5 Huge Myths About Social Security

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5 Huge Myths About Social Security

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5 Huge Myths About Social Security
By Ilan Moscovitz
October 15, 2012

Excerpts:

"Social Security has been providing Americans with old age, disability, and widow and orphan insurance for as many as 77 years. But like so many of today's crucial financial topics, it's also shrouded in myth. Here are five big ones.

Myth No. 1: Social Security is going bankrupt
The biggest misunderstanding out there relates to Social Security's financial challenges. (A Google search for "Social Security bankruptcy" turned up 50 million hits.) But the fact is that Social Security isn't going bankrupt, nor is bankruptcy really possible as the system is currently set up...

Myth No. 2: Meeting Social Security's future shortfall is really hard
We only need to come up with about 0.9% of GDP in order to make Social Security's revenues match up with its expenses for the next 75 years. To put that into perspective, 0.9% is close to the cost of unemployment insurance, the high-end Bush tax cuts, or one-fifth of the Defense budget. That's not insignificant, but it's hardly apocalyptic...

Myth No. 3: Social Security's financial challenges are due to rising life expectancies
This one's only partially true. For the past few decades, there have been about three workers for every Social Security beneficiary. It's estimated that ratio will fall to around two by 2035. Since Social Security's revenue is generated by workers, a rising proportion of beneficiaries to workers puts a strain on the system. The idea that it makes sense to cut benefits by raising the retirement age naturally arises out of the fact that life expectancies are rising.

However, three things are important to keep in mind. First, a declining proportion of workers to beneficiaries doesn't automatically mean Social Security can't support its beneficiaries because workers become more productive over time. Since 1980, productivity per worker has increased by 78%.

Second, although it's true that life expectancies at birth have risen quite a bit over recent decades, the more important metric -- life expectancies for 65-year-olds – have only risen by about two years since 1980. What's more, the same seniors who don't have sources of income besides Social Security haven't seen the same gains in life expectancy and often work in physically demanding jobs that are harder to perform at 70.

Finally, there are other, perhaps more significant reasons for the projected shortfall, including declining birth rates and rising income inequality over the past several decades.

Myth No. 4: Social Security adds to the deficit
Social Security can't add to the deficit, because it has its own funding source (Social Security payroll taxes) and isn't allowed to spend any money it doesn't have. Much of the confusion comes from the fact that under federal accounting practices Social Security is represented in the consolidated federal budget, as well as from the fact that Social Security's trust fund, like many insurance funds, invests in Treasury bonds. (Bonds are debt investments.)

The exception has been the payroll tax holiday, which lowered payroll taxes starting in January 2011 in order to stimulate the economy. During that period, the federal government made up the lost revenue to Social Security that would have been collected. The holiday is expected to end next year.

Myth No. 5: Social Security only provides retirement benefits
Social Security isn't a retirement savings plan. It's actually a universal insurance program that helps protect workers, retirees, and their families from life's unknowns. Most Social Security benefits do support retirees via old-age insurance, but some also provide insurance in case people become disabled, widowed, or orphaned."

The rest here... Motley Fool
"I'm not a skeptic because I want to believe, I'm a skeptic because I want to know." --Michael Shermer
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