By now we’re accustomed to weak reporting about Social Security, but a piece on Yahoo Finance, part of its “Just Explain It” series, is a real doozey. It does not come within one centimeter of explaining Social Security, and instead misleads the 16,089 readers, as of mid-day Monday, who have weighed in with comments, plus thousands of others who didn’t. It’s a textbook example of scare mongering.
For starters, the writer, Samantha Wender, doesn’t seem to know what Social Security is. It is not a “social welfare program” as she calls it. It is social (or group) insurance that protects against lost wages in old age, from disability, and when a family breadwinner dies. It is like traditional employer group pension plans, and not like food stamps, which is indeed a means-tested welfare program.
Then Wender gives her audiences what she says is a “quick history lesson,” explaining that Social Security was “originally a retirement program—nothing more. Now the program distributes several social welfare and insurance benefits,” somehow implying that there is something wrong with this. And in fact, a small survivors’ benefit was part of Social Security from the beginning, and Congress quickly improved it. Disability benefits were added in 1956, and requirements for eligibility are very strict.
Wender describes the system’s pay-as-you-go feature: Current workers pay into the system and earn a right to a benefit later on, while their contributions finance benefits for today’s retirees. She reports that the number of current workers is declining relative to retirees, so thus the system is in a dire financial pickle. “As baby boomers continue to retire at a record clip, approximately 10,000 on any given day, this model becomes harder to maintain,” she writes. As proof, Wender says the ratio of workers to retirees was 7.11 in 1950; 4.5 today; and will be 2.6 in 30 years. Those numbers are wrong, by the way. In his corrective column Friday Dean Baker, co-director of the Center for Economic and Policy Research, gave the correct stats from the Social Security trustees report, showing that in 1950 the ratio was 16.5; today it’s 2.8; and is projected to be 2.2 in 30 years.
But more important: the focus on the ratios is misleading. Two weeks ago, we awarded a laurel to The Motley Fool for busting Social Security myths—including this pervasive one about declining ratio of workers to retirees. “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,” reporter Ilan Moscovitz wrote. He noted that productivity has increased nearly 80 percent in the last 30 years. And we are a richer country than we were 30 years ago, one that can well afford to maintain Social Security benefits. The US spends 5 percent of GDP on Social Security. By comparison: In 2000, Germany spent nearly 12 percent of its GDP on old age, survivor, and disability benefits.
In a previous post, I noted that no less an expert on Social Security than the late Robert Ball, who served as commissioner for many years, explained the declining ratio this way to interested reporters a few years before his death in 2008:
The plain fact of the matter is that Social Security faces an eminently avoidable long-range funding shortfall, not an inevitable collapse brought about by unmanageable changes in the historic ratio of workers to beneficiaries. Those who advance that argument are using an accurate statistic to make a highly inaccurate charge.
Wender is also off the mark in her examination of Social Security’s shortfall. She reports correctly that Social Security payouts exceeded non-interest income in 2010 and 2011. But why gloss over the role of interest? In 2011, for example, the system had a $69 billion surplus when all of Social Security’s income, including interest on its reserves, is counted. To ignore interest earnings is like saying Warren Buffet shouldn’t count interest and dividends in calculating his income. Wender concedes there is “extra” money in the Social Security “bank account,” but says “the number of beneficiaries will continue to grow at a substantially faster rate than the number of covered workers.” Apparently to prove her point, she writes:
The Board of Trustees estimate that in 2033 all the money in the Social Security “bank account” will be depleted. This means that workers in their forties fifties [sic] today may not have access to the Social Security benefits that they’ve paid into when they retire.
Aside from the mistake in logic—workers can’t pay into a benefit—Wender has contradicted her own description of the system’s pay-as-you-go feature. If workers are still paying into the system, which they will be, how can the system be depleted in 2033 in the manner she suggests? Indeed even in 2033—with no fixes at all from Cogress—the trustees say there will be sufficient funds to pay 75 percent of the benefits, and perhaps close to 80 percent, according to Congressional Budget Office projections. And as Baker points out, “because benefits are projected to rise through time, this would still be a larger benefit than most retirees receive today.”
Yahoo advises that its “Just Explain It” series decodes the jargon “so the stories you read become relevant and understandable and you can impress your friends at your next dinner party.” We suggest readers forget about this one and impress their friends with a good bottle of wine.