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 5. That's less than ,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 3,000. For the same year, the average life insurance value to survivors of a deceased worker covered by Social Security was 3,000.

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.)

No, instead of discussing the facts, politicians are using the issue to poke the other party in the eye. Democrats say that the ballooning Bush budget deficit exacerbates the problem, while Republicans blame Social Security's ills on Democratic support for gay marriage... or something like that.

But we can only blame politicians so much. After all, they didn't put themselves in office; we did. So behind the myths is the truth: We are ultimately responsible for what happens to Social Security by making it an issue -- by making the so-called "third rail" touchable and electing people who will solve the problem.

And when it comes to retirement, we cannot -- and never could -- rely on Uncle Sam to make our golden years truly golden. For that, we can only rely on our ability to forgo current consumption in order to save for future, in-retirement consumption. Now that's a tough choice.

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Robert Brokamp is a former financial advisor and English teacher Brokamp who finds discussions of Social Security "titillating." His musings on retirement, investments, budgeting, and whoopee cushions can be found on Fool.com and in various other publications, including Better Investing, Details, and Newsweek. He is also the co-author of The Motley Fool Personal Finance Workbook and the author of The Motley Fool's Guide to Paying for School.

The Motley Fool is investors writing for investors.