6 Myths of Social Security - from the Motley Fool

[Taxman]

I’ve been looking for an easy to understand piece to share with all of you since questions about SS came up recently on the board. Try this one on for size…

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 page of the current statement -- as seen in this example -- 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 the point [sic], will be enough to pay [sicker] only about 73 cents for each dollar of scheduled benefits.

So, as you can see, not only is Social Security facing financial problems, it's also lacking good editors. (Hey, so are we.) But you get the point: 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.

Myth 6: You can believe the politicians
Here's the real problem with Social Security: The people who can fix it have no incentive to do so. The solution will entail tough choices, and -- as Mr. Greenspan found out -- even voicing the options can provoke a firestorm. So no politician -- whose job relies on short-term popularity, not long-term responsibility -- will fight for painful reforms. In fact, within hours of Greenspan's testimony, the candidates in the 2004 presidential election were denouncing the Fed chairman's suggestions, promising full Social Security benefits for everyone, and pledging to personally bring you breakfast in bed. (Except for Ralph Nader, who was busy staring into a mirror and blowing kisses.)

Read the full article at the Motley fool: [Only registered and activated users can see links. Either login above or Register Now]

[telos2000]

Myth 7 - that politicians are civil servants. There is nothing civil about them and they darn sure don't serve up anything but pork.

[crazytimes]

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.

What does average insurance value means?

[Taxman]

In a nut shell, it describes the equivalent amount of disability or life insurance needed to achieve the same level of benefits. It’s a little bit more complicated than that, but that’ll do for this discussion.

[ShainaT]

"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." THIS IS A HUGE MYTH!!!

Thanks Taxman! Very good article! I know you must be busy at work...I remember all too well the crazy time of year this can be.