Social Security an entitlement program, what does that mean?

October 23, 2018

 FDR signing the Social Security law in 1935.

 

Social Security, a government program, is often termed an entitlement, but this doesn't mean, as some who get Social Security benefits seem to believe, that they paid into the system and therefore are 'entitled' to get their money back. "Keep your hands off of my Social Security," is a phrase you often hear. Recipients are not entitled to their Social Security benefits because it is their money that they paid into the system, and that this entitles them to the benefits, that they are just getting their own money back.

 

This is not so, and the connection to what Social Security recipients receive in benefits is only loosely connected to how much they have paid in Social Security taxes.

 

What the term entitlement means as applied to Social Security is that the Social Security law and accompanying regulations sets out the rules and parameters that a person has to meet in order to be entitled to the benefits under the law. When applying for Social Security benefits you will get the benefits that the formula in the law says you are entitled to, that is entitled by the law, hence the term entitlement. If there is any dispute between the applicant and the government over whether the applicant meets the rules for a particular level of benefits, there is a mechanism for appeal and for adjudication to resolve the issue.

 

And there is no vault or 'lock box' that contains cash that the program has access to, and that can be used to pay benefits. Nor for many reasons should there be. It would be folly to tax the people and then to stash the cash somewhere to do nothing until the time comes to pay out benefits. It would be a drain on the economy, and would cause persistent  tendencies towards recessions. There is no alternative to the fact that benefits must be paid out of current revenues of the Federal government.

 

There is a formula in current Social Security law that determines your benefit amount. It depends on how many years you have worked and how much you have earned during that lifetime of work. The formula is designed so that workers with lower lifetime earnings generally get more in lifetime benefits than they pay in Social Security taxes, workers in the middle, around the median of lifetime earnings, will come out pretty even, getting lifetime benefits pretty much matching their tax payments, and higher lifetime earners will get lifetime benefits that are less than their lifetime Social Security taxes.

 

Other factors effect the ratio of benefits received to taxes paid. Those who are lucky enough to live longer will get higher benefits relative to paid taxes (note that high lifetime earners tend to live longer, but not, on average, by enough to counteract the fact that they paid higher taxes while they were working). Those who retire early because of disability will generally receive higher lifetime benefits than they pay in taxes, and widows who may have worked at low wage jobs who collect on their deceased husband's Social Security will generally receive higher benefits than taxes paid.

 

The very first generation of Social Security recipients reaped benefits far in excess of any Social Security taxes that they paid. The reason for that is, of course, that benefits began under the law before there was much time for tax payments to accumulate. The law was passed in 1935. The first benefits were paid in 1940. An example of  the first beneficiaries getting a windfall is Ida M. Fuller. On January 31, 1940 Ida became the first person to receive a Social Security retirement  monthly benefit check. She had paid Social Security taxes of $24.75 between 1937 and 1939 on an income of $2,484. Her first check, dated January 31, 1940 was for $22.54. Ida worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.

 

Ida's experience was not unique. Many readers probably have grandmothers and grandfathers who benefited like this from the program, and it saved them from a miserable old age in poverty.

 

None of the rules under which Social Security benefits are determined is carved in stone. Congress can change the law. The change can include raising or lowering benefit amounts, raising or lowering the Social Security tax, and raising or lowering the full retirement age.

 

Under current law, Social Security benefits are designed to be funded via the Social Security payroll tax, the tax that is taken out of your paycheck when you are working. But there is no iron clad rule that says Social Security benefits forever can only be paid out of revenues from the Social Security tax. If a majority in congress were to pass a law that says X amount of income tax dollars can be used to fund X percent of Social Security Benefits, and the President were to sign that law, it could solve any crisis under which Social Security could not meet its obligated benefit payments under the law.

 

One way to funnel more general tax revenue towards funding Social Security benefits that I have advocated would be for Congress to pass a law requiring that the government pay a higher interest rates on the funds held as surplus in the Social Security trust fund than they currently do. Currently, the rate of interest paid on these funds is determined by a formula enacted in 1960. The average of the 12 monthly interest rates for 2017 was 2.313 percent. Congress could change Social Security law to use a formula which would increase that percentage rate to say 5.5 percent, thus funneling more than twice as much interest earnings into the Social Security coffers. The interest to Social Security Trust Fund comes from the general tax revenues of the United States.

 

 

 

 

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