8/20/2012 2:15 PM ET|
5 myths about Social Security
The rest of us would love to have a pension that pays 80% of our final pay, but the reality is that few federal workers, including lawmakers, will get that much. They simply won't participate in the system long enough. The average monthly benefit payment for federal workers is a bit more than $2,200, according to the U.S. Office of Personnel Management.
The reason Congress hasn't fixed the Social Security crisis is not indifference. It's politics. The most likely solutions all face strong opposition. If Social Security is going to get repaired, your lawmakers need to hear from you that you want it done, even if it means some difficult or unpopular changes.
Myth No. 4: Illegal immigrants are draining the system.
The U.S. has a serious illegal-immigration problem. More than 11 million people -- about 4% of the total U.S. population -- are living here without authorization.
This undocumented population has a heavy impact on schools and the health care system, among other things. But its effect on Social Security is actually positive. Illegal immigrants contribute billions of dollars a year, according to Social Security's chief actuary, Stephen Goss. Over the past few decades, the net positive contribution totals somewhere between $120 billion and $240 billion.
In other words, Social Security would be in worse shape than it already is without illegal immigration.
Undocumented workers pay taxes into the system under stolen Social Security numbers but rarely try to collect benefits, since they're not legally entitled to them. Some apply illegally, of course, and Goss estimates that such fraud costs the system about $1 billion a year, far less than what other illegal immigrants pay in.
To put the fraud into perspective: The Social Security system sends out $59 billion in checks every month, or more than $700 billion a year.
What's really causing Social Security's financial crunch is simple demographics: fewer workers supporting more retirees and other beneficiaries.
By the way, there's another, much larger group that doesn't benefit from its contributions to the system. This group includes married working women who make less than their husbands.
Married people can claim benefits based on their own work histories, or they can opt to get essentially half of their spouse's benefit. (You have to choose; you can't claim both at the same time.) So if your spouse's benefit is $1,000 a month, you would get a spousal check of $500.
That smaller spousal check is still greater than what many working women would qualify for, based on just their own work histories. And this spousal benefit is the same whether or not they worked. So these women get no benefit from all the payroll taxes they've contributed to the Social Security system.
Men can face the same situation if they're married to high earners. But typically it's women who are affected, since they usually earn less and have work histories that are often interrupted (as they stay home to care for kids or aging parents, for example).
Myth No. 5: I could earn better investment returns on my own.
Perhaps you could, but Social Security isn't an investment program. It's insurance, designed to insulate you against poverty in your old age.
Social Security is meant to provide you with a steady check in retirement that you can't outlive or lose in a stock market downturn. Many people wind up needing that income: Social Security provides the majority of income for more than half of people aged 65 or over. It makes up 90% or more of income for 43% of singles and 22% of married couples.
If you want an investment program that allows you to take your chances -- well, you've got that. You can (and should) invest through workplace plans like 401k's or on your own through individual retirement accounts and taxable accounts.
But all the evidence so far suggests that most people do a truly bad job of managing their retirement funds. They start too late, save too little and cash out when they leave jobs. They borrow against their savings or tap it for other expenses. They take too little or too much risk, hiding their money in cash accounts or overdosing on company stock, for example. They fail to rebalance their asset allocation. Some panic and sell in downturns rather than hanging on.
You may well be the exception. Even if you are, you may still be glad to have Social Security -- rather than yourself -- supporting parents and other relatives who didn't do as good a job providing for their last years. And if it turns out you're not the investing genius you think you are, you'll still have Social Security to fall back on.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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