Image: Social Security Card © Comstock

If you want to know the truth about Social Security, don't ask a politician or a pundit.

There's just too much misinformation floating around about the retirement system, and it's coming from both sides of the political spectrum. Some on the left claim that everything is just dandy and no major changes need to be made, which is hogwash. Some on the right claim the system is irreparable, which is hooey as well.

Stranded in between are the confused millions who contribute to and benefit from the system. They just want to know if Social Security will be there for them when they need it.

The answer is yes, if the politicians can ever get their acts together.

Here are five big myths about the system that are getting in the way of getting things done:

Myth No. 1: Social Security won't exist when I retire.

Those who want to dismantle Social Security often suggest it's about to collapse into rubble. That false assessment is one of the reasons so many people are convinced the system won't be there when they need it.

It's true that Social Security's finances need fixing. Without changes, the system will be able to pay only 75% of promised benefits after 2037.

But the system doesn't need radical changes to restore its financing to solid ground. The bipartisan Debt Reduction Task Force, headed by former Republican Sen. Pete Domenici of New Mexico and Democrat Alice Rivlin, a former director of the Congressional Budget Office, suggested several repairs:

  • Gradually increase the full retirement age to reflect improvements in longevity.
  • Change to a different measure of inflation that grows more slowly to calculate cost-of-living increases.
  • Slightly reduce the growth in benefits for the top 25% of wage earners.
  • Boost the amount of earnings subject to the payroll tax over time.
  • Bring newly hired state and local government workers into the system.

Liz Weston

Liz Weston

These aren't the only changes that could be made. An immediate 1.8% payroll tax hike or a 12% overall benefit cut would also work (.pdf file). But a combination of smaller benefit cuts and tax increases may be the most reasonable, not to mention politically palatable, way of restoring the system to a strong financial footing. You can try coming up with your own solutions at the American Academy of Actuaries' Social Security Game site.

Myth No. 2: The trust fund assets are worthless.

Yes, Virginia, the Social Security trust fund actually exists. But it doesn't contain a big pile of cash.

The Old-Age and Survivors Insurance and the Disability Insurance trust funds collect our payroll taxes and invest the surplus, when there is one.

Over the years, the surplus has been lent to the federal government to pay for other programs. In return, the trust fund received IOUs in the form of special-issue, interest-paying Treasury bonds. These bonds are backed by the full faith and credit of the U.S. government, just as regular Treasurys are.

The trust fund has worked this way since its inception in 1939, by the way. Congress didn't place the fund "off limits" at one point and then later decide to raid it, despite hoax email assertions to the contrary.

The tricky part, and the reason some have dismissed the trust fund as an accounting fiction, is that the Treasury needs to come up with the money to make good the bonds when it's time to cash them in. This cash has to come from somewhere: increased taxes, reductions in other spending or additional borrowing. Although the trust fund assets aren't scheduled to be depleted for another 26 years, this need for the Treasury to redeem the bonds will put pressures on the federal budget well before 2037, according to the Social Security Administration's board of trustees.

Myth No. 3: Congress doesn't pay into Social Security, so it doesn't care about fixing the crisis.

U.S. lawmakers used to be exempt from the Social Security system. But that changed in 1984, when all federal employees, including members of Congress, were added to the Social Security system.

This myth is often accompanied by another fiction: that members of Congress participate in a lavish, exclusive pension scheme that guarantees 100% of their salaries for life, even if they serve only one term.

The truth isn't quite so juicy. Congressional lawmakers contribute to, and benefit from, pension programs that cover all federal workers. Before 1984, Congress and other federal employees were covered by the Civil Service Retirement System. Workers and lawmakers hired since then are covered by the Federal Employees Retirement System.

The pensions under either system depend on the federal worker's pay and how long he or she worked for the government. By law, the pension can't exceed 80% of the employee's pay in his or her last year on the job. Benefits paid under the system are reduced by the amount of Social Security a participant receives.