5 myths about Social Security

System reform is a hotbed of controversy. But to move ahead, we've got to identify the myths, toss them aside and refocus on realities.

You can't write about Social Security and not get flooded with angry e-mails representing all points of the political spectrum. From those who dub it "Socialist Insecurity" to those who hold their checks to be an inalienable right, people often have passionate and firmly held beliefs about the system.

Unfortunately, sometimes those beliefs are based on myths. In the interest of more honest debate, let's review some of these legends.

Looking for the cash hoard

What isn't in the trust fund is a big hoard of cash.

Three-quarters of the money that's collected in Social Security taxes goes right out the door again in the form of benefits to Social Security recipients. The surplus that isn't needed to pay benefits is loaned to the federal government to pay for other programs.

In return for this loan, the trust fund gets IOUs in the form of special-issue, interest-paying Treasury bonds. The interest isn't paid in cash, however; the Treasury issues the fund additional bonds for the interest amount. Last year, the fund was credited with $80 billion in interest; the total value of the securities is about $1.5 trillion.

Critics often deride these bonds as "a bookkeeping entry" or a fiction, but they're real obligations of the U.S. government, said Steve Goss, Social Security's chief actuary. In the past, they've been cashed in when Social Security or its sister program, Medicare, temporarily ran low on funds. The last time was in the early 1980s.

"They're backed by the full faith and credit of the U.S. government," Goss said. "They're every bit as real . . . as any savings bond or Treasury bond any individual might hold in society."

The problem, of course, is that the government now owes the trust fund so much money -- and relies on its surplus so heavily -- that real problems will be created when it comes time to cash in those IOUs. Uncle Sam is going to need to find another source of income to replace the surplus (or cut spending, or borrow money from somewhere else), plus come up with cash to pay the bonds it's already issued.

Myth No.2: Congress doesn't pay into Social Security, so it doesn't care about fixing the crisis. The idea that U.S. lawmakers don't pay into Social Security is 20 years out of date. Before 1984, U.S. representatives and senators -- like all other federal employees -- weren't covered by Social Security and didn't pay into the system. Congress passed a law in 1983, which took effect the next year, requiring all its members (and all federal employees hired after that year) to participate in the system.

This myth is often accompanied by the assertion that Congress participates in a private pension scheme that pays them their salaries for the rest of their lives. In fact, the Civil Service Retirement System, which covered federal employees in earlier decades, was closed to new participants after 1983. The pensions available under this old system depend on the federal worker's pay and tenure with the government, but by law can't exceed 80% of the final year's pay. Benefits paid under the system are reduced by the amount of Social Security the participant receives.

The reason Congress hasn't fixed the Social Security crisis is politics. The most likely solutions -- raising taxes, cutting benefits, establishing private accounts or some combination of the three -- all face strong opposition. In addition, the people currently receiving benefits are represented by one of the strongest, most politically-connected lobbies in existence: AARP. The 20-something workers who likely will pay the cost for congressional inaction don't have nearly the same clout.

Life expectancy and disappearing assets

But those statistics reflect the higher infant and child mortality rates of the times. If you survived childhood, you had a good shot of living beyond retirement age. Men who lived to age 30 in 1935 could expect to last another 37 years. Women at 30 had a 40-year average life expectancy.

If you actually reached retirement age, your prospects for a relatively long retirement were good. Men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. (Today, men of the same age can expect to live another 16 years, and women 19 years.)

In fact, about half of the 30 state pension plans that existed in 1935, and many of the private pension plans, used 65 as a retirement age. Most of the others used age 70. Social Security's creators thought 65 was the more reasonable age and believed the system could be self-sustaining if they chose that age.

Myth No.4: Social Security will run out of money in 2042. Social Security will still be receiving payroll taxes from workers in 2042. What may have disappeared by then are the assets in the Social Security trust fund.

Even that isn't cast in stone, however. The Congressional Budget Office in June projected that the trust fund wouldn't dry up until 10 years later, in 2052. The CBO used different assumptions than those used by the Social Security Administration, projecting faster growth in worker earnings, higher interest rates and lower inflation.

Here's how the Social Security Administration projects the timeline:

• In 2018, Social Security will begin paying out more than it takes in. For the first time, it will have to use the interest being paid on the securities it holds in order to meet its obligations.

• In 2028, Social Security would have to start redeeming the securities themselves.

• By 2042, Social Security would have cashed in the last security, and the system would have enough revenue to pay out only 73% of promised benefits. That percentage would drop over time if Congress failed to act.

Demographics and add-ons

In any case, foreign workers who live in the United States have to work and pay taxes into the system for at least 10 years to qualify for Social Security benefits, just as U.S. citizens do.

What will really hurt Social Security are two factors: demographics and the scope of Americans who are covered.

In 1950, there were 16 workers for every person receiving Social Security benefits. By 2015, there will be only three workers for each beneficiary. Fifteen years after that, the ratio will be down to 2.2 to 1.

Even that demographic shift wouldn't be such a disaster if Social Security hadn't expanded far beyond its original mandate of providing retirement benefits for workers. About 30% of Social Security's total benefits are paid to retirees' dependents and survivors and to disabled workers.

Here's a summary of the add-ons over the years:

• In 1939, five years after Social Security began, Congress added payments for the families of workers who died, and for retirees' dependents (such as stay-at-home spouses).

• In 1956, Congress added disability benefits for workers.

• In 1974, Supplemental Security Income or SSI was established as a welfare program for low-income seniors and people with disabilities.

• In 1965, Congress established Medicare to pay health-care costs for seniors.

Of these add-ons, however, only the first two -- disability benefits and payments to dependents, widows, orphans -- actually affect Social Security's bottom line.

SSI benefits are paid out of the federal government's general revenues. Medicare is paid for with its own tax and has its own trust fund.

(Medicare is in far worse shape than Social Security. Medicare's trustees project insolvency in 2019, 23 years before the earliest date Social Security is scheduled to run aground. Medicare has an unfunded liability of $27.7 trillion over the next 75 years, while Social Security's unfunded liability for the same period is $3.7 trillion. To put this in perspective, the entire national debt is currently about $7 trillion.)

Like Medicare, the disability insurance program also has its own tax and its own trust fund. But the disability fund's results are combined with that of the retirement system when Social Security insolvency projections are made, Goss said, and account for $700 billion of the $3.7 trillion unfunded liability.If the disabled, the dependent and the survivors were booted out of the system, Social Security could pay for itself --assuming tax levels remained the same.

"The system would be more than adequately funded," Goss said, "if only retirees were receiving benefits."

That's not a solution Goss -- or anyone else who really thinks about it -- could endorse. Even if it were morally viable, kicking out all the widows, orphans, disabled and stay-at-home spouses is politically untenable.

So we're back to choosing from the same controversial list of options: cutting benefits, raising taxes, privatizing some or all of the system. What we choose, though, should be based on the realities of the system -- not the myths.