The Navigoe Blog

Social Security: what it is and what it isn't

There are a lot of myths and misinformation about Social Security. You hear these things all the time, “it’s going broke” “I’ll never see a dime from Social Security” “I get less because I’m considered wealthy” “Social Security is a big ponzi scheme!”

Well, it’s time to dispel the myths. I offer you my thoughts on what Social Security is and what it isn’t:

Social Security - myths facts misconceptions

Social Security is:

A type of insurance

It is self funded by payments made by those being insured (you, me and everyone else who pays or has paid FICA). Like any form of insurance, it provides a level of protection against certain types of financial risks: retirement (specifically, old age or longevity), disability, death.

Going to be around when you retire

Depending on your age today, changes may be made to Social Security benefits by the time you’re ready to cash in. The most likely change is that the full age of retirement will increase from the current highest age of 67 (for those born after 1959) to 68 or 69. Alternatively, the formulas may be adjusted to decrease the benefit amounts. Another option is that some means testing may be added, increasing the taxation of benefits or even reducing benefits for higher income households.

Going broke

Yes, I know I just said that it will be around when you retire. But, I’m afraid the reports that Social Security is going broke are true. Based on current projections, the Social Security Trust fund will be depleted by the year 2033. This does not mean that it will cease to exist. Under current estimates, after the trust fund is depleted, Social Security will be able to meet 75% of benefits obligations. Changes in the bullet point above will need to be implemented. So, it’s not dissolving, but if you had a few trillion and depleted it down to zero, you would say you’re broke, right?

Self funded

There’s a bit of semantics here, in that it is funded by the payroll tax revenue collected from you, me, the companies we work for and all other eligible workers and their employers. That’s not really “self” funding. But it doesn’t derive payments from general Federal budget.

Taxable

For most recipients, anyway. If your “combined income” which includes your Adjusted Gross Income, your tax-free income (such as muni bond interest) and half of your Social Security benefit payments is more than $34,000 for individuals or $44,000 for married couples, then 85% of your Social Security payments are taxable.

The primary source of income for the elderly

Among those over age 65, 52% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.

 

Social Security is not:

A retirement account

You don’t have an account somewhere like a 401k or IRA. This is more like the pension plans that most big companies used to offer (and few do today). Your benefit is in the form of a monthly payment to you and possibly your spouse. And maybe even your ex-spouse. There have been proposals to privatize Social Security or allow individuals to invest their contributions in the stock market, but nothing of that sort has been made into law.

A welfare program

Welfare programs provide benefits to those who exhibit sub-standard means without a requirement of those beneficiaries to pay into the system. Social Security provides benefits to those who have paid into the system (or their beneficiaries). Not only that, but the more you paid in, the larger your benefits (although not directly proportional).

Designed to be “fair”, in that it favors the lower income workers

Social Security is specifically designed to pay out a higher percent of your income to those in the lower income brackets, and a smaller percent to those in the higher income brackets. The higher income worker will receive a larger overall benefit, but it will be a smaller percent of average lifetime earnings.  The thinking, I presume, is that the risk of financial ruin is higher among low income workers, and the opportunity, ability or likelihood to save outside of Social Security is higher among high income workers.

Designed to be “fair”, in that it favors those with longevity

Those with shorter life spans derive less benefit, since it’s a lifetime payout. Research clearly shows that there is a positive correlation between wealth and life expectancy. Therefore, we can assume that high income earners can expect to receive a larger lifetime benefit from Social Security.

A pyramid scheme

Yes, the new entrants pay into the system to allow those who entered earlier to begin taking money out of the system. Sounds like a pyramid scheme. However, it doesn’t narrow as you go up (other than mortality reducing old age population). A pyramid scheme funnels the money up to a small few who reap great rewards. Nobody is getting rich on Social Security.