There's more than a little irony to the fact that your eventual personal financial independence is so dependent on Social Security, a government program that enforces mandatory participation.

Another strange development in the Social Security saga is that it was once known as "The Third Rail" in politics because it was not to be "touched" on by intelligent politicians. Now it has become a magnet for partisans of every persuasion.

Not surprisingly, the increased debate over Social Security has inspired some twisting of the truth about the past, present, and future of the program. So it might be helpful to flesh out the difference between fact and fiction.

"Social Security is broke"

Right now, it isn't. In fact, over the almost 75-year cumulative existence of the program, Social Security has taken in much more money than it has paid out in benefits. Currently the surplus sits at about $2.4 trillion.

According to the latest report from the Social Security and Medicare Board of Trustees, that surplus is expected to continue for another eight years, until 2016.

The system will then cease to earn a surplus, but there is a projected interest amount that will be earned on the accumulated surplus that will prevent the extra money from being tapped until 2025.

After that date, the surplus will be drained over the next fourteen years, until 2037. Then, projected benefits would have to be reduced to about 75% of what they were expected to be.

In other words, in about thirty years, if you were expecting to get $2,000 per month, you would instead get $1,500 per month. The money would go directly from workers to retirees, with no accumulating surplus.

"Then everything's okay"

Well, not really. And you shouldn't necessarily be comforted by the notion that a "pay-as-you-go" Social Security system might be able to fund a majority of projected retiree benefits three decades from now.

Notice that the word "projected" appears several times in the discussion above. The actual figures will be much more dependent on how will the U.S. economy does over the coming decades.

The reason is that high unemployment is a double-whammy to the health of the Social Security system. First, "less workers working" means less people are paying in to the program.

And people laid off in their early sixties who would otherwise prefer to be working might be forced to tap the benefits sooner than they would otherwise prefer.

Finally, even "comfortable" retirees could decide to draw their benefits prematurely because of decimated investment portfolios and/or drastically-lowered income from the low rates paid on conservative, interest-bearing securities.

"At least I'll keep what I'm paid"

In theory and regardless of the amount, once your Social Security check lands in your checking account, the money is yours to spend as you please.

But partly in response to past Social Security mini-crises, several provisions have been enacted that could cause you to net out much less than the amount of the check.

First, you'll get dinged if you initiate your benefits before reaching "normal" retirement age—66 years old for those born after 1943, and 67 years old if you were born after 1960.

Second, taking Social Security before normal retirement age can also cause you to lose benefits if you also have earned income during that period. For 2009, for every $2 over $14,160 you earn annually will reduce your benefit by $1.

Third, Social Security income is technically tax-free to retirees. Unless, that is, your adjusted gross income in retirement, added to your tax-free interest and half of your Social Security, exceeds $25,000 for singles ($32,000 for married couples).

Then half of your benefits are taxed at your top marginal rate. If the formula figure exceeds $34,000 for singles ($44,000 for married couples), 85% of your benefits will be subject to income tax.

These levels, by the way, were instituted in 1983, and have never been adjusted upward for inflation. A cynic would say that the bureaucrats knew full well that without adjusting the amounts, more and more recipients would get snared by the formula, and end paying income taxes on their benefits.

But cheer up. Next month you'll learn when you should take Social Security payments, and what you should do before you initiate the checks to ensure you get the maximum possible amount.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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