The Biggest Myths About Social Security

November 10, 2011

In talking to people all over the country about their retirement, there are two big myths I’ve noticed when it comes to Social Security. The first one (which I hear less and less) is that there’s an account set up somewhere for you that you’ve been contributing to with your tax dollars. Unfortunately, Social Security doesn’t work that way. Instead, your tax dollars are immediately paid out to current beneficiaries with the expectation that future taxpayers will pay for your benefits when you retire.

For the last few decades, Social Security has been receiving more money than it’s been paying out but all the surplus money in that “Social Security Trust Fund” was loaned to the federal government. Guess what happened to it? It’s like that scene in the movie Dumb and Dumber when after a missing suitcase of cash is recovered, it’s discovered that the title characters have spent all the money and replaced it with IOUs detailing “every penny accounted for.”

In about 25 years, we’ll run out of those IOUs too. That’s where the second myth comes in, that Social Security won’t be around when we retire. (You’ve probably heard about the survey that more young people think it’s likelier that they’ll see a UFO than a dime from Social Security.) Yes, Social Security will be “bankrupt” in the same sense that a person is bankrupt who can’t pay ALL their debts. But that doesn’t mean the person has no income and can’t make ANY of their debt payments.

In this case, lots of people will still be paying taxes into the system (unlike a true Ponzi scheme, it can keep going indefinitely by forcing people to participate). That’s bad news for them but good news for you when you retire. It’s projected that in 2036, Social Security will be able to pay about 75-80% of the benefits they’ve promised. It’s nothing to rave about (especially when you consider what you could have earned by investing those tax dollars), but far better than getting nothing at all.

For that reason, you might want to assume that your benefit will be about 75% of whatever Social Security is projecting for you. That doesn’t mean that’s exactly what you’ll get. After all, they may decide to increase taxes, raise the retirement age further, cut benefits more for higher income people, or some combination of the above.

There has also been talk of opening private accounts for younger people. While this might have been a good idea when there was a surplus, no one knows where the money would come from to fund these accounts now that Social Security has started spending more than it has coming in. One idea would be for the government to pair benefit cuts with a mandate that people save a minimum percentage of their income in an account that couldn’t be touched until retirement. The savings could help make up for the lower benefits while avoiding the stigma of  being a “tax” since the money would stay in your account rather than be spent by politicians.

In any case, no one knows for sure what Social Security will look like in 25 years. I’m willing to bet that it will still be there, but not in its present form. Hopefully, by then it won’t resemble something from a movie with a title like Dumb and Dumber.