Sunday, December 12, 2010

Actual Information about Social Security

Social Security is in the news again. Let's face it: most people don't really know very much about how it works. They know they have to pay taxes for it, and that they will theoretically get benefits. But that's about it.
Unfortunately, many who don't really understand the other parts (e.g. how benefits are calculated or what the Social Security Administration does with the surplus money that they don't immediately need) seem to have strong opinions about it anyway.

Below is a link to a paper by the American Academy of Actuaries which gives some background on Social Security, details why it is projected to run short on money, and assesses the merit of several ideas that have been proposed to fix it. I ran across the paper earlier this year because it was one of the papers I was tested from on the actuarial exam I took in May. The paper is now almost 4 years old, but I think it should be required reading for anyone who wants to participate in a discussion about what to do about Social Security.

One highlight:

The surplus revenues from previous years has been "invested" in special issue government bonds. As those funds are needed the federal government will have to pay the money back with interest. This fact gives rise to the argument that "Social Security would be fine if the government hadn't already spent the surplus."
This is, of course, a stupid argument. First of all, the federal government will have to pay it back, so the money isn't gone. Secondly, the alternatives to investing the surplus in government bonds are investing in corporate bonds/preferred or common stocks (too risky), or stuffing it in a really big mattress (obviously stupid). You can't exactly do an efficient laddered CD scheme with two trillion dollars.