Questions, Answers Aimed at Demystifying Social Security
President Clinton’s proposal to use projected federal budget surpluses to “save Social Security first” has added to the vast amount of myth and misinformation about the workings of the huge program of benefits for the elderly and disabled.
These questions and answers are intended to clear things up:
Q. I’ve been paying Social Security taxes for 30 years and the Social Security Administration has sent me a document showing how much I have paid in and how much I will be entitled to receive in benefits when I retire. Are my tax payments set aside for me somewhere in a government bank account, waiting for the day I retire?
A. No. Social Security is a pay-as-you-go system. Most of the money that workers and employers will pay into the system this year will be spent on benefits for people who are retired. When you retire, tomorrow’s workers and employers will pay the taxes used for your benefits.
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Q. But isn’t there such a thing as the Social Security Trust Fund?
A. Yes. It’s where your payroll tax payments go and is the fund from which retirement benefits are paid.
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Q. How is the fund doing?
A. It’s in great shape, for now. It is taking in billions of dollars more in taxes than it is spending for retirement and disability benefits. When the current fiscal year began Oct. 1, the trust fund held $595 billion. By the end of the year, the government estimates that it will grow to $693 billion.
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Q. Does the Social Security Administration hide all that money under a mattress?
A. Hardly. It buys Treasury Department securities.
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Q. Does Treasury pay interest?
A. You bet. Its Treasury bonds, notes and bills are earning an average of 7.6%. In 1998, the Social Security system figures to earn $47 billion in interest.
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Q. What does the Treasury do with the money invested by Social Security?
A. It mixes it with all the other money it raises from taxes and from its other borrowings and uses it to pay for all the things the government does, from acquiring F-22 warplanes to providing federal grants to public libraries.
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Q. How long will the trust fund keep growing?
A. Until 2018, when older members of the baby boom generation will have been reaching retirement age (which then will be 66) for seven years.
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Q. What happens then?
A. Spending for benefits will rise sharply, much faster than payroll tax revenues, and the trust fund, by current estimates, will hit the wall in 2029. In that year, the system will be able to pay only 75% of the benefits promised under current law.
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Q. Can’t the president use today’s budget surpluses to bolster the trust fund against that day?
A. Well, not exactly. Today’s budget surplus is Social Security.
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Q. Come again?
A. For this year, Clinton is forecasting a government-wide surplus of almost $10 billion. But remember, that includes the $105-billion surplus in the Social Security system. So the government is still running a $95-billion deficit in everything else it does. Not until 2007 will the government run a surplus in the everything-except-Social-Security category.
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Q. Then Clinton’s promise to use the surplus to “save Social Security first” is hollow?
A. Not exactly. He is trying to prevent Congress from using the “surplus” to cut income taxes.
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Q. How does that protect my retirement income?
A. A surplus means the government borrows less money. That in turn means it pays less in interest costs and has more money available for other purposes, including Social Security.
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Q. What are the possible solutions?
A. Congress could raise taxes, cut benefits or both. This is the approach of most of Social Security’s traditional supporters. But there is growing interest in permitting taxpayers to place some of their payroll taxes in individual accounts where they could invest in the stock market. The president is calling for a year of discussion, leading to a bipartisan agreement in 1999 on a long-run fix.
