November 12, 1999

Social Security Sweepstakes

by Andrew Biggs

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

"Everyone has received them in the mail," says Rep. Frank LoBiondo (R-N.J.). "'John Doe, you have won ten million dollars.' You open the envelope and inside are a packet of official-looking documents bearing seals and stamps. . . . It is not until you get out the magnifying glass and read the fine print on the back of the fourth page do you realize you have a better chance of being struck by lightning twice in the same day than actually winning a prize."

On November 2, the House quickly passed legislation "to protect our most vulnerable consumers" by requiring "up-front, clear, and easy to read disclosures" in sweepstakes mailings. If only the government would follow the same rules.

Despite Congress's concern, Americans today receive mailings that make sweepstakes entries look like paragons of full disclosure. But there is no law to protect consumers from those mailings, because they come from the government itself. Last month, the Social Security Administration sent out the first new "Social Security Statement," a four-page report the SSA touts as a "great tool for financial planning." Designed to calm workers' fears about Social Security's future, the statement essentially says, "If you earn this much and work to this age, this is how much you'll receive from Social Security when you retire."

There's just one problem: it is flat-out untrue. The SSA describes the statement's purpose as "getting people to look at real numbers." Here are some real numbers the SSA should look at: the 1999 Trustees Report shows that by 2034 Social Security will be so short of cash that it may have to cut today's average monthly benefit of $780 to a mere $553.

"All we would have to do in 2034 if there were no changes is cut benefits back to about 71 percent of their current level," Deputy SSA Commissioner James Roosevelt admits. (All we would have to do? Tell that to a poor retiree, completely dependent on Social Security, who suddenly finds himself living more than 25 percent below the poverty line.) The problem is not that essential details like this are hidden in the fine print; it's that they're not there at all.

Whatever the merits of sweepstakes mailing, anyone who actually reads the entry knows that he has not won anything, that the numerical odds against winning are very high and that he does not have to pay in order to enter. Contrast that with the Social Security Statement, from which even the most meticulous reader learns what Social Security promises him but nothing about the more than 25 percent payroll tax increase needed to pay it. Adding insult to injury, the statement costs taxpayers over $70 million annually to distribute -- that's very expensive junk mail.

One member of Congress has plans to change this. Rep. John Sununu (R-N.H.) is preparing legislation that would require the SSA to amend the Social Security Statement. Sununu's plan would notify recipients that to repay the bonds in the Social Security trust fund, taxes would have to rise, benefits fall or borrowing increase; that after the fund runs out, Social Security will be capable of paying only 71 percent of promised benefits; and that Social Security's rate of return to beneficiaries has dropped steadily over time. That would give workers a much better idea of how bad a deal Social Security is turning out to be.

Winning a sweepstakes may be a million-to-one shot, but unless market-based reform raises Social Security's rate of return, your chances of getting full benefits without a tax hike or an increase in the retirement age are even lower. Maybe Congress should work on government mailings before it sets about fixing those from Publishers Clearinghouse.