Social Security Myths and Realities

Many myths have been spread about proposals to establish voluntary personal retirement accounts under Social Security. These new accounts would enable younger workers to build retirement nest eggs by setting aside a portion of their Social Security taxes in a personal retirement account that could be invested in low-risk bond and stock funds. Some of the most common myths are debunked below.

Myth 1: Personal retirement accounts would privatize Social Security.

Reality: Totally false. The federal government would still collect Social Security taxes, distribute Social Security benefits and be entirely responsible for administering Social Security. Younger workers would simply have the option of setting aside a portion of their Social Security taxes in to a personal retirement account.

Myth 2: People would be forced into personal retirement accounts.

Reality: Personal retirement accounts would be voluntary. No one would be forced to start a personal retirement account. Those who do not opt for a personal retirement account would continue to draw benefits from the traditional Social Security system.

Myth 3: Seniors who count on Social Security might see their benefits cut.

Reality: Dead wrong. Absolutely nothing would change for seniors and those nearing retirement. Voluntary personal retirement accounts would only be available for workers under 55.

Myth 4: Personal retirement accounts offer no security because some younger workers would spend the money instead of leaving it in the account.

Reality: Personal retirement account funds could not be withdrawn until retirement. Account holders would not be allowed to make withdrawals from, take loans from, or borrow against their accounts prior to retirement.

Myth 5: Personal retirement accounts offer no security because some people would spend it all as soon as they retire.

Reality: Personal retirement accounts could not be emptied out all at once, but rather would be paid out over time, as an addition to traditional Social Security benefits. Security procedures would be established to govern how account balances would be withdrawn at retirement.

Myth 6: Personal retirement accounts are too risky because the value of stocks and bonds swing wildly and people investing in companies like Enron could lose everything.

Reality: Personal retirement accounts could not make investments in individual companies. Personal retirement accounts would be limited to investments in a mix of conservative bond and stock funds. Workers would be permitted to allocate their personal retirement account contributions among a small number of very broadly diversified index funds. Personal retirement accounts could not make investments in individual companies.

Myth 7: Personal retirement accounts are too risky because the stock market might drop significantly right on the eve of someone's retirement, wiping out a lot of the gains they have made over the years.

Reality: Personal retirement accounts would be protected from sudden market swings on the eve of retirement. To protect workers as they near retirement, personal retirement accounts would be automatically invested in the "life cycle portfolio" when a worker reaches age 47, unless the worker and his or her spouse specifically opted out by signing a waiver form stating they are aware of the risks involved. The life cycle portfolio would gradually shift the allocation of investments as the individual neared retirement so that it was weighted more heavily toward low-risk bonds.

Myth 8: Personal retirement accounts are a giveaway to Wall Street.

Reality: Personal retirement accounts would not be eaten up by hidden Wall Street fees. Personal retirement accounts would be low-cost. Most of the administrative fees, estimated at .3 percent (30 cents for every $100 invested), would be for recordkeeping, which would be done by the government, not investment management done by Wall Street.