Social Security Primer

Social Security has been a great program and needs to be continued. For many people who have no other income, it means a basic level of economic security that they can't outlive. For the more affluent it provides additional retirement income and a guaranteed income they also cannot outlive.

There is a great deal of confusion about the future of social security. The concept is simple, but the implementation has been perverted over the years. Just to make the issue more confusing, President Bush insists on linking private accounts with saving social security. This is not true, but many people haven't figured this out yet.

Here is how I understand social security works. It was designed as a pay as you go program. The payroll taxes that people pay do not go into a special account just for them. The money from their paycheck is used immediately to pay the retirement benefits for someone who has already retired. What they get for the money withheld from their wages is a promise that someone else will pay their retirement benefits when they finally retire. Actually, social security is more like an insurance program that pays you when and if you live long enough.

Of course, the problem is as time goes on more people are retiring than are joining the work force and paying social security taxes. When the amount of money needed to pay retirees each month is greater than the social security taxes collected that month, we have a problem. That scenario is estimated to occur about 2018.

Theoretically we won't have a problem until a much later date (maybe 2040?). That is because the amount of social security taxes workers and employers currently pay exceeds the amount needed to pay current retirees. This extra money is supposed to be saved and used when retirement benefits exceed the amount being collected from workers and employers.

Unfortunately the money is not really being saved in the social security fund. It is being "loaned" to the federal government and used to pay its current bills. The social security fund has the IOUs for this money, but when it comes time to start collecting it the money will already have been spent.. The government will have to repay the IOUs with other taxes (like income taxes). That means workers at this time will be paying benefits to retirees with their social security taxes and their income taxes. The amount of money needed to pay future retirees the amounts they've been promised is significant and will be a burden on workers in the future.

The two basic solutions are to raise taxes or cut benefits.