Social Security: Ask Rusty

Social Security Isn't Welfare; Raiding the Social Security Trust Fund; & Government Pension Offset (GPO) & Maximizing Benefits

By RUSSELL GLOOR,
AMAC Certified Social Security Advisor

June 08, 2017
Thursday AM

(SitNews) - Social Security Isn't Welfare
 
Dear Rusty:  I receive Social Security, but I still go in the hole to the tune of about $300 per month!  I hear some people describing Social Security as "welfare" but I resent that description.  Between my employer and me, we pay over 15% of every paycheck to Social Security, so it's not "welfare", it's my hard earned money that I've paid these taxes on for 47 years.  The Government has spent my money instead of investing it to make sure I could retire and not live under a bridge.   I think that they should pay me back plus interest so I can live out my retirement!  Signed:  Disgusted

Dear Disgusted:  You're right that it's your hard earned money that you've contributed to Social Security for many years, and it's certainly not "welfare" by any definition.  I do understand your frustration but I'd like to clarify a couple of things you are concerned about.

You're correct that you and your employer have contributed over 15% of every paycheck to "FICA", but not all of that goes to the Social Security Trust Fund.  The breakdown is that 12.4% goes to the SS Trust Fund, and the rest - 2.9% - goes to help fund Medicare.  The combined 12.4% Social Security contribution is evenly split - 6.2% each by you and your employer.  Of the 6.2% you both contribute, 5.3% goes to the Old Age & Survivors Insurance (OASI) fund from which regular Social Security benefits are paid, and 0.9% goes to the Disability Insurance (DI) fund from which SS disability benefits are paid.  Nevertheless it is, as you say, your money - and your employer's - that goes into these funds.

Social Security really wasn't set up as an individual retirement investment vehicle; rather it was designed so that current workers contribute to a fund from which "old age and survivor's" benefits are paid to eligible seniors.  Said another way, those working now pay for those now retired.  Any excess - contributions over and above that spent to pay benefits - is deemed to be "surplus".  By law, the money in the Trust Fund can't be used for anything other than Social Security & Disability benefits, and (also by law) any surplus money from contributions must be invested in "interest-bearing securities backed by the full faith and credit of the United States".  This is done via special-issue government bonds, which pay interest at "market rate" (currently 1.5%).  As of the end of 2015, the Social Security Trust Fund had about 2 ¾ trillion dollars invested in those special-issue bonds, which are redeemable either at maturity or on demand as needed to pay benefits. The Trust Fund's revenues still exceed costs every year, although the amount of annual surplus is declining because the ratio of workers to retirees is declining.  Current estimates are that Social Security's "old age & survivor insurance" revenue will stop running a surplus about 2020, after which any income shortfall would be taken from the Trust Fund's investments.  The trust fund wouldn't run out until about 2034, at which point benefits will be reduced unless Congress acts before then to improve solvency.  AMAC has developed a "Social Security Guarantee" which we have been regularly promoting to Congressional Representatives in Washington, D.C.  This is a common-sense plan which ensures that Social Security will be able to pay full benefits into the next century, and we plan to continue lobbying congress to adopt the AMAC plan, or something similar.   

So, to recap, the money you contributed while you were working went to pay benefits for those already retired and, after you retire, contributions from those still working will be used to pay your benefits.  And any surplus funds collected were invested in interest-bearing bonds for future use, and those funds cannot be used for any other purpose than Social Security benefits payments.

Raiding the Social Security Trust Fund

Dear Rusty:  I would like to know how much money has been taken out of Social Security by presidents, and was any paid back with or without interest on the withdrawal?  Signed:  Wants to Know

Dear Wants to Know:  The idea that any President or Congress has taken money out of the Social Security Trust Fund is simply not an accurate description of how the Social Security system works. I know these accusations abound on the Internet, normally promoted by someone or some organization trying to further a political agenda. But the reality is that the Social Security program has, since its inception in 1935, been a "pay as you go" system where current workers pay Social Security taxes to fund benefits for current beneficiaries. Over the years, when there were many more workers than beneficiaries, considerably more was taken in than was paid out in benefits and the surplus each year is placed in the Social Security Trust Fund, which as of June 2016 had a value of 2.81 trillion dollars. By law, Social Security is required to invest that surplus in special issue U.S. Treasury securities, not unlike those available to private investors, which are backed by the "full faith and credit of the U.S. Government", but these special issue securities are redeemable at any time at face value. These securities typically yield interest of about 1.5 - 2.375 percent (2016 rates), and this interest aids in growing the value of the trust fund. Now, yes, investing in those securities is technically loaning money from the Trust Fund to the U.S.Treasury, where the money can be used for any purpose the Government sees fit, just like all other revenues the Government collects from anywhere. But that loan and those securities can be called for payment at any time by the Social Security Administration when it needs money to pay benefits to Social Security recipients. So when you read or hear something about Congress or one or the other President "raiding" the Social Security Trust Fund, it is simple hyperbole designed to stir emotion and promote an agenda. The reality is that Social Security must, by law, invest surplus funds in interest-bearing special issue Government securities, essentially loaning money to the U.S. Treasury which must be repaid upon demand.

It's worthwhile to note here that there are actually two parts to the "trust fund"; one for Old Age and Survivors Insurance (OASI) benefits and another for Disability Insurance (DI) benefits.  Although there is now 2.8 trillion dollars in both of these funds, the current lower ratio of workers to beneficiaries means that both of these funds either already are (as with DI) or soon will (as with OASI) start to be depleted to pay benefits.  This is why you are now hearing concerns about Social Security's financial solvency.  Current projections by the Funds' Trustees are that the Disability Insurance fund will be depleted by about 2022 and the OASI fund will be depleted about 2034.  If Congress does not act before then to reform the program, benefits at that time would be limited to paying out only as much as was received in Social Security revenue, which could mean about a 21% reduction in benefits.  However, given the intensity of the spotlight on this issue today, it's probable that Congressional action will be taken in sufficient time to ensure the program's solvency for the foreseeable future.

Government Pension Offset (GPO) & Maximizing Benefits:

Dear Rusty:  I recently retired from my job after 35 years at the U.S. Department of Defense.   I know I'm not eligible for Social Security because I was part of the CSRS pension program and never had FICA taxes withheld from my paychecks.  My husband, on the other hand, has worked his entire life in the construction business paying FICA taxes and has earned more than enough credits to collect Social Security when he reaches that age in a few years.   He is 58 and I am 59 years of age.  He doesn't have a traditional pension plan through his employer, but does participate in an employer-sponsored 401(k).  We are quite financially secure at this point, but as we look forward I'd like to make sure we can maximize any Social Security benefits available to us so we can continue to live comfortably as we age.   So my question is, how can my husband maximize his Social Security benefit, and will I be able to collect any Social Security benefits as his spouse?  Signed:  Looking Ahead
 
Dear Looking:   Oh how we wish more people would, like you, plan well in advance for their golden years!    First let's deal with your question of how your husband can maximize this Social Security benefit.
 
The rules for this are pretty simple, but both physical and financial health need to always be a primary consideration.  If your husband is both physically fit and financially able, waiting until well after he is first eligible to collect Social Security is the best strategy to increase his benefit amount.   If he were to start collecting at age 62 he would only get about 71.67% of what he would get at his full retirement age (FRA) as defined by Social Security, which for him is 66 years and 8 months.  After his FRA his benefit amount will increase by about 8% per year for each year he delays, up to age 70 when he will reach his maximum benefit amount.  Delayed retirement credits are actually earned monthly, so it's not necessary to wait a full year to get credit for delaying benefits.  
 
Now, as his spouse you would ordinarily be eligible for spousal benefits based upon your husband's work record but, since you are receiving a CSRS pension from the Federal Government, you are affected by a provision known as the Government Pension Offset, or GPO.  In theory, the CSRS pension program was designed to be part pension and part replacement of Social Security, which is why you did not pay Social Security payroll taxes over your career.   The GPO rules state that Spousal Benefits must be reduced by a factor equal to 2/3rds of a person's government pension.  Just by way of example, that means that if you are receiving a CSRS pension of $1,000 per month, any Social Security spousal benefit you might be entitled to would be reduced by $667.  So, if your spousal benefits (normally 50% of your husband's Social Security benefit at FRA) would be $667 or less, you wouldn't receive any spousal benefit.  If it were more, you would receive only the excess over $667.  So you may want to go to ssa.gov and get an estimate of your husband's benefit at his FRA, and then see if 50% of that amount is more than 2/3rds of your CSRS pension amount.  If it is you will be entitled to spousal benefits; if it is not, you won't be entitled to spousal benefits from Social Security.  You might not be surprised to find that GPO often completely offsets Social Security spousal benefits for many Government CSRS retirees.  Note too that GPO will also affect your widow's benefit should you be the surviving spouse, because it will be subject to same calculation as your spousal benefit.  However, if your husband is the surviving spouse, and he receives a survivor's annuity from your pension, his Social Security benefit will not be affected.

The Foundation welcomes questions from readers regarding Social Security issues.
To submit a question, email the Foundation at info@amacfoundation.org

©2017 Russell Gloor, AMAC Certified Social Security Advisor http://amacfoundation.org

The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation's Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation's Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services.

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