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The five nuttiest rumors about Social Security
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In last week's column, I reviewed the ten most common misconceptions people have about Social Security benefits. But the program side of Social Security is only half the picture. There is also the policy and political side of our nation's bedrock retirement system. In fact, because of crazy rumors spread on the Internet, far more people have been misled into believing nutty stories about Social Security policies, especially when it comes to financing the program. I've discussed these issues many times before in this column, but based on the emails I get, no one is listening!

Nutty rumor number one: Congress has stolen Social Security funds and used the money for other purposes.

The facts: This isn't so much a nutty rumor as it is a gross distortion of the facts. I've worked with Social Security issues for 40 years now, and I don't think a day has gone by in the past four decades in which I haven't heard some version of this story.

I like to explain it this way. Every day, about $2 billion funnels into the Treasury Department in the form of Social Security tax collections. Every nickel of that money is immediately converted to U.S. treasury bonds. Three times each month, a portion of those bonds is redeemed to pay for the Social Security benefits sent out to 50 million recipients. The rest of the money is spent to help fund other operations of government. But the Social Security system still holds the treasury notes — and those notes earn interest just like all other U.S. treasury securities.

If you have some treasury bonds as part of your investment portfolio, do you complain because the government has spent your money (the money you invested in those bonds) for other purposes? Of course not! You expected them to do just that. But you feel safe because you hold the bonds. Likewise, the Social Security trust funds are safe because they still hold the bonds.

I get emails almost daily from readers who propose alternate forms of financing the Social Security system. Many argue that the funds should be managed like those in other large pension or insurance portfolios. But these folks fail to comprehend the scope of the program. Social Security makes up about one-fifth of the entire budget of the United States. Comparing Social Security to another pension plan is like comparing the Bank of America to a child's piggy bank.

Nutty rumor number two: Social Security trust fund bonds are simply worthless IOUs. They are not worth the paper they are printed on.

The facts: Millions of investors around the world hold U.S. treasury bonds in their portfolios. Do they think of them as worthless IOUs? Quite the contrary: Even with all the concerns about deficits and debt ceiling limits, they are often considered the safest investment a person can make. The same is true for the bonds held by the Social Security system.

There is a lot more to this funding story than I can explain in this short column. For a more comprehensive discussion of the issues, send me an email and ask for a free digital copy of my fact sheet, "Myths and Facts About Social Security Financing."

Nutty rumor number three: President Lyndon Johnson moved Social Security money to the general fund so he could spend it.

The facts: President Johnson merely changed an internal government bookkeeping practice, a procedure that has been followed by every administration (Democratic or Republican) since. Social Security's income and expenditures have always been kept on a completely separate set of books. Johnson simply merged those Social Security ledgers into the government's overall budget. He did it for a sneaky reason — Social Security's surpluses helped mask the huge deficits he was running up because of the Vietnam War. But that bookkeeping sleight-of-hand doesn't change the way Social Security has always been financed.

Nutty rumor number four: Social Security is going bankrupt because of all the deadbeats who are being paid disability benefits. And this is siphoning money away from more deserving seniors.

The facts: The Social Security disability program is funded and managed separately from the retirement program. Anything paid to someone with a disability does not take one nickel away from a retired person.

And despite all the allegations of fraud to the contrary, the Social Security disability program is known for having very stringent eligibility rules. You simply don't qualify for benefits unless you have a very severe disability. Also, people who get disability benefits have worked and paid Social Security taxes, just like those getting retirement benefits.

Many people confuse the Social Security disability program with the Supplemental Security Income (SSI) disability program. SSI is a welfare program that is run by the Social Security Administration. SSI benefits are paid for out of general tax revenues, not Social Security taxes.

Nutty rumor number five: Social Security benefits are routinely paid to illegal immigrants.

The facts: You must be an American citizen, or you must be living in this country legally, to qualify for any kind of Social Security benefit. And even more stringent rules apply to SSI. With some very minor exceptions, you must be a U.S. citizen to qualify for SSI.

About one-half of one percent of all Social Security benefits paid is sent overseas. But the vast majority of those benefits are going to U.S. citizens who have retired and moved to another country. SSI benefits cannot be sent overseas.