What is Social Security and how does it work?

Where do my Social Security tax dollars go?

What is the Social Security "Trust Fund"?

What rights do I have to my Social Security taxes or benefits?

What if I die before I retire?

What happens to Social Security if we don’t do anything?

Will personal accounts reduce or eliminate the benefits my parents and grandparents receive?

What are other ways to fix Social Security?

What if there is a market downturn?

How will I invest and manage my PRA?

What is the future of Social Security reform?

The bulk of Social Security taxes and expenditures fund retirement benefits for qualified workers. In addition, the system provides disability benefits for former workers and survivor’s benefits for retired spouses of a deceased worker and/or the children of a deceased worker.

If you look at your pay stub you will see a line item called “FICA.” FICA stands for “Federal Insurance Contributions Act,” but it really means “payroll tax.” See that big number after the word FICA on your pay stub? That is the amount of your income the government takes from every one of your paychecks—money you will never see again. Your employer also has to pay payroll taxes to Social Security on your behalf. All told, each and everyone of your paychecks is reduced by 12.4% in taxes paid to Social Security.

Once your tax dollars are collected, they are used to fund someone else’s Social Security benefits on a pay-as-you-go basis. Your money that is taken today funds the retirement benefits of people who are retired today. That means your money is not being saved for you.

In order to collect Social Security benefits, retired workers must fall within certain guidelines set up by the Social Security Administration. Some of the basic rules are that, first, a person must have spent 10 years working and paying Social Security taxes to collect any benefits at all. Second, a person is only eligible to collect the full benefits to which he is entitled after reaching “full retirement age.” This is a number picked by the government that tells you when you can and can’t retire. Currently, that age is 67 for anyone born after 1960, but the government could raise that any time it wants.

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Many people, incorrectly, believe their Social Security taxes are being held in a government bank account with their name on it. This is false: your social security number is NOT a bank account number.

In fact, Social Security tax dollars are not held anywhere at all: they are spent immediately on the benefits of current retirees and, because more is collected in taxes than is paid out in benefits, surplus funds are borrowed by Congress to spend on other programs. That means your Social Security taxes can be used for pork barrel spending projects like building bridges to nowhere.

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The Social Security “Trust Fund” is essentially just an accounting mechanism. It doesn’t even contain any real money.

Currently, more money is being taken in Social Security taxes than is paid out in benefits. This creates a surplus. Because Congress can’t resist spending a surplus, the “Trust Fund” is the device the government uses to loan itself YOUR Social Security dollars. It borrows your money by writing itself “special issue treasury bonds.” Receipts for these bonds are the only things contained in the “Trust Fund.” Put another way, there are just a bunch of I.O.U’s for money the government loaned to itself sitting in an office somewhere—that’s what they call the “Trust Fund.”

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None. A common misconception of many workers is that their Social Security taxes are saved for them and that they have a legal property right to that money. In fact, in 1960 the Supreme Court ruled in Flemming v. Nestor that workers have no rights to their Social Security taxes or to Social Security benefits. The future of your retirement dollars lies in the hands of 535 Congressmen who are empowered to do whatever they want with it.

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If you have a spouse or a child under 18 when you die, they can collect some of your Social Security benefits as survivor benefits. If you are unmarried or your child is over 18 when you die the government keeps your money. Because you have no property rights to your Social Security taxes or benefits, your children cannot inherit your money and the government keeps it all.

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Social Security has already reached a crisis today, and its situation becomes worse over time.

Right now more money is collected in Social Security taxes than is paid out in benefits, and the government has been borrowing the extra funds. In 2017 there will no longer be surplus money and the costs of benefits will be greater than the amount collected in taxes. To continue to pay full benefits, the government will have to pay back the Social Security money it has been borrowing. It will have to get the money from somewhere, and this will put huge strains on the budget and the economy.

Even if the government pays back all the Social Security loans in full, that will not be enough to fund benefits for very long. About the same year our generation will be ready to retire, the system will only be able to afford to pay 74% of the benefits we have been promised. 74% may sound like a lot, but it isn’t. Slashing benefits by such a large amount would cause the poverty rate of seniors to double.

If nothing is done to fix Social Security—and soon—your financial future and the future of the economy is anything but secure.

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No. One of the benefits of personal retirement accounts is that the return on investments is high, so high, in fact, that it is possible to protect the level of benefits to be received by those in or near retirement and still guarantee you, the personal account holder, a better benefit than you would get under the current system.

The policy institutes and economists who support personal accounts are sensitive to the fact that our parents and grandparents have planed their future around the existing Social Security system, and all viable reform plans take the need to preserve their benefits into account when creating an improved system. PRAs will protect benefits for your parents and grandparents and, unlike the current system, protect benefits for you too.

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Without personal accounts, the Social Security Trustees have made a few reform suggestions to achieve solvency: an immediate 16% tax increase on payroll taxes or an immediate 13% cut in Social Security benefits.¹⁰ Neither option is very attractive.

First of all, increasing taxes is bad for workers and the economy. Not only would your paycheck shrink, but because a portion of all Social Security taxes are paid by employers, a tax increase would make salaries more expensive, jobs would most likely be cut and economic growth would decline.

Second, cutting benefits means that your grandparents and parents—who planned their futures around their promised benefits—will be adversely affected. According to the US Census, the average amount of a Social Security benefit check is $919.¹¹ Following the Trustees recommendation and cutting benefits by 13% would reduce that amount to $796 or $9,561 per year—that is just barely above the poverty line.¹² Do you really want your parents and grandparents to live on that?

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There is no need to be afraid of market fluctuations. Saving for retirement is a lifetime project. Even though the market has good and bad years, a downturn in one year—even if it is the year you decide to retire—will not destroy a lifetime of wise saving and investing. There would also be certain restrictions that would limit the types of funds or the mixes of stocks in which a PRA could be invested, thus reducing risk. Even if a retiree were to fall upon particularly hard times the government could still provide a guaranteed minimum benefit so that all retirees have financial security.

Plus, don’t forget that the current system provides you a negative return as it is. Forget the market: you lose money no matter what with the current system. If our generation could open retirement accounts now, we would have the opportunity to spread risk over our entire working lives, so the chances of not having enough money to retire on are slim to none.

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There is no reason to worry about how you will invest your personal account. First, reform plans limit the types of investments available to workers. This would ensure that money is only invested in low risk stocks, bonds, or equity funds. Guidelines would also help workers learn to create the right blend of investments to maximize their returns. Second, there are already a host of financial planning businesses that help people invest for the future every day. When the time comes for you to open your personal account, you can get help from these service providers. Finally, you can even put a retirement plan on autopilot with savings programs like lifecycle funds. These funds automatically adjust the mix of stocks and bonds in your portfolio as your retirement date approaches—investing aggressively when you are young and conservatively when you are old—so that your retirement savings will be invested for you without having to lift a finger.

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In the last year, the country has overcome the first hurdle in the road to reform: Americans now overwhelmingly acknowledge that Social Security is facing a crisis that makes reform necessary. The next step is making sure the right plan—one that is both politically and fiscally viable—is implemented.

Creating Personal Retirement Accounts is the only reform plan which encompasses individual rights to ownership and choice while also achieving fiscal sustainability. It is also the only plan that creates a secure future for our generation without burdening us with tax hikes and benefits cuts.

It is up to our generation to make sure that we get the plan that we want and the plan that is best for us. To secure your future make sure your voice is heard, your vote is counted, and join S4 in the fight for Personal Retirement Accounts!

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