Telling Tales

WHEN YOU WERE growing up, did you ever hear stories like these?

• “If you swallow gum, it will stay in your stomach for seven years.”
• “If you keep making that face, it will freeze that way.”
• “If you drink coffee, it will stunt your growth.”
• “If you watch too much TV, your eyes will turn square.”

In hindsight, these stories are funny and harmless. But problems can arise if, as adults, we make important decisions based on misinformation. Within the world of personal finance, the topic that seems most susceptible to tall tales is Social Security. I regularly hear people attack it, arguing that it’s a Ponzi scheme or that it’s going to go broke.

While the program isn’t perfect, I believe it’s far better than its reputation suggests. Below are five common myths about Social Security, along with my views.

Tall Tale No. 1: Social Security is going broke.

Fact: It’s true that there are special trust funds that hold Social Security’s surplus tax revenue. Those funds, however, are not Social Security’s only source of funding. The reality is, Social Security is an obligation of the federal government. Unlike a private company’s pension plan, the government will have to continue making payments, whether or not there’s any surplus remaining in those trust funds. Yes, in the future, Congress could vote to reduce benefits. But the system cannot truly “run out of money.”

Tall Tale No. 2: It’s just a retirement plan.

Fact: While Social Security is best known for its retirement benefits, it also provides two other important programs: disability insurance and life insurance, in the form of survivor benefits. With a few exceptions, all three programs are available to every American.

Tall Tale No. 3: Since Social Security provides disability benefits, there’s no need for private disability insurance.

Fact: While Social Security provides a disability program, I still recommend private insurance. That’s because the bar is much higher to receive benefits from Social Security than it is from a private insurer.

Tall Tale No. 4: If I haven’t worked, I’m not entitled to any benefits.

Fact: Social Security was designed in an earlier era, when households typically had only one breadwinner. For that reason, the system will pay retirement benefits to both a retired worker and to that worker’s spouse, even if the spouse never worked. This is a separate benefit, on top of the worker’s own benefit, and does not reduce the worker’s benefit. Benefits are also available to ex-spouses.

Tall Tale No. 5: I should sign up at my earliest possible opportunity.

Fact: Most likely not. Again, Social Security was designed in a different era, when life expectancies were shorter. As a result, the benefits get much more generous if you can wait. Your monthly check will permanently increase by eight percentage points per year, plus inflation, for each year that you wait beyond your “full retirement age” of 66 or 67, up until age 70, at which point the benefits don’t increase further.

Adam M. Grossman’s previous articles include Nothing to Chance, In the Cards and You—But Better. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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