0 All you did when you paid those FICA taxes was do what was necessary to stay out of jail:\u00a0 obey current tax laws.<\/p>\n 3.\u00a0 Your benefits are not guaranteed<\/em>. Congress can change the rules at any time \u2013 and indeed has several times over the life of the program.\u00a0 Just ask anyone affected by the 1970s \u201cnotch\u201d \u2013 if you can find anyone still alive who was affected, that is.\u00a0 Or you can anyone who\u2019s had to delay retirement due to the rise in Social Security retirement age.<\/p>\n 4.\u00a0 You didn\u2019t \u201cpay into the plan\u201d or \u201cearn it\u201d<\/em>. What you did was pay your taxes as required by law.\u00a0 That\u2019s it.\u00a0 You earned nothing, and there was no \u201cplan\u201d to \u201cpay into\u201d.\u00a0 You pay taxes because the law says you must.<\/p>\n 5.\u00a0 Social Security is not \u201cinsurance<\/u>\u201d<\/em>. Insurance involves paying premiums in exchange for a defined payment in the event a certain event occurs.\u00a0 Social security involves paying taxes required by law, along with \u2013 if you\u2019re lucky \u2013 getting whatever benefit Congress deems you deserve when you retire or become disabled.\u00a0 Big difference.<\/p>\n 6.\u00a0 The “Trust Funds” contain investments that have real value.<\/em>\u00a0 Not really.\u00a0 As explained above, they’re more like interest bearing checking accounts.\u00a0 They earn little value – not nearly enough to pay annual benefits.<\/p>\n Plus, those “trust funds” are “guaranteed” by Uncle Sam, not by real assets.\u00a0 Uncle Sam is so broke these days that if it cost a quarter to take a dump he’d probably have to upchuck instead if he couldn’t find someone to loan him a nickle.<\/p>\n 7.\u00a0 Finally, I\u2019ll say it again: Social Security is not a retirement plan<\/em>.\u00a0 Bluntly, it\u2019s an intergenerational income transfer program \u2013 or in plain language, a means of redistributing income from workers who earn it to others who in general no longer work.\u00a0 In plain language, it\u2019s a welfare program that by design provides an unearned income to elderly and disabled persons as recipients, and is funded by taxes levied on those currently employed.<\/p>\n The Social Security \u201cTrust Funds\u201d \u2013 What They Are, and How They Work<\/u>.<\/p>\n OK, above there\u2019s an overview, followed by a list of some things Social Security is not.\u00a0 So, how does it work?\u00a0 How does the money get from taxpayer to beneficiary?\u00a0 Where does it all come from, and where does it all go?<\/p>\n In what follows, I won\u2019t be addressing Medicare; that also has a trust fund, but though there are some similarities it\u2019s a different beast and appears to be run somewhat differently.\u00a0 I also haven\u2019t researched that one in enough detail to be able to write anything about it that would be reasonably accurate.<\/p>\n The \u201cTrust Funds\u201d<\/u>.\u00a0 Social Security has two so-called \u201ctrust funds\u201d<\/em><\/a>. <\/em>\u00a0The quotes are there because in reality, these are merely two temporary holding accounts \u2013 or, if you prefer, \u201claundry bins\u201d or \u201cslush funds\u201d – that allow income to be held temporarily (and earn a bit of interest) before it is spent within a relatively short period of time.\u00a0 These funds are called the \u201cSocial Security Old Age and Survivors Trust Fund\u201d<\/em><\/a> and the \u201cSocial Security Disability Trust Fund\u201d<\/em><\/a>.\u00a0 (Though it\u2019s technically in the name, I refuse to include the term \u201cInsurance\u201d in the name of either trust fund \u2013 because Social Security IS NOT FREAKING INSURANCE, no matter how many times people have lied through their teeth claiming that it is.\u00a0 It\u2019s a damned tax-funded government income transfer program mandated by law; neither payments nor participation are voluntary, and taxes are not insurance premiums.)<\/p>\n While the two funds (Old Age and Survivors, Disability) are distinct, they both operate virtually identically.\u00a0 So a single discussion of how they operate suffices for both.<\/p>\n