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Six Social Security Myths

http://www.fool.com/investing/ira/2004/03/08/six-social-security-myths.aspx

Robert Brokamp
March 8, 2004

That Alan Greenspan... always causing a ruckus. A couple of weeks ago, he said that the rebellion in Haiti was a CIA plot, that he found the Super Bowl halftime show "titillating," and that the Social Security program will not be able to cover its future obligations.

OK, so maybe he just said the last part. But it got as much attention as if he had said the other two -- as if he said something scandalous and controversial. However, he didn't. He just said something that he's said before, and that everyone already knows. Or at least I thought that everyone knew.

The media covered Greenspan's comments, and often included segments that featured "average Americans" and their reactions -- which were often misinformed. 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 read and saw, 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 15 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.

Myth 2: These trust funds have money
Instead of leaving the excess Social Security taxes alone -- putting it in a so-called lockbox -- the federal government "borrows" the money to spend however it wishes. Ask yourself this question: What kind of nest egg would you have if you kept borrowing from your 401(k) to pay the mortgage?

So when Uncle Sam slips his debit card into the trust fund ATM in 15 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! (Perhaps Uncle Sam needs to visit our Credit Center and shop for a low-interest-rate credit card.)

Myth 3: 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 2003, the average monthly retirement benefit was $895. That's less than $11,000 a year. So pinning your golden years to Social Security was never a smart idea.

Myth 4: Social Security is just about retirement
Even if you're not retired, chances are you're already receiving benefits from Social Security. Those benefits are disability and life insurance coverage.

According to the SSA, in 2002 the average insurance value of Social Security benefits to a young disabled worker with a spouse and two kids was $353,000. For the same year, the average life insurance value to survivors of a deceased worker covered by Social Security was $403,000.

That may not be much consolation if you never receive disability or survivor's benefits, but you nonetheless have that safety net. And since one in seven workers die before age 67, and almost three out of every 10 of today's 20-year-olds will become disabled before age 67, this coverage isn't negligible.

Myth 5: You won't get anything
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