"No greater tragedy exists in modern civilization than the aged, worn-out worker who after a life of ceaseless effort and useful productivity must look forward for his declining years to a poorhouse. A modern social consciousness demands a more humane and efficient arrangement."
-- Franklin Roosevelt
President Roosevelt is the one who signed Social Security into law, and it has become a critical part of Americans' retirement security ever since. Indeed, most elderly beneficiaries get 50% or more of their income from Social Security. It's therefore rather important that we not base any of our retirement-related thoughts or actions on Social Security myths.
Here are nine myths to set yourself straight on.
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, then are 10 Social Security myths, debunked.
Myth No. 1: Social Security is running out of money. The Social Security program is not all set for the foreseeable future, but the situation is not as bad as you might fear. Between taxes taken in and interest earned on them, less benefit checks written, the Social Security trust funds have been running a surplus in every year since 1982. Surpluses are likely to stop around 2019, 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 be depleted by 2034 -- if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%, according to the Social Security Administration, leaving beneficiaries with about 75% of what they were expecting. That's not exactly good news, but 75% is far better than the 0% some people expect. Fortunately, there's a decent chance that the system will be shored up, one way or another. There are many possible fixes, though politicians don't 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 No. 2: The money you pay into the system is the money you receive from it later. Some people assume that when money is removed from their paycheck, it goes into an account expressly for them -- growing in value over time and provide them with income in your retirement. That's not the case, though. The taxes from all the paychecks of people currently working are pooled and then paid out to retirees collecting their benefits. So your contributions are supporting others, and when you retire your benefits will come from the earnings of those working. That has been a great system 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, making eventual changes to it probable.
Myth No. 3: Everyone contributes equally to Social Security. Everyone's income does face the same tax rate for Social Security -- but it's only up to a certain capped annual earnings amount. (As of 2017, the cap was $127,200.) Thus, someone earning $127,200 in 2017 and someone earning $5 million will pay the same Social Security tax -- a fact that many see as unfair. Taxing all of each worker's income, instead of just the first $127,200 of it, is another proposed fix to the system, and it's been estimated that 71% of the trust fund shortfall could be wiped out by eliminating the earnings cap over a 10-year period.
Myth No. 4: The Social Security benefits you receive are based on your last 10 years of income. Your benefits are based on the income you earned in your 35 highest-earning working years (adjusted for inflation). The rules do require you to accumulate 40 work credits in order to qualify for benefits, though, which is typically achieved in 10 years.) If you've only worked 30 years, the formula will include five years' worth of zeroes, which will give you smaller benefit checks than if you'd worked for 35 years. If you work for more than 35 years, your lowest-earning years will be dropped, so working a little longer can be a way to boost your benefits.
Myth No. 5: Social Security is designed to replace most of your pre-retirement income. Nope. According to the Social Security Administration, retirement benefits for those with average earnings will likely replace about 40% of your pre-retirement earnings. Those who had above-average earnings in their working years can expect a lower replacement rate, and vice versa. The average monthly retirement benefit was recently $1,364, which amounts to $16,368 per year. If your earnings have been above average, though, 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 $2,687. (That's about $32,000 for the whole year.)
Myth No. 6: Those who've never drawn a salary will never get Social Security benefits. Don't assume you're out of luck if you've been a homemaker or have worked for yourself for all your life. If you 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 No. 7: The age at which you start collecting benefits is 65. We often think of 65 as the normal (or "full") retirement age, and for a long time, that was indeed the case for all retirees. But in order to strengthen the Social Security system, the age was increased. For those born in 1937 or earlier, it's 65, for those born in 1960 or later, it's 67, and for those born between 1937 and 1960, it's somewhere in between.
Myth No. 8: Your benefits are fixed. Don't assume that your benefits are what they are. There are some ways that you can get more out of the system.For example, know that 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. Thus, it's not necessarily dumb to start collecting early -- as most retirees actually do. Other ways to increase your benefits include working longer, earning more, and/or coordinating strategies with your spouse.
Myth No. 9: Social Security benefits are not taxable. They are often not taxed, but they could be taxed. If you are working or have other significant income while collecting Social Security benefits, up to 85% of your benefits might be taxed.
The more you learn about Social Security, the more effective your decisions regarding it will be. There are various strategies, for example, that can help you get the most out of the program.