Congressman Etheridge on Social Security

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Saving Social Security

Back to information about Social Security Privatization

Questions and Answers about Social Security and Privatization

Q: How many people does Social Security cover? How much is the average benefit?

A: In 2005, more than 47 million Americans will be covered by Social Security. The average benefit for a retired worker is $950 a month. Nine out of ten individuals age 65 and older receive Social Security benefits. For nearly two-thirds of retirees, Social Security provides more than half their income. In addition to providing retirement benefits, Social Security is a crucial life and disability insurance program. More than 6 million disabled workers, nearly 5 million widows, and 4 million children receive Social Security benefits.

Q: How does Social Security work?

A: Workers and their employers pay into the Social Security Trust fund through payroll taxes (FICA taxes) and earn guaranteed monthly benefits which are payable to them when they retire or become disabled, or to their surviving spouses or children if the worker dies. Social Security benefits last as long as a retiree lives and are annually adjusted to keep up with inflation.

Q: What is the Social Security Trust Fund?

A: The Social Security Trust Fund is a financial account in the U.S. Treasury. Social Security taxes are deposited in this account, and Social Security benefits are paid from it. Also, the Social Security Trust Fund holds any funds not needed in the current year to pay benefits and invests them in interest-earning Treasury bonds that are guaranteed by the U.S. Government.

Q: Is Social Security really going "bankrupt" as President Bush said in the State of the Union?

A: No. The Social Security Trust Fund has been building up reserves for over 20 years because it took in more in payroll taxes than it needed to pay benefits. The Social Security Trust Fund has accumulated more than $1.7 trillion in reserves. The Congressional Budget Office (CBO) has estimated that the Trust Fund’s reserves will be sufficient to keep Social Security solvent for nearly 50 years (until 2052), and, even after that, the payroll taxes coming into Social Security will still be sufficient to pay 80 percent of benefits.

Q: What happens in 2018? President Bush has said that starting in 2018 "the math does not work"

A: In 2018, the Social Security Trust Fund will start paying out in benefits more than it is scheduled to take in through payroll taxes. That means Social Security will need to start using a small portion of its reserves, although the amount of money Social Security has in its Trust Fund will still continue growing for many years after that. The Trust Fund’s reserves are held in Treasury bonds, which are widely considered the safest investment on earth. Like all bonds sold by the government, they are backed by the full faith and credit of the United States, and must be paid back with interest. In our nation’s entire history, we have never defaulted on a Treasury bond. Social Security has cashed in bonds in its Trust Fund at least 11 times in the past without any problem.

We do need to get our fiscal house in order so that we can meet all our obligations. Four years ago, we had a $5.7 trillion surplus in the federal budget. Today, we have a $2.7 trillion deficit. Congress needs to pay back the money it borrowed from Social Security and from foreign countries to pay for President Bush’s tax cut.

Q: Will President Bush’s private accounts extend the life of the Social Security Trust Fund?

A: No. The White House acknowledges that their private account proposals will not improve Social Security’s financial situation at all. In fact, they will make it worse. The leading privatization proposal suggested by President Bush’s commission actually moves up by several decades – to 2021 – the date when Social Security might not be able to pay full benefits.

Q. So how does the President propose to close the solvency gap in Social Security which his private account proposals would make worse?

A: President Bush’s Commission came up with three different proposals to privatize Social Security, and every one of these proposals would cut Social Security’s guaranteed benefits. In fact, even people who don’t choose to enroll in the new private accounts would have their benefits cut. The plan the President called a "good blueprint" would cut future benefits across the board by nearly 50 percent. For younger workers this would equal a benefit cut by $152,000 over their lifetimes.

Q. Will these benefit cuts be made up with money from the private accounts?

A. No. Risky private accounts would not make up for this loss in guaranteed benefits. Indeed, those who choose private accounts, will see their guaranteed benefit cut even more. Private account holders will see additional benefit cuts equal to the amount they would have contributed to Social Security but instead diverted to a private account, plus 3 percent interest above inflation. Estimates are that this "benefit offset" could be as much of 80 percent of the amount of money in a person’s private account.

Q: The President says the private accounts will be structured exactly like the federal Thrift Savings Plan. How are the private accounts the Bush Administration is proposing different than a 401(k) or IRA account?

A: A 401 (k) is not established with funds diverted from Social Security. A 401(k) does not reduce the amount of Social Security benefits you are entitled to receive. In other words, 401(k)s supplement Social Security rather than replace it, as privatization proposals would. Congressman Levin supports efforts to make sure all workers have retirement savings and pensions, but we should not dismantle Social Security to do that.

Q. Will Seniors be unaffected by Privatization?

A: President Bush says that his plan has no effect on people 55 or older. But diverting trillions of dollars from the Social Security Trust Fund into private accounts weakens Social Security for everyone, including those over 55. In addition, the Bush Administration is only talking about the portion of their plan to create private accounts. The Administration has not released the details of its plans to cut Social Security benefits in the future. During his State of the Union message, the President only listed some possible options that "are on the table," including reducing the formula for how initial Social Security benefits are calculated, raising the retirement age, and discouraging early collection of Social Security benefits.