This is a version of an article published in 2004 that contained jokes about Alan Greenspan, Janet Jackson, and the word "titillating," which are no longer timely. But the topic of Social Security still is.
Last night, President Bush spent a goodly part of his State of the Union speech talking about Social Security reform. On the way to work this morning, I listened to C-SPAN Radio, which featured congressfolks discussing the speech and regular folks calling in with their questions, comments, and mumbling rants.
What struck me -- besides the fact that I love C-SPAN -- is that so many people don't understand Social Security and are monstrously ill-informed. On one level, the lack of knowledge about Social Security is alarming, given its importance to the average American. But on another level, it's understandable, given our daily information inundation. Heck, proper pancreas function is also important to average Americans, myself included, but I couldn't tell you what function my pancreas serves.
But from what I heard (including from the congressfolks), it's clear that there are a lot of myths surrounding the pancreas -- I mean, the Social Security debate. So permit me to address what I see as the biggest misconceptions about the biggest line item in the federal budget.
Myth 1: Social Security is a savings account
Don't confuse Social Security with a 401(k), IRA, or any other type of retirement account. The money in your 401(k) or IRA is yours -- Uncle Sam can't take it (though he can certainly tax it).
Social Security, however, is not a savings account. You do not have an envelope at the Social Security Administration in which your taxes are deposited. The taxes taken out of your paycheck today become a retiree's benefit check tomorrow. For now, the government is collecting more money than it is paying out, so a trust fund was established for the extra payments.
However, in approximately 13 years the flow will reverse, with more money going out than coming in. At that point, the government will need to dip into that trust fund. The SSA estimates that by 2042, the trust fund will be depleted. Other estimates peg that date at 2052.
Myth 2: These trust funds have money
Those trust funds are invested in special-issue Treasury investments, which are the safest investments in the world. However, they also represent a loan that Uncle Sam will have to pay back in the future. So when Uncle Sam slips his debit card into the trust fund ATM in 13 years, he'll just receive an IOU -- from himself. In other words, instead of billions of dollars' worth of reserves, the trust fund represents billions of dollars' worth of debt. How will the government be able to pay this debt, i.e., pay the Social Security benefits that won't be funded by tax receipts? By borrowing more money or raising taxes.
Myth 3: That 2042 date means something
By law, the Social Security Trustees have to make a few educated guesses about how the program will fare over the next 75 years. In 1994, the Trustees estimated that the trust funds would be depleted in 2029. And now they say the funds will last until 2042. But no long-range estimates -- from the government or anyone else -- can be accurate. It's just impossible.
Back in 1968, no one could have predicted the oil crisis, the inflation of the '70s and early '80s, the fall of Communism, the rise of IRAs and 401(k)s, MTV, and the Internet. Given the surprises of that past 37 years and their impacts on our economy, why should we think that predictions about the next 37 years will be reliable?
Myth 4: The system is "bankrupt"
Three months before your birthday, you should receive a statement from the SSA listing your recent earnings history and your estimated benefits. On the front page of the current statement, you'll read the following:
Without changes, by 2042 the Social Security Trust Fund will be exhausted. By then, the number of Americans 65 or older is expected to have doubled. There won't be enough younger people working to pay all of the benefits owed to those who are retiring. At that point, there will be enough money to pay only about 73 cents for each dollar of scheduled benefits.
Even without changes, you'll still receive approximately three-fourths of your scheduled benefit. That stinks for those of us who will be in retirement by then, but it's not as gloomy-and-doomy as we are often led to believe. As long as there are workers paying FICA taxes, the program will have money.
Myth 5: Social Security is fine
Since the growth of retirees will outpace the growth of workers, Social Security is not hunky-dory. Something needs to be done, sooner rather than later. There is no painless solution: Taxes will have to be raised, benefits cut, or a mixture of the two. Which you prefer probably depends on your income, other retirement resources, and belief in the purpose of Social Security. If you see it as a safety net to prevent widows, orphans, and the elderly from living in poverty, you might argue that taxes should be raised and/or benefits cut for wealthier Americans. If, on the other hand, you see it as a way for individual Americans to supplement their retirement income irrespective of other resources, you might be inclined toward broader benefit cuts -- and perhaps the possibility for individuals to do better through private accounts.
Myth 6: Private accounts are the answer
The president's solution entails younger workers to be able to divert a portion of their Social Security taxes to private investment accounts, where they can choose from a few low-cost mutual funds. If they invest wisely, and the markets cooperate, these investors will have even more retirement income than they would have received from the current Social Security system.
I love this idea. I would love to spend the next couple of decades managing my own money. I would love to be able to pass this benefit on to my kids and grandkids, who would receive none of my retirement benefits under the current system. I love the idea of having more control over my financial future.
But I also know this: Allowing private accounts does not solve Social Security's problems. It is more of an ideological goal than an economic solution. In fact, diverting money to private accounts leaves less money to pay current and near retirees, which the government would have to come up with elsewhere, probably by more borrowing. If the president and Congress had kept discretionary, non-defense spending in check over the past few years, perhaps this would be more palatable. But given our current deficits and skyrocketing Medicare spending (the real retirement crisis), I'm curious how the country can afford a plan that, by itself, doesn't solve the long-term problem.
Myth 7: Social Security will pay for a swell retirement
Regardless of the future of Social Security, it never was -- and never will be -- a way to fund the retirement of your dreams (unless your dreams involve small living spaces and small portions). In December 2004, the average monthly retirement benefit was $954. That's less than $12,000 a year. So pinning your retirement on Social Security was never a smart idea.
When it comes to retirement, we cannot -- and never could -- rely on Uncle Sam to make our golden years truly golden. That's why The Motley Fool created the Rule Your Retirement newsletter service, to help people make the smart choices before and after they quit work. (Give it a 30-day free trial, and we'll give you our "8 Ways to Supercharge Your Retirement" special report.)
Robert Brokamp finds discussions of Social Security "titillating." He is also the editor of Motley Fool Rule Your Retirement newsletter service. The Motley Fool is investors writing for investors.