How many times during the recent debate over Social Security reform have you heard someone refer to Social Security's "guaranteed benefit"? The AARP says "Social Security is the guaranteed part of your retirement plan." Nancy Pelosi, the Democratic leader in the House, touts the system's "guaranteed retirement benefit." The liberal activist group ProtectYourCheck.org, headed by former Clinton chief of staff Harold Ickes, is running ads calling Social Security "a guarantee you earned."
But Social Security benefits are not guaranteed.
They are not guaranteed legally because workers have no contractual or property rights to any benefits whatsoever. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that Social Security taxes are not contributions or savings, but simply taxes, and that Social Security benefits are simply a government spending program, no different than, say, farm price supports. Congress and the president may change, reduce, or even eliminate benefits at any time.
As a result, retirees must depend on the good will of 535 politicians to determine how much they will receive in retirement. And what could be less guaranteed than a politician's promise? In fact, Congress has voted to reduce Social Security benefits in the past. For example, in 1983, Congress raised the retirement age.
Benefits are not guaranteed economically because the government doesn’t have the money to pay them Social Security will begin running deficits in just 12 years. Overall, the program is facing unfunded obligations of roughly $12.8 trillion. That means that it has promised $12.8 trillion more in benefits more than it can pay. If we do nothing to reform the program, then -- by law -- Social Security benefits will eventually be cut by 26 percent.
The only guarantee with Social Security is that younger workers will not receive what they have been promised.
There is one glimmer of hope. President Bush and others have proposed that younger workers be given the choice of privately investing a portion of their Social Security taxes through personal accounts.
The worker would own this personal account. It would be the worker's property, and no politician could ever take it away. Because the account belongs to the worker, it would be fully inheritable. When the wage earner dies, the money can flow to his or her relatives.
Under the current Social Security system, when you die, the government simply gets to keep every penny you've paid into the system.
While there are no guarantees with private investment, history has shown that American capital markets provide a much better rate-of-return over the long term than Social Security. Workers who choose personal accounts could reasonably expect retirement benefits much higher than what Social Security can actually pay them.
In fact, a middle-income worker who put his or her half of the Social security payroll tax (6.2 percent of wages) in a personal account, invested in a typical portfolio of 65 percent stocks and 35 percent bonds, would likely receive more in retirement than even what Social Security erroneously promises.
The sales pitch for personal accounts should boil down to the following: It's your money. You've earned it.