In recent weeks, I have seen Facebook posts about Social Security with “facts” that people are being asked to share. They make assertions about the Social Security tax rate and what Congress has done with the money. This is unfortunate because they are completely inaccurate in so many ways, but too many people accept this junk and pass it along. As someone who spent a career in employee benefits, I feel a need to correct them.
These Facebook posts say things like the Social Security checks will be renamed “Federal Benefit Payments” or that the Social Security tax rate was 15% of our income. And they assert that if we had individually invested this money instead giving it to the government (which purportedly “used it elsewhere”) we would have $1.3 million in our savings.
Not so. The total Social Security tax rate is 12.4% not 15% and it has not been that level for the last 40 years. The math in these posts is also wrong: 12.4% of $30,000 is equal to $310 per month, not $375. Nobody is going to earn 1% interest compounded monthly. In fact, if you could have invested the $310 each and every month (an impossibility given one did not earn the $30,000 their entire working life because it’s an average), it would take an annual return of over 8.5% to reach $1.3 million. Pension funds don’t even assume that rate of return.
Nobody took the Social Security tax money and “used it elsewhere.” The fact is, the government did invest our tax money in a low-risk interest earning account; one big account invested in U.S. Treasury Bonds (about as low-risk as you can get) that currently holds about $2.8 trillion with an average interest rate of 3% now paying the Social Security Trust about $98 billion a year in interest.
But the real points that are missed in these limited-knowledge memes are the most important:
- Social Security is guaranteed income not dependent on one’s investments
- Social Security provides more than a benefit to the taxpayer; it provides for spouses, ex-spouses and children
- Social Security provides disability benefits way before the normal retirement age
- Social Security provides some inflation protection
- Social Security provides survivor benefits
There is one basic problem, however: The promises made by the law to current and future beneficiaries are not being funded. In other words, incoming taxes plus interest plus all the money now in the trust is not sufficient to pay full benefits for even the next 20 years. This means income to the trust must increase and/or the promises for future benefits must decline.
Richard.D. Quinn, a Verona resident since 1971, has 50 years experience designing and managing employee benefit plans. You can read more of his work on his blog, QuinnsCommentary.com or on Twitter @quinnscomments.
