September 21, 1999

Read the Fine Print on the New Social Security Statement

by Andrew G. Biggs

Andrew G. Biggs is a Social Security analyst with the Cato Institute.

The Social Security Administration has enthusiastically rolled out its new and improved Social Security Statement to nearly universal applause from the press. The new Statement tells workers how much they have paid into Social Security and how much they can expect to receive in retirement. SSA Commissioner Kenneth Apfel calls the Social Security Statement "a valuable tool that will help Americans prepare for their long-term financial security."

But how much does the Statement really tell Americans? As with any financial statement, it pays to read the fine print. Except that on the Social Security Statement there isn't any, and it's in the details that its dangerous deceptiveness lies.

On one count, the new Statement is an improvement. Past statements disclosed only the employee's share of the payroll tax, 6.2 percent of wages up to $72,600. That made Social Security seem like a good deal, since the worker did not see the 6.2 percent tax his employer paid on his behalf. But economists agree that the full 12.4 percent tax is really paid by workers, since the employer's share is deducted from wages. Congress has now forced the SSA to disclose both employee and employer shares of the payroll tax.

Although workers now know how much they have paid into Social Security, the new Statement tells them little about what they can expect to receive. A Gallup survey shows that Statement recipients know that benefit levels are based on earnings and that Social Security pays disability and survivors' benefits, but the Statement doesn't reveal that there simply is not enough money to pay for those benefits. While Democrats and Republicans agree that Social Security faces substantial long-term financing issues, the Social Security Statement acts as if these problems simply do not exist. By 2014, payroll taxes will be less than needed to pay benefits. By 2035, SSA's own "intermediate" estimates project that Social Security will be able to pay only 72 percent of promised benefits. The non-partisan Concord Coalition considers more accurate SSA's "high cost" estimates, which show the ability to pay only 61 percent of promised benefits. Payroll tax shortfalls of that size would reduce today's average monthly retirement and survivors' payment from $711 to between $434 and $512.

In other words, the numbers just don't add up: either taxes must go up or benefits come down. But you would never know that from reading the new Statement. Unlike an IRA or 401(k) statement, there's no fine print stating that benefits might fall by close to 40 percent or that tomorrow's workers might be unwilling or unable to shoulder payroll taxes of between 18 and 21.5 percent of their wages.

Commissioner Apfel concedes that "the estimate is not just a projection based on current income, it's based on current law. Both could change." In fact, the Statement's benefit projections completely ignore SSA's own best estimates. The Statement relies instead on promises from politicians, whom a Gallup survey revealed to be the second-least trusted profession in America. (Car salesmen should demand a recount.)

Apfel claims "the new statement will help people plan better for retirement." Maybe it will help people who would accept an IOU from someone they don't trust, who admits not having the money to repay, and who will be long out of office when the crisis hits. But the rest of us want to know how much retirement income current payroll tax rates will really buy. The true answer is less than 75 percent of already meager promised benefits, and perhaps as little as 60 percent. By 2067, when today's newborns will retire, Social Security may be capable of paying no more than half of promised benefits.

There are two alternatives: stick with the status quo, which means higher taxes, lower benefits and an increased retirement age, or allow workers to invest their payroll taxes in individual accounts that they would own and control. Privatization will raise Social Security's rate of return so future retirees can live in dignity without burdening workers with back-breaking taxes. Real social security comes not from paper promises but from real money, held by workers and invested in American businesses that produce real increases in wealth.

Commissioner Apfel declares that SSA must "focus on the people paying into the system rather than the ones receiving benefits." Indeed. SSA's first step should be to tell workers how little they can really expect to receive for their payroll tax dollars. That information alone would be an impetus to privatization.