Misinformation on the internet is not uncommon. But myths of all types - including the ones surrounding the Social Security program - have been around for far too long. Unfortunately, those myths hurt many people, especially those who plan their futures around them.
Today, we’re going to debunk eight common Social Security myths!
Many people believe that Social Security is going to run out of money. Younger generations even say they aren’t counting on having Social Security income when they retire. While this mindset encourages saving for retirement in other ways, it’s also not true.
The Social Security program is a pay-as-you-go system. Employers and employees who are currently paying taxes are funding a large portion of the current benefit payments. As long as this practice continues, the program will not go bankrupt. That being said, funding challenges do exist. Until recent years, funds coming into the program have always surpassed funds going out. However, people are living longer, and the retiree population is growing at a faster rate than the working population. More money is leaving the program than is coming in.
Still, money from taxes will continue to flood in, even if the current funds get depleted. Benefits for future retirees will be available, but maybe not to the full amount they are today. Current estimates predict those funds will cover about 78% of the future benefits.
This might be the most unfortunate Social Security myth. Social Security was never meant to be a retirement plan. When it was created, it was meant to help disabled individuals and families with limited to no income. It promised to supplement a retirement income, not be the sole provider.
This myth led many people to forgo retirement savings and investing. Those who held this belief are now struggling to afford the minimum expenses that come with living. Contributions you make to Social Security while paying taxes are not held in an individual account just for you. In fact, the program only replaces approximately 40% of any preretirement earnings.
This was only true prior to 1984. At that time, the Social Security program faced depletion. To fix the problem, the government started taxing benefits so money would flow back into the program. However, some beneficiaries still receive untaxed Social Security income.
Single individuals whose income is between $25,000 and $34,000 or married couples whose income is between $32,000 and $44,000 have only half of their benefits taxed. No tax is paid on amounts below those thresholds. Above those thresholds, 85% of the benefit amount is taxed.
In addition, some states apply state taxes to Social Security benefits. Rules vary by state.
Like myth three, this myth has some basis in truth. When the Social Security program started in 1935, 65 was the full retirement age. Full retirement age or FRA is the age at which a person receives 100% of their calculated Social Security benefits.
Increasing the FRA was another change that occurred in 1984. The last year that FRA was 65 was 2002. The new FRA is being slowly phased in. People who were born in 1955 have a full retirement age of 66 and two months. From that point, the FRA increases by two months every year, ending at age 67. Anyone born in 1960 or later has a full retirement age of 67. While you can begin collecting Social Security benefits sooner, the amount is reduced.
Another reason people often think that the full retirement age is 65 is because that is the age at which you can enroll in Medicare.
Considering the current rate of inflation, it’s easy to see why so many people think Social Security income should increase every year. While this may be the case in some years, it is not a guarantee.
COLA, the Cost-of-Living Adjustment, is calculated based on the federal index prices of consumer goods and services. Any increase is determined by reading the index from the third quarter of one year to the third quarter of the next. If there is not a measurable increase, Social Security benefits are not adjusted. In fact, there have been three years in which no increase occurred.
Individuals who wish to continue working while collecting Social Security have limitations on how much they can earn. However, this is not a permanent limitation, and it does not apply to everyone.
The limitation only applies to individuals who are not yet of full retirement age. If they earn over a certain amount, which varies each year, their benefits are reduced. When they reach FRA, the limits no longer apply. Plus, the benefits will be adjusted upward over time, thereby recouping any formerly reduced benefit amounts.
Again, this one is only partially true. Yes, your ex-spouse is entitled to collect benefits based on your earnings. Those benefits could amount to up to 50% of the amount you are entitled to. However, benefits your ex-spouse receives based on your income do not impact the amount you are eligible for.
The Social Security program has two trust funds. One is for individuals with disabilities, and the other is used for current retirees and/or their survivors.
The government does borrow money from Social Security. They invest the funds in U.S. Treasury securities and then spend earnings on other programs. However, they have to put any amount borrowed back into the program, plus some interest. The Social Security program redeems treasury bonds to pay benefits. According to records, the government has always repaid borrowed amounts. In fact, in 2019, they also contributed over $80 billion in interest.
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