Is Social Security a good deal for workers? That’s the question the AP posed in an August 5 piece dredging up a very old argument against Social Security—that workers pay more into the program than they later get back—and presenting it as fresh news. Its lede:
People retiring today are part of the first generation of workers who have paid more in Social Security taxes during their careers than they will receive in benefits after they retire. It’s a historic shift that will only get worse for future retirees, according to an analysis by The Associated Press.
Previous generations got a much better bargain, the AP reported, because payroll taxes were very low when the program started in the 1930s. The August 5 story rolled through the media, including the AARP’s blog and the Fox News blog, which headlined its post: “New retirees receiving less in Social Security than they paid in, marking historic shift.”
But the notion that people are not getting their money’s worth with Social Security has been around for about three decades. It’s revived by opponents whenever it seems there is a chance to privatize the system or cut benefits—experts on both sides of the debate believe that Social Security changes could be part of a grand political bargain on the deficit struck after the elections. And it’s revived even though the argument contains a faulty explanation of how the program works.
In 1995, another time when Social Security was under attack in Congress, here’s what a cover story in Time had to say:
Years before it collapses altogether—starting this year—the Social Security system will begin to be a bad deal for increasing numbers of those who do collect benefits. Until now, just about all recipients have got back the sum of their lifetime contributions, plus interest, with just a few years of retirement checks. But some 1995 retirees will be the system’s first losers—meaning the benefits they stand to collect will, on average, fall short of what they paid in Social Security taxes.
Neither story mentions that giving people exactly what they paid in Social Security taxes has never been the goal of Social Security. It is insurance, not a savings account. People retiring now may or may not get more benefits in dollars and cents that equal or exceed the FICA contributions they made. That will depend on a bunch of factors, such as their earnings, their age when they die, and whether they have a spouse or dependent children. In response to the 1995 Time article, no less an expert than the late Robert Myers—who helped create the system, served as its chief actuary for 23 years, and was deputy Social Security commissioner under President Reagan—wrote:
Social Security is not and never was intended to be—a system involving complete individual equity, under which each participant would get exactly his or her money’s worth in benefit protection, no more and no less. Rather it is intended to contain elements of both social adequacy and individual equity.
What Myers meant was that low-income workers would get benefits representing a larger portion of their pre-retirement earnings than those with higher salaries. But the higher-income workers get a larger benefit in absolute dollars. This crucial point is likely to surface in any negotiations over a grand bargain, which the AP didn’t quite get, saying only, “Social Security benefits are progressive, so most low-income workers retiring today still will get slightly more in benefits than they paid in taxes.”
David Certner, the legislative policy director for the AARP, pushed back in the AP story somewhat on the money’s worth argument saying that “returns alone don’t fully explain the value of Social Security. You are buying this lifetime inflation-protected benefit that you can never run out of and that will always be there for you.” While he mentioned disability and survivors’ benefits, important features not normally found in private sector retirement plans, they seemed lost, sandwiched between opening graphs advancing the money’s worth argument and the gloom and doom kicker. “I used to think that it was worth paying for your Social Security, but now I don’t think so,” said 52-year-old Anthony Riley of Columbus, OH.
At 22, Mackenzie Millan of Los Angeles “has even greater doubts about whether Social Security will be a good deal for her. ‘The money that I put aside now, it’s not like that money is going to be waiting for me,’ she said. ‘That money is going toward someone else.’” Apparently Millan didn’t understand that her taxes paid today guarantee her benefits in the future.