Most of us will be receiving Social Security benefits in our retirement, and for many of us, it will be rather important and much-needed income. Thus, it's critical to understand Social Security, and how you might make the most of it, instead of acting on misconceptions. Here are 10 Social Security myths, debunked.
Myth 1: Social Security is running out of money and may not be around soon.
Fear not -- things are not quite as bad as you may have thought. Between incoming taxes and the interest it earns, minus benefit checks written, the Social Security trust funds have been running a surplus in every year since 1984. Surpluses are likely to stop in 2020, though, at which point the Social Security system can rely on incoming interest payments to make up the deficit -- for a while.
According to several government estimates, Social Security funds are likely to become insolvent between 2033 and 2037, if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%. That's not great, but it's far from shrinking by 100% -- and there's a good chance that the system will be shored up, one way or another.
Myth 2: It will be very hard to make Social Security solvent again.
There are many ways to shore up Social Security, though politicians don't always agree on them. For example, fully 77% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees from its current 6.2% to 7.2% in 2022, and 8.2% in 2052.
Myth 3: The money you pay into the system is the money you receive from it later.
Many people assume that the money taken out of your paycheck for Social Security is kept on your behalf, growing with interest, until it's paid out to you in retirement benefits. Not so. The system pays current benefit recipients with taxes collected from people currently working.
This has worked well for a long time, but now people are living longer and collecting benefits for more years. Back in 1960, the contributing-workers-to-beneficiaries ratio was 5.1, with about 73 million workers supporting close to 14 million beneficiaries. As of 2013, it was just 2.8, with 163 million workers supporting 57 million beneficiaries -- and it's expected to hit 2.1 by 2035. This is stressing the system, and making eventual changes to it probable.
Myth 4: Everyone contributes equally into the system.
Everyone's income faces the same tax rate for Social Security -- up to a certain capped annual earnings amount. (As of 2016, the cap was $118,500.) Thus, someone earning $118,500 in 2016, and someone earning $5 million, will pay the same Social Security tax -- a fact that many see as unfair. (By the way, taxing all of each worker's income instead of just the first $118,500 of it would also wipe out much of the Social Security trust-fund shortfall; specifically, it's been estimated that 71% could be wiped out by eliminating the earnings cap over a 10-year period.
Myth 5: The Social Security benefits you receive are based on your last 10 years of income.
Nope. The calculations determining your benefits are based on the income you earned in your 35 highest-earning working years. The Social Security rules do require you to accumulate 40 work credits, which is typically achieved in 10 years, in order to qualify to receive benefits.
If you've only worked 30 years, then the formula will be including five years' worth of zeroes. So it's best to have 35 years' worth of earnings -- and the higher, the better. (if you work 38 years, your three lowest-earnings years will be tossed out, replaced by higher-earning ones.)
Myth 6: Social Security doesn't pay much.
The average monthly retirement benefit was recently $1,347. That amounts to $16,164 per year, and probably doesn't seem like that much. Note, though, that if your earnings have been above average, you'll collect more than that -- up to the maximum monthly Social Security benefit for those retiring at their full retirement age, which was recently $2,639 -- or about $32,000 for the whole year.
Even the smaller benefits are meaningful to most people. According to the Social Security Administration, the majority of elderly beneficiaries get 50% or more of their income from Social Security, while 22% of married elderly beneficiaries, and 47% of unmarried ones, get fully 90% or more of their income from Social Security.
Myth 7: Those who never worked for an employer will never get Social Security benefits.
If you've worked for yourself and have filed tax returns as a self-employed person, you will have paid into the system and can expect benefits. Self-employed workers actually pay twice as much into Social Security as employees do.
Employee income is taxed at 6.2% for Social Security, with employers contributing an additional 6.2%. Those who are self-employed pay both the employer and employee portions, forking over a whopping 12.4%.
Meanwhile, even if you've never worked outside the home -- if you are or have been married -- you can still collect benefits based on the earnings record of your current, ex-, or late spouse -- generally between 50% to 100% of the spouse's benefit. (Divorcees will need to have been married for at least 10 years and not have remarried.)
Myth 8: The retirement age at which you start collecting benefits is 65.
We often think of 65 as the normal retirement age, but in order to strengthen the Social Security system, the normal (or "full") retirement age was increased. For those born in 1937 or earlier, it's 65, and for those born in 1960 or later, it's 67. For those born between 1937 and 1960, it's somewhere in between.
Myth 9: There isn't much you can do to change the amount you get.
This is wrong, too. You can start receiving benefits as early as age 62 and as late as age 70. For every year beyond your full retirement age that you delay starting to receive benefits, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter.
Retire early, and your benefits may be up to about 30% smaller. Note, though, that the system is designed so that total benefits received are about the same no matter when you start collecting, for those with average life spans. Checks that start arriving at age 62 will be considerably smaller, but you'll receive many more of them. You can also increase your benefits by working longer, earning more, and/or coordinating strategies with your spouse.
Myth 10: Social Security benefits are not taxable.
They are often not taxed, but they could be taxed. If you're working, or have other significant income while collecting Social Security benefits, up to 85% of your benefits might be taxed.
There's more to learn about Social Security -- especially about strategies you might employ in order to increase your benefits.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.