Time to Face the Facts about Social Security

For nearly 90 years, a widespread misconception has shaped how Americans view Social Security. Many believe that their payroll taxes are saved in a trust fund, to be drawn down when they retire. But in reality, Social Security has never operated as a savings system. Instead, it functions as an income transfer program, where the taxes collected from today's workers immediately fund the benefits for current retirees. This misconception about how Social Security works continues to distort the debate around its future. Social Security was designed to transfer income, not to save it. The first recipient of Social Security, Ida May Fuller, perfectly illustrates this. Fuller paid less than $25 in Social Security taxes (about $500 today) before retiring in 1940. Her first check nearly matched what she had paid in, and over the next 35 years, she collected $23,000 in benefits--nearly 1,000 times what she contributed (or roughly $500,000 in today's terms). This arrangement worked out great for earlier generations, but today's workers aren't so lucky. They are paying high taxes for a benefit that's far lower than what they could earn if they invested the money in a balanced portfolio of stocks and bonds instead.