The Intercept reported in a new piece that Social Security is a very good program – and it might well be right. But that doesn’t excuse factual errors in the case that’s presented.
The truth is that while Social Security might be desirable for us as a society, it’s not as good as the Intercept is making it out to be.
The Intercept is essentially running propaganda for how good Social Security is, instead of a rational discussion of the full facts. For example, it is true that Social Security is a lifetime inflation-adjusted annuity, but then we are told: “If Social Security were eliminated, it would be prohibitively expensive or impossible for older people to get anything similar from an insurance company.” That’s not actually true. We have two proofs of this: One is that in many other countries, inflation-proofed lifetime annuities are available. They’re even available in the U.S., although few actually buy them. The other is that if Social Security didn’t exist then people wouldn’t have been charged the lifetime taxes for Social Security and so would be able to afford more in the way of their own annuity.
“Annuities bought from insurance companies generally don’t offer any kind of inflation adjustment,” the piece continues. That’s generally true, but it doesn’t have to be. The products exist, they’re just not generally purchased.
“It is possible to pay more — much more — for annuities that will go up to some degree with inflation, perhaps up to 2 percent or 4 percent or sometimes higher. But Altman points out that Social Security’s COLAs were 9.9 percent in 1979, 14.3 percent in 1980, and 11.2 percent in 1981. No insurance company would offer that kind of inflation protection and would go bankrupt if it tried.” That’s one of those things that used to be true but is no longer. Now that the US Treasury issues inflation protected (linked to the CPI, called TIPS) bonds it’s trivially simple for an insurance company to offer fully inflation-protected annuities.
“Social Security is designed so that the less a retiree made during their work life, the larger the percentage of their wages are replaced by the program. “ This is true but it doesn’t mean quite what The Intercept thinks it does. If lower income people get a greater return on the taxes they’ve paid in then this means that higher-income people must get a lower such return. That’s explicit in the use of the word “larger” when taxes are related to income. So, the return on the taxes must be lower for higher income folk than it is for lower.
There’s also a more conceptual problem with The Intercept’s discussion of costs and “prohibitively expensive”. Everyone does pay into Social Security, or at least everyone with a working income does. Whether something is expensive or not depends upon how much they get out for what they pay in. Fortunately, these numbers have been calculated for us at the Urban Institute.
For single males who will retire in 2025
Level of income SS benefits SS taxes paid
Low earnings $201,000 150,000
Medium earnings 332,000 333,000
High earnings 438,000 533,000
These numbers flatter Social Security returns considerably. They are assuming that if the taxes were not paid and were directly saved instead they would earn 2% (real, after inflation) which is bond returns. There has been near no 40 year period in the past century when equities did not beat this. They also assume only a 35-year working life and there are very few who pay FICA taxes for that short a period of time.
Yet even with that flattery, we can see that medium- and higher-income people at least would be better off if they didn’t pay Social Security taxes and invested the money directly instead. That’s even before we adjust for returns to equities rather than bonds.
At which point they would be able to buy a better, or higher income, annuity than Social Security offers. Even with the inflation protection.
The Intercept is a journalistic foundation set up to provide entirely independent reporting, free from any financial interference. The site gains some 4 million views per month.
We are not saying that Social Security is a bad idea, at least some form of government old-age pension probably is a sensible idea. But the idea that Social Security is cheaper than other ways of achieving that same goal isn’t wholly true. For higher-income people, it’s definitely not true. Yet The Intercept tells us that private provision of Social Security benefits would be “prohibitively expensive,” which is simply wrong. For a good proportion of people, a private provision would be cheaper. Social Security pays out to some good proportion of people less than they have paid in in taxes.