Stop Falling for These 6 Social Security Myths

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Over 166 million taxpayers pay into Social Security, which pays benefits to over 65 million Americans. As with any program as large and sprawling as Social Security, myths about how it works can run rampant — and since the facts tend to require more than a sound bite to explain, those myths become entrenched in our collective consciousness as fact.

But not only are these Social Security myths untrue, believing them can cause you to make poor decisions about your Social Security benefits. Here are six of the most common and harmful myths about Social Security, debunked:

1. The Government Is Raiding the Social Security Trust Fund

You will often hear people complain about how untrustworthy our government is, and offer the fact that Congress "raids" the Social Security Trust Fund as proof. While it is true that the Trust Fund is where excess Social Security taxes are placed for future beneficiaries, and it is also true that the government uses money in this account to pay for government programs, it is simply not true that the fund is being "raided."

Here's what's going on. Money placed in the Social Security Trust Fund may sound like it is being put in a vault somewhere for the safekeeping of future beneficiaries. But that's not how money works. Not only would that be a security risk, but the money in such a vault would lose value to inflation. In order to maintain and increase the value of the trust fund, the money must be invested in government programs.

Think of it this way: Any time you invest money commercially — whether by putting it in an interest-bearing bank account or by buying stocks or bonds — you are probably aware that the institution is immediately spending the money you have invested. The private institution spends your investment with the understanding that it will earn profits and be able to pay you back, with interest.

The government is no different. It spends money invested in the Social Security Trust Fund on infrastructure, military spending, government salaries, welfare, and the like, knowing that those investments will earn interest. But unlike a private institution, this kind of government spending is backed by the full faith and credit of the U.S. government.

The government's spending of money from the Social Security Trust Fund is just as valid a use of invested money as is the lending and spending that a bank or corporation does with investors' money.

2. Social Security Is Going Bankrupt

This myth is based on a kernel of truth — specifically, Social Security benefit payments exceed payroll tax revenues and have done so since 2010. In order to maintain promised benefits, Social Security has had to dip into the Social Security Trust Fund. As of 2013, the Trust Fund began losing value, and it will become entirely depleted by 2037.

This is the point at which most analysis stops, and that is why you will often hear the myth that Social Security is circling the drain. But it is impossible for Social Security to go bankrupt, because it was always designed as an immediate transfer of funds from current workers to current beneficiaries. (When there were more workers than beneficiaries, excess taxes were placed in the Trust Fund. This was the case until 2009). The program does not count on a specific pool of money, but on the tax revenue of current workers.

That being said, once the Trust Fund is depleted, tax revenue is only expected to pay for approximately 79% of promised benefits. This is the shortfall you will hear experts referring to when discussing the future of Social Security. But it does not spell the end of the program. It is just a shortfall that we need to find a way to make up.

Social Security was created specifically so it could be changed and tweaked to meet the changing needs of Americans — changing needs like this anticipated shortfall. We might have little faith in Washington right now, but it is specifically the job of our government to make changes to Social Security to deal with this coming shortfall. Eventually, they'll get around to it.

3. It's the Baby Boomers' Fault We're in This Mess

There are plenty of articles out there that place the blame for Social Security's financial woes squarely at the feet of the baby boomer generation — the largest-ever generation of Americans, born between 1946 and 1964. There are 76 million baby boomers, and having that many people retire over a couple of decades places an enormous burden on Social Security. Since our system is based upon an immediate transfer from current workers to current retirees, having the boomers retire all at once puts too many retirees into the equation.

But the boomers' retirement is hardly a surprise. They've been around for six or seven decades now, and we have seen this mass boomer retirement phase coming for many years. According to Virginia P. Reno and Joni Lavery in the Social Security brief Can We Afford Social Security When Baby Boomers Retire?, "Policymakers began to plan as early as 1983, when Congress lowered the cost of Social Security benefits for boomers and later generations by raising the age at which unreduced retirement benefits will be paid."

Believe it or not, our government has been trying for quite some time to prepare for this moment. Part of the reason we had such a surplus in the Social Security Trust Fund was because of our preparation for the mass retirement of the boomer generation. We are far better prepared for the boomers than many doomsayers might have you believe.

4. Waiting for Benefits Means You Risk Not Getting Your Fair Share

It is possible to take Social Security benefits as early as age 62, although your benefits will be permanently reduced by up to 25% to 30 percent by taking them early. Wait until your full retirement age (66 for individuals born between 1943 and 1954, rising to age 67 for anyone born in 1960 or later), and you will receive your full benefits. If you can wait until age 70, you will receive delayed retirement credit equal to approximately 8% per year between your full retirement age and 70.

If you calculate the break-even analysis on your Social Security benefits, it often looks like you're better off by taking early benefits. Early, reduced benefits offer you more lifetime benefits for nearly 15 years into the break-even analysis.

The problem with this thinking is that the only way for you to "win" these calculations is to die young. It would actually be far worse for you to take early benefits and then live a long life on a reduced income. It is much smarter to delay your benefits as long as possible to provide yourself with the largest benefit you can get.

5. Immigrants Are Taking Social Security Benefits They Didn't Pay For

This myth is an election year favorite, and it conflates Social Security benefits with Supplemental Security Income (SSI) benefits. Social Security benefits are only available to beneficiaries who either paid into the system themselves, or who are the dependents of those who paid into the system. If you have not paid any Social Security payroll taxes (or you haven't been the dependent of someone who has), you are not getting Social Security benefits. Period.

SSI, on the other hand, is a welfare program designed to provide aid to the elderly and disabled, and SSI benefits are paid through general governmental revenues. Immigrants are eligible to collect SSI benefits, but only if they show the same level of extreme need as any other SSI beneficiary.

6. Privatizing Social Security Would Make the System Fairer

The possibility of privatizing Social Security is a common suggestion for fixing many of the problems inherent in such a large government program. These suggestions often promise that privatization will be cheaper for the government, more lucrative for beneficiaries, and fairer for everyone since you will get out what you put in.

Unfortunately, none of those three promises would be true. Social Security is a very efficiently run program, with administrative expenses totaling less than 1% of the program's budget. But creating and maintaining individual investment accounts would be incredibly expensive, since it would incur broker commission fees and/or mutual fund management fees, which would either come from the program budget or individual investors.

In addition, it is unlikely that the majority of beneficiaries would be able to improve upon their Social Security "return on investment" through investment accounts, since humans are notoriously irrational investors. Social Security benefits are guaranteed, while investment returns are not.

Finally, attempting to create pay-for-what-you-get fairness in a social insurance program like Social Security is a non-starter. The intention of Social Security is to provide guaranteed income to the elderly, the disabled, and their families, by spreading the cost of that income over all of society. Strict fairness in such a system would leave our most vulnerable citizens in abject poverty or worse. It's also important to note that the transition costs of privatizing Social Security have been estimated at nearly $5 trillion over the first two decades. Those costs would need to be paid by current workers, who would potentially be paying into their privatized accounts and still be paying taxes that go toward current beneficiaries — which would feel incredibly unfair.