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The Biggest Social Security Lies You've Believed

Sean Williams, The Motley Fool

When talking about America's most important social programs, Social Security is likely at or near the top of the list. Each and every month, more than 62 million people receive a Social Security benefit check, of which nearly 43 million are retired workers. Out of these almost 43 million people, data from the Social Security Administration shows that 62% are reliant on Social Security for at least half of their income. In other words, seniors would probably be in some deep trouble without this guaranteed source of monthly income. 

But in spite of its importance, Social Security remains a source of great confusion for much of the American public -- workers and retirees included. A recently released survey from MassMutual found that nearly half of all older Americans (aged 50 or over) failed a five-question, true-false quiz. Meanwhile, a 10-question, true-false quiz from MassMutual conducted three years prior on adults of all ages found that 72% failed (i.e., answered six or fewer questions correctly). 

A messy pile of Social Security cards.

Image source: Getty Images.

Have you fallen for these mammoth misconceptions?

As the old adage goes, "what you don't know can cost you," at least when it comes to Social Security. However, what you don't know can also let your imagination run wild. Over the years, some mammoth misconceptions and outright Social Security lies have gained steam, reshaping the perception of America's most important social program. Here are a handful of the biggest Social Security lies you may have believed, along with why they're completely wrong.

Social Security lie No. 1: Social Security is going bankrupt and won't be there for me when I retire.

Arguably the biggest Social Security lie is the idea that the program will soon be bankrupt and not able to provide a benefit to future retirees. This lie is perpetuated by the latest annual report from the Social Security Board of Trustees, which calls for a major shift come 2022. In four years, the program will begin paying out more in benefits than it's generating in income for the first time in 40 years. This shift is a result of a growing number of baby boomers entering retirement and thus lowering the worker-to-beneficiary ratio, an increase in longevity over many decades, and growing income inequality that has allowed the rich to live substantially longer (and collect a bigger Social Security check) than lower-income folks.

By 2034, a dozen years later, Social Security's approximately $3 trillion in asset reserves is expected to be completely exhausted. It's this excess cash depletion that has 51% of Americans, according to a 2015 Gallup survey, confident that they won't receive a dime from the program by the time they retire. Thankfully, more than half of all Americans are wrong. 

Social Security has three funding mechanisms, and one of those funding sources ensures that the program is incapable of going bankrupt. Social Security's lesser funding sources are the interest earned on its asset reserves ($88.4 billion in 2016) and the taxation of Social Security benefits ($32.8 billion in 2016).

A man dumping out his piggy bank.

Image source: Getty Images.

Meanwhile, its 12.4% payroll tax on wage income between $0.01 and $128,400 (as of 2018) accounted for $836.2 billion of the $957.5 billion collected in 2016. As long as Americans keep working, the payroll tax will ensure that money is collected, which can be disbursed to eligible beneficiaries. This isn't to say that the current payout schedule is sustainable. According to estimates from the Trustees report, it's not. Benefits for current and future retirees may need to be slashed by as much as 23% to ensure that payouts continue without interruption through 2091. But Social Security is not, and cannot, go bankrupt, short of Congress changing how the program is funded. 

Long story short, it will provide you a benefit when you retire, but that payout may not be as robust as what your parents or grandparents received.

Social Security lie No. 2: The government has stolen from Social Security, and it needs to repay every cent they took, with interest.

Another really common Social Security lie is the idea that Congress stole or borrowed from the Social Security Trust and hasn't paid the money back. As a result, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust is now in deep trouble.

As believable as this myth might appear, it's entirely false. Rather than letting what currently amounts to nearly $2.9 trillion in excess cash lie around and lose purchasing power to the rising price of goods and services (i.e., inflation), the program primarily invests its asset reserves in special-issue government bonds and, to a lesser extent, certificates of indebtedness. These assets are earning approximately 2.9% annually, which in 2016 helped the program generate $88.4 billion in income. In other words, the federal government is already paying interest to Social Security.

A businessman in a suit holding a stack of hundred-dollar bills behind his back in one hand and crossing his fingers behind his back with the other hand.

Image source: Getty Images.

What often confuses the public is the idea that the federal government is paying its bills with the money used to purchase these special-issue bonds. The thing is, the federal government sells debt all the time to fund general expenses, and not just to the Social Security program. These special-issue bonds are backed by the full faith of the U.S. government, and at no point has the federal government failed to make an interest payment owed to Social Security's Trust. Likewise, when these bonds have matured, the federal government has always repaid what was owed. The federal government hasn't raided or stolen anything from Social Security, and every dime that should be in the OASDI is accounted for. 

If there is something to be concerned about, it's the United States' growing national debt levels. About the only worry for Social Security's special-issue bonds is if debt levels rise so high that the federal government can't make its interest payments. However, with the program facing a complete excess cash exhaustion in just 16 years' time, this seems extremely unlikely to happen.

Social Security lie No. 3: The government needs to stop giving Social Security benefits to noncitizens.

A third misconception that just won't die is the belief that undocumented immigrants have been able to claim Social Security benefits, and that they are draining the program's resources.

If anything, this myth has things completely backwards. Though not all noncitizens in this country are working within legal channels -- i.e., paying federal and/or state tax -- quite a few are. In 2010, according to data highlighted by AARP, undocumented immigrants' wage income netted Social Security approximately $12 billion in payroll taxes. Yet, the program's rules are crystal clear: noncitizens aren't able to receive Social Security benefits. Thus, numerous undocumented immigrants are likely paying into a Social Security program that'll never supply them with a red cent in benefits.

A visa foil underneath a Social Security card.

Image source: Getty Images.

AARP also notes that this lie may have arisen from Americans conflating Social Security's OASDI Trust and Supplemental Security Income (SSI), which provides supplemental income to the disabled, blind, and those ages 65 and over. Though the SSI program is overseen by the Social Security Administration, the two programs are funded differently, with Social Security's OASDI being funded by the three mechanisms discussed above, and SSI funding coming from the federal government's general fund. Noncitizens who are refugees, asylum seekers, and those lawfully admitted for permanent residence, are eligible for SSI. But this in no way means that undocumented immigrants are draining the Social Security Trust. 

Ultimately, it's time these three Social Security lies were put to bed for good.

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