Frequently Asked Questions About Strengthening Social Security
Social Security has been a fact of life for almost 70 years. Now that the debate about Social Security reform is daily news, it's more important then ever to understand how the program works and what the long term impact of many of the changes being considered mean to you and your family.
The following Q&A covers Social Security basics first. It then outlines AARP's stance on many of the reform proposals currently being debated. The article also clarifies some of the misleading criticisms you may have heard about AARP and its position on Social Security.
We hope this information will reduce the clutter of the often conflicting messages you may be hearing and will allow you to draw your own conclusions about the future of this important American institution.
AARP's Position
Social Security Trust Funds
Private Accounts
Solvency Options
Diverse Populations
AARP's Position
What is AARP's stand on the Social Security debate?
AARP believes a secure retirement rests on four pillars: Social Security; pensions and savings; earnings from work, and health care. For most Americans, Social Security is the strongest and most reliable of the pillars.
We believe Social Security benefits must:
- Be guaranteed for future generations of workers, retirees and their families;
- Not be jeopardized by market fluctuations;
- Be protected from inflation;
- Never be depleted by a long life.
There are numerous proposals about how best to reform Social Security. We are open to discussing them all. However, while some of the ideas on the table would help strengthen the program, others would erode Social Security's guarantees.
AARP believes workers should have opportunities and incentives to invest for their retirement in addition to Social Security, not as a replacement for some or all of the guaranteed benefits provided by Social Security.
We oppose creating accounts out of the contributions workers currently make into Social Security. Often called by various names ("personalization," "privatization," "private account," and "personal accounts") such proposals would divert a part of each worker's Social Security contributions into individual accounts.
- Individual accounts funded with Social Security revenues actually worsen Social Security's long-term financial health, draining revenues out of Social Security at the very time boomers begin to retire.
- Such individual accounts would likely require greater benefit cuts or revenue increases than would otherwise be necessary to secure Social Security's long-term health.
- Such individual accounts are expensive-they will cost about $2 trillion. That means that most workers would have to pay twice to create this new system-first to keep our commitments to current and near-term retirees and again to fund these private or personal accounts.
Diverting money from Social Security into individual accounts is particularly harmful for those who rely most on Social Security: women, people of color and low-wage workers.
AARP advocates on a number of issues where you stand to make money. Why isn’t this conflict of interest?
Our social mission drives the products and services we make available to our members — not the other way around. AARP has repeatedly said that it would support public policy initiatives even if they eliminate the need for AARP-endorsed services and products. For example, in 1994 AARP supported health care reform proposals that would have eliminated the need for supplemental Medicare policies, a product which AARP made available to our members through our endorsed provider.
AARP will always support legislative initiatives that are in the best interest of our members even if it means the elimination of a particular product or service that we endorse.
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Social Security Trust Funds
Isn't Social Security going broke? It probably won't be there for me.
Social Security is not going broke. It can pay 100% of promised benefits until 2040. After that, without any changes, incoming revenues will be enough to pay more than 70% of benefits for decades to come. This isn't good enough — getting 70% wouldn't be fair for today's retirees and it certainly isn't fair for tomorrow's. AARP is in favor of strengthening Social Security so that it continues to pay full benefits to our children and grandchildren.
Doesn't the fact that the worker/retiree ratio is dropping mean that Social Security can't be fixed?
It is true that the worker-to-retiree ratio is declining and that life expectancy is increasing, both of which place a strain on the Trust Funds. However, it is also true that the retirement of the Boomers comes as no surprise to anyone. To the contrary, Boomers have been helping to pre-fund their retirement by building a huge surplus while they are still in the workforce. Changing demographics are already factored into the Social Security Trustee's projections, too.
The fact is, taking into account all of the demographic and economic projections, with no changes, Social Security will be able to pay 100% of promised benefits until 2040 and more than 70% of benefits after that.
Aren't the trust funds just filled with worthless IOUs?
Not at all. By law, all income to the trust funds not immediately needed to pay expenses, is invested in bonds guaranteed by the U.S. government. These bonds are like the bonds that you or I might buy to save for retirement or for our children's education. Far from being "worthless IOUs," those investments are backed by the full faith and credit of the federal government. The bonds earn interest-in 2002 the rate of return earned by the trust funds averaged 6.4%. For more than 200 years, in good times and bad, during wars and depressions, American bonds have always paid off. They're one of the safest investments in the world.
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Private Accounts
What does "privatization" of Social Security mean?
Privatization is often used as shorthand for the idea of diverting part of the money workers currently contribute to Social Security into individual private accounts. The other word frequently used is "personalization." These accounts would be "carved-out" of Social Security, and the money would no longer be available to pay Social Security benefits.
Unfortunately, the debate over this idea often focuses on language rather than the two things that really matter-how would such proposals impact both an individual's actual Social Security benefit and the overall financial health of the Social Security system.
Call it what you want-"privatization," "personalization," "carve-outs," "private accounts," or "personal accounts"-the fact is that this would hurt the financial health of Social Security and poses a threat to the retirement security of millions of Americans and their families.
Wouldn't putting my payroll taxes in an individual account give me control over my own money?
Personal control can be appealing and has a definite place in your retirement portfolio-in addition to Social Security. However, privatized or carve-out accounts fundamentally change Social Security and undermine the program's benefits. What proponents of carve-outs don't tell you is that in reality, you wouldn't have that much control-- your investment choices would likely be very limited. Most carve-out proposals would limit workers to just a few investment choices to try to keep administrative costs down.
Can't I do better by investing on my own?
Maybe, but maybe not. Market averages are just that-averages. If you put one foot in boiling water and the other in ice-water, on average the water is comfortable. The reality, of course, is very different! Personal accounts come with a host of risks. The majority of mutual funds under-perform the market average. The stock market goes down as well as up, and sometimes it stays down for quite awhile. Many retirees who thought they were set financially are having to cut their budgets dramatically or even return to work because the value of their portfolios has declined significantly over the past few years.
As far as personal account bringing new control, people already have control over their money when they invest in private pensions, IRAs, and 401(k) plans. When combined with the solid foundation that Social Security provides, these are excellent vehicles for retirement savings.
Isn't it true that if you die before retirement, you don't get anything for all those years you paid into Social Security? At least with individual accounts, I can leave a legacy for my family.
If you die before retirement, you get something for all those years of participation. Your surviving spouse and minor children can collect monthly Social Security survivor benefits because of your payroll contributions. Even if you never have to use it, you are also protected by valuable disability insurance coverage, which would provide benefits for you and your family. Remember, about a third of Social Security benefits go to disabled workers, and dependents. According to SSA, the value of those survivor and disability protections are worth more than $500,000 to a young worker with average earnings, a spouse and 2 kids. Remember, Social Security was never intended to be an investment; it is a base benefit and family insurance plan.
While carve-outs seem appealing to those concerned about leaving a legacy for their family members, in reality many of the accounts would be too small. Retired workers with small or moderate balances could easily outlive their accounts. Instead of having a legacy to pass on to their heirs, many would end up depending on their heirs for support.
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Solvency Options
How can Social Security be strengthened without cutting benefits or raising taxes? Do you oppose cutting Social Security benefits or raising Social Security taxes?
Benefit cuts and raising taxes are not the place to start. We need real solvency options that are tested, debated and then agreed upon. Private accounts that are created out of Social Security will weaken, not strengthen the guaranteed benefit people have earned and will get in their later years. There are real solvency options that should be explored that will make a substantial difference.
Specifically, what does AARP propose to improve the solvency of Social Security?
There are a number of real solvency options that should be explored and debated. For example, these two steps would be a significant down payment towards long-term solvency:
- Increasing the cap on taxable wages (set at $90,000 in 2005); and,
- Diversifying the way part of the trust fund assets are invested to increase the rate of return.
The bottom line is that any acceptable reform plan must ensure that future generations of workers, retirees and their families can count on a guaranteed and inflation-proof benefit that can't be outlived.
What's AARP's plan?
AARP is committed to finding a balanced solution that will bring Social Security to solvency, starting with diversifying the Social Security Trust Funds' investments and raising the maximum amount of wages subject to the Social Security payroll tax.
These are only two of the options that could contribute to Social Security solvency. And they are a good initial step. That is why we are also working to broaden the discussions on strengthening Social Security to focus on all potential options and tradeoffs, rather than how to implement a fundamental restructuring of the program. AARP is also committed to improving overall retirement security, which includes pensions, savings, and health care coverage. With improved retirement savings, future generations will have a more secure retirement.
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Diverse Populations
Isn't Social Security a bad deal for African Americans?
On the contrary — Social Security is indispensable to African Americans' overall income security. Most studies claiming Social Security is a bad deal for African Americans have several fundamental flaws. They look only at retirement benefits and completely ignore Social Security's disability and survivor benefits. Although African Americans have a shorter life expectancy than whites, they rely more than whites, on average, on the life insurance and disability protections that Social Security provides.
African Americans, who have lower average earnings than whites, also benefit from Social Security's progressive benefit formula. Since poverty rates among African Americans are higher and they are less likely to have other sources of retirement income, they depend heavily on Social Security benefits as a base of income.
Isn't Social Security a bad deal for Hispanics?
Social Security benefits are especially important to Hispanic Americans because they tend to live longer on average than do other Americans. Social Security's retirement benefits are guaranteed to last a lifetime and provide annual cost-of-living adjustments. Hispanic Americans are also less likely than whites to have pensions or other sources of retirement income, so Social Security benefits are integral to their retirement security.
Wouldn't women do better with individual accounts?
No. The size of an individual's account would depend largely on how much he or she contributed to the account. Since women tend to have lower earnings and more years out of the paid workforce, they would have fewer dollars going into their accounts. At retirement, because of their longer life expectancies, women would have to make their smaller accounts last over more years.
Women do very well under Social Security for three primary reasons. First of all, Social Security's progressive benefit formula gives those with low and moderate incomes a better return relative to their contributions. Secondly, Social Security benefits cannot be outlived. Finally, Social Security benefits increase every year to help meet rising costs of living. Since women tend to live longer than men, these protections are especially important.
Divorced spouses might not be adequately protected under a system of carve-out accounts. Social Security provides survivors and retirement benefits to a woman who was married for at least 10 years to the worker. His benefits and those of his current dependents are not reduced. An individual account would likely be divided up at the time of divorce.
