The Unending Task of Debunking Social Security Fear-Mongering

Although conservative politicians in the United States unleash their most passionate tirades on social issues—the contrived controversy over Planned Parenthood being only the most recent example—economic issues can also elicit white-hot, unreasoning rage. I strongly disagree on the merits with the people who take conservative positions on, say, abortion or same-sex marriage, but I can understand why they become so emotional. But conservatives’ anger about economic issues—and their unwillingness to listen to facts or logic regarding those issues—is truly puzzling.

One of the perennial targets of conservative vitriol is the Social Security system, the highly successful government retirement program that might face some easily fixable financing issues a few decades from now. But to listen to politicians and commentators on the right, one could be forgiven for thinking that Social Security is doomed. Conservatives have developed a short list of utterly nonsensical claims about Social Security, and they repeat them endlessly.

I have written frequent columns here on Verdict about Social Security, attempting to set the record straight on the zombie-like arguments that Social Security’s opponents constantly revive. For example, barely two months ago, my Verdict column described Republican presidential candidate Jeb Bush’s confusion about Social Security, in particular about the program’s retirement age. (He has said that he might want to increase it from 65, but he obviously is unaware that it has already been set to increase to 67, starting with people born in 1960.)

A few days ago, I happened to watch a short segment on a Fox News morning program, in which the interviewer (an upbeat talking head named Martha MacCallum) spoke with a Fox Business News financial reporter named Melissa Francis. Unfortunately, a video of the segment is apparently not available online (nor have I been able to find a transcript). Even so, the interview was interesting to watch, because it was a showcase for several of the most commonly repeated uninformed attacks on Social Security, with both interviewer and interviewee eagerly agreeing with each other that Social Security is doomed, unfair, foolish, unsustainable, and on and on.

Here, I will run through the more egregious false claims that the MacCallum-Francis interview repeated as fact. I do so not to focus specifically on the two people involved, but merely because the interview was so recent (yet so uninformed by actual evidence), and because it covered so much of the territory of anti-Social Security mania.

Unfortunately, there can never be a final, complete takedown of the full range of anti-Social Security arguments, because the people who repeat those arguments simply will not let them die. Even so, it is important to revisit some of these issues on a regular basis, in an effort to prevent the entire political conversation from being taken over by this relentless craziness.

False Claim #1: Social Security Is a Ponzi Scheme

In the Fox News interview, which lasted approximately four minutes, Ms. Francis asserted twice that Social Security is a Ponzi scheme. That sounds bad. We know, for example, that convicted swindler Bernard Madoff lost millions of dollars for his clients in a massive Ponzi scheme. Ponzi schemes are taught as cautionary tales in economics departments and business schools. It truly would be bad if Social Security were really a Ponzi scheme.

Fortunately, Social Security is nothing of the kind. Unlike words like “fair” or “balanced,” some words have actual meanings that cannot be twisted out of existence. The Securities and Exchange Commission (SEC), which is the chief federal agency charged with protecting the public against Ponzi schemes, includes a full discussion of the term on its website, in Q&A form.

What is a Ponzi scheme? The SEC answers: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” The idea is that someone like Madoff will tell investors that he has found a company or a business opportunity that will pay very high returns. The money that his clients/victims contribute is supposedly being put into that investment opportunity, which then pays returns to the investors from the profits of the underlying business. In other words, it sounds like a legitimate investment.

The problem is that there is no underlying investment, and the “dividends” that are being paid in the early stages of the fraud are only payable by finding new victims. Ultimately, that must end. The SEC answers the question “Why do Ponzi schemes collapse?” as follows: “With little or no legitimate earnings, Ponzi schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

Social Security is nothing like that. Social Security is not, and has never been, correctly thought of as a money-making investment opportunity, based on high returns on mysterious investments. Instead, it is obvious to anyone who cares to look that Social Security is a system that uses contributions from current workers to pay current retirees, and that will use contributions from future workers to pay benefits for current workers when it is their turn to retire. This works not by finding an ever-larger pool of “suckers” to buy into the fraud, but simply by matching projected revenues over time with projected benefits over time. (I will return to this “matching” issue below.) There is no need to find new “investors” to make Social Security work. It does not collapse if it stops growing.

Consider a simple example. Imagine that two people are working, one younger and one older, and there is also one child and one retiree in their little community. The workers have a combined income of $100,000. They agree that they will spend $25,000 on the child, $25,000 on the retiree, and consume $25,000 each while they are working. They also agree that this will continue forever. Later, when the child begins to work (and is replaced by another child), and the retiree has died (replaced by the older worker), there are still two workers and two non-workers, and everyone can still consume $25,000 each.

The point is that this system is sustainable. It does not require finding new people to join the system, and it makes no false claims about how the money is being used, or where the benefit payments are coming from. It is a pay-as-you-go system, and it is clearly not a Ponzi scheme.

False Claim #2: Demographics Will Overwhelm Social Security

“Aha!” say the doubters. “So Social Security isn’t inherently a Ponzi scheme, but it is still unsustainable because of the aging of the Baby Boomers. There will be more retirees than workers.” This claim, in fact, showed up in the MacCallum-Francis interview on Fox News, with Ms. Francis claiming that the problem is that there will soon be too many retirees, and that people are now living into their nineties. The system cannot be sustained, right?

Wrong. The ability of a retirement system to cover its retirees only partly depends on the ratio of workers to retirees. It also crucially depends on how productive workers are. In the numerical example above, imagine that in the next generation there will be two retirees and one worker (and one child), but the retirees will have bequeathed enough new knowledge and machinery that the worker will be able to produce $100,000 on her own. That would still allow everyone (the child, the worker, and the two retirees) to consume $25,000, just as before.

The crucial question, then, is whether workers’ productivity in the United States is growing fast enough to make up for the temporary growth in the retiree population, while the Baby Boomers move toward their final reward. The good news is that it is. In fact, we know that even the most pessimistic projections of U.S. productivity growth will allow per capita consumption to continue to grow smartly. Demographics have not defeated us. We are defeating demographics.

False Claim #3: The Trust Funds Are Nothing But Worthless Paper

With nothing sensible to say about the actual sustainability of the Social Security system, conservatives have also resorted to making false claims about the Social Security retirement trust fund. They assert that the trust fund is not “real,” and that the rest of the federal government is frittering away the money. This claim betrays a gross misunderstanding of accounting principles.

Under normal circumstances, there would be no trust fund at all. A pay-as-you-go system does not require a trust fund, because its ongoing expenditures are covered by its ongoing revenues. Because of the impending aging of the Baby Boom, however, in 1983 President Reagan agreed with congressional Democrats to build up a trust fund, to be drawn down when the Baby Boomers retire.

The plan all along, then, was to have Baby Boomers pay more than needed while they worked, so that they could be paid in full when they retired. But why was the excess money not being put into “real” investments? The simple answer is that Social Security’s excess money could have been invested in private financial markets—although it is hard to imagine why conservatives would have preferred having a multi-trillion-dollar federal fund own a huge chunk of corporate America—but doing so would have been a wasteful shell game.

If the federal government otherwise needed to borrow money—to fund foreign wars of choice or to pay inflated costs to for-profit health care providers (or for the many good things that the government also does, including paying for education, scientific research, childhood nutrition programs, and so on)—then the Treasury would have had to go into the private financial markets and borrow those funds. Why have one arm of the federal government buy up private financial securities, only to have another federal agency borrow all of that money back, and more?

The trust funds, therefore, were never meant to be invested in stocks and bonds. The trust funds are simply an accounting mechanism that keeps track of the money that the federal government did not have to borrow, because Baby Boomers were paying excess Social Security taxes. (By “excess,” I mean taxes far greater than was required to pay retirees’ benefits at the time.)

Saying that the trust funds are “empty” or “mere paper,” therefore, simply misses the point. The federal government in the future will reimburse the Baby Boomers for their overpayments, allowing the system to be a pay-as-you-go system not on an annual basis, but on a generational basis.

And saying that those promised future payments cannot be honored, because there will be “no money,” would apply not just to Social Security but to military spending and all of the other things that the federal government finances on an ongoing basis. Even the most pessimistic official forecasts going out decades into the future show that these Social Security promises (and other obligations) can be sustainably financed.

False Claim #3A: We Would Be Better Off Investing Our Savings On Our Own

At one point in the Fox News segment, the interviewer interjected that, rather than having the Social Security system put people’s money into “worthless paper,” it would be better to allow people to put their money in the bank. Only then, apparently, will we know that no one has taken the money that is rightly ours, to use it for some unknown purpose.

This would be a surprise to bankers, who never have any intention of taking deposits and letting them sit in the vault. The entire business model of banking is based on taking money from depositors and lending it to other people who promise to pay it back some day. The money that people see on their bank statements, therefore, must also be “worthless paper” (or pixels) by this logic, because their money is no longer actually sitting in the bank.

If the bank becomes insolvent, by the way, the only way that depositors will receive their money back is via government guarantees, which means that the ultimate backer of our savings (and 401k) accounts is that same federal government that will pay for our Social Security benefits.

The larger point is that people should not imagine that their money is sitting safely in a vault. Private banks and the government make the economic system work by setting up systems in which people’s money can be used by other people, to the benefit of all. Social Security is not a deposit account, but even if it were, one could still claim that “your money is not really there.” That would be a correct statement, but only in a trivial and uninformed sense.

False Claim #4: Social Security Will Go Broke in (Fill in the Date)

As I noted above, the Social Security system was set up to collect enough funds to pay for scheduled benefits through the time when the Baby Boomers are no longer alive. Even the best laid plans, however, might go awry. One of the complaints from those who attack Social Security is that the system will actually run short of money before the Baby Boomers die. Is that correct?

The Fox News segment began with the interviewer reading from an annual statement that is sent to Americans every year. The statement explains the benefits that one can expect to receive, based on the person’s age, earnings and other relevant factors (such as whether the worker takes early retirement). The interviewer then noted an asterisk, and gleefully read aloud from a footnote, which said that the system will not be able to pay full benefits starting in 2033, but will instead only be able to pay 77 percent of scheduled benefits from that point forward. “There it is, in black and white!” she exclaimed.

There are several problems with that statement, the smallest of which is that neither the interviewer nor the interviewee bothered to use the most up-to-date estimates. In fact, the latest Social Security Trustees’ annual report has revised that pessimistic estimate, with 79 percent of benefits payable starting in 2034. Still not great news, but anyone would prefer the new scenario.

More significantly, Ms. Francis noted at one point in the interview, “I always assume that I will get nothing from Social Security.” This is truly odd, because she had just been making a big deal about the outdated 77 percent estimate, which would mean that someone whose full benefits would have been $3000 per month would still receive $2310. Disappointing, but if that is what we are worried about, why would anyone ever assume that she will receive nothing? (The Social Security Trustees, by the way, do publish an alternative economic forecast scenario each year in which it would never be necessary to cut benefits at all.)

Therefore, when we say that the trust fund might someday be “empty,” all we really mean is that the system would revert to an annual pay-as-you-go system. And as I have pointed out in previous Verdict columns, even the reduced benefits under a pay-as-you-go system would be greater than current retirees receive, in inflation-adjusted terms.

Finally, Ms. Francis pointed out that the trust fund’s “drop-dead date” used to be in the 2040s, and she suggested that the reason for the change is that the Baby Boomers have aged. The problem is that we have known about the aging of the Baby Boomers ever since the Baby Boomers were born, and the Trustees have always taken that generational bulge into account in their forecasts. The drop-dead date forecasts actually changed more recently because of the Great Recession, which no one anticipated (especially in its severity). Getting the economy more firmly back on track would be the best way to deal with any concerns about Social Security’s long-run finances.

The fundamental point, however, is that it need never happen that we find ourselves cutting Social Security benefits, even if the Trustees’ more pessimistic forecasts turn out to be true. If it becomes necessary, there are many plans that would raise additional revenues from a variety of sources, the most obvious being to lift the regressive cap on earnings that are subject to Social Security taxes.

In fact, however, it would not be necessary to raise taxes at all. If current forecasts turn out to be true, annual federal borrowing will be well within the range that we could finance full Social Security benefits into the indefinite future, even if the trust funds do reach a zero balance. Reasonable people could argue that there are better ways to arrange our taxing and spending priorities, but the suggestion that Social Security benefits will definitely be cut, and that there is no way to stop that from happening, is simply wrong.

Social Security’s eighty-year run has been an unparalleled success, reducing poverty among the elderly and providing a modest level of retirement security for all American workers. There is far too much misinformation about the system’s sustainability and finances floating around. The system could be improved in many ways, but the idea that younger people will never receive their Social Security benefits is nothing but dishonest fear-mongering.