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Opinion: 5 things everyone should know about Social Security

You’d think the looming crisis in America’s main retirement plan would be a bigger topic of discussion. The Social Security trustees, after all, just said the plan is now $20 trillion in the hole and will run out of cash by 2034. 

Instead, if Social Security is being discussed at all right now the main topic for debate seems to be about how to expand the benefits, rather than how to pay for the ones we have.

I recently wrote about five ideas for saving the system. Here are 5 other points that are relevant, which everyone should know, but which nobody seems to talk about.

1. Despite what critics say, Social Security was always designed to support long retirements. There’s a caucus that wants to “save” the system by raising the retirement age (which is another way of cutting benefits). They point out that when Social Security was first enacted in the 1930s, the age of eligibility was 65, and that was also the life expectancy. But this point is dishonest. That was only the life expectancy at birth—and it was artificially depressed because back then, as during most of history, many people died in childhood. What really mattered was the average life expectancy for adults. And even in the 1930s, those who reached 65 could expect on average to live another 13 to 15 years.

2. The Federal Reserve is killing the trust fund. As Social Security is invested only in U.S. Treasurys, the Fed’s policy of driving down interest rates has eviscerated the fund’s returns over the past decade. As recently as 2008, the fund was earning more than 5% a year on its assets. Last year it was half that. And so far this year, Social Security has been pouring money into bonds paying as little as 0.875%. Even while planning to raise benefits by 6%. You can’t do this indefinitely and stay in business. Treasury bonds today yield less than inflation. And this is easily fixable: As the federal government is just borrowing money from itself, there is no reason it can’t credit the trust funds with enough money at least to match inflation, let alone pay its bills.

3. Illegal immigration is subsidizing Social Security at the moment—and legalizing undocumented workers will make the funding gap wider. I’ll bet this will infuriate people on both sides of the political divide. Too bad. Facts are facts. Currently, many undocumented workers pay into the system using fake Social Security numbers, but cannot claim benefits. This may be huge, involving as many as 1.3 million fake Social Security numbers and more than $1.3 trillion in unclaimed benefits. It’s a point conceded even by those most critical of illegal immigration, such as the Center for Immigration Studies, which points to the potentially enormous cost to the system of legalizing these workers’ status (and therefore letting them claim Social Security).

4. Upper-middle class people get more out of Social Security than they realize. Sometimes higher earners figure they get a raw (ish) deal out of Social Security because they get a lower annual return on their contributions than poorer people do. But that misses three things. First, Social Security is paid for by a regressive flat tax, which hurts low-earners relatively more than high earners. Second, knowing they can rely on Social Security income allows higher earners to take on more risks with the rest of their retirement plan, presumably earning higher returns. And, third: Higher earners on average tend to live much longer than low earners, so they can expect to collect many more checks. The life expectancy gap is big—and getting bigger. According to the National Academy of Sciences, men aged 50 today who are in the top 20% of earners can expect to live on average about 13 years longer than men in the bottom 20%. Among women, it found the gap is 14 years.

5. Slashing Social Security might not save us a nickel anyway. Social Security isn’t some boondoggle or foreign war whose bills could be slashed without widespread effects on Main Street America. It’s the main support for elderly Americans, and a massive part of the total economy. Social Security provides a third of the income for America’s seniors. A fifth of senior couples and nearly half of senior singles rely on it for 90% of their income. Economists at the University of Chicago—not previously known for its Marxist leanings—recently estimated that Social Security alone cut the poverty rate among the elderly by 75%. Put another way, without the program elder poverty would quadruple. Money taken away won’t be “saved.” Most or all will end up coming from other sources—children and grandchildren, inheritances, charities and so on. And that which doesn’t will come out of consumer spending. Social Security paid out $1.1 trillion last year—a major part of the $14 trillion consumer economy. Cut that in future, and the pain will be felt far and wide.

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