Social Security is arguably the most important social program in the United States. A majority of the more than 41 million retired workers currently receiving benefits count on those benefits for at least half of their monthly income.
Then again, Social Security is also a widely misunderstood program. A MassMutual Financial quiz on basic Social Security concepts conducted in 2015 found that just 28% of the 1,513 people who took the quiz got a passing grade (seven correct answers out of 10, or better). Just one lone quiz taker wound up answering all 10 questions correctly. Even for those who passed the quiz, missing even one question could mean missing out on an opportunity to maximize Social Security benefits.
The biggest Social Security lies you've been told
The results of this quiz highlight a general trend with Social Security: There are a lot of lies and myths that abound and perpetuate the lack of knowledge surrounding this critical program. Today, we'll take three of the biggest lies you've been told (and probably believed) and debunk them for good.
1. Social Security is going bankrupt and won't be there for millennials
Probably the biggest Social Security lie of all is that the program is going bankrupt and millennials will never see a dime of benefits. A Pew Research Center survey in 2014 found that 51% of the millennials they polled believed Social Security was headed toward bankruptcy.
The reason this misconception has lived on for so long is because the long-term outlook for Social Security is pretty dire, according to the Social Security Board of Trustees. The Trustees estimate that Social Security will have completely exhausted its $2.8 trillion in spare cash by 2034, leading to what could be up to a 21% across-the-board cut in benefits. People hear "depletion of spare cash" and assume the worst for the program.
But here's the reality: Social Security is almost guaranteed to never go bankrupt. The reason it'll never go bankrupt can be traced to its primary funding source, the payroll tax. Social Security's payroll tax is a 12.4% tax on earned income between $0.01 and $127,200, as of 2017.
Most workers only pay half that amount (6.2%), with their employers covering the other half. The self-employed are responsible for the full 12.4%. In 2015, payroll taxes generated more than 86% of Social Security's revenue for the year.
In other words, as long as Americans keep working, Social Security will keep collecting payroll taxes. This doesn't mean benefits couldn't be cut at some point in the future, but the program essentially can't go bankrupt because it'll always be generating revenue from working Americans. Heads up, millennials! You will be getting Social Security income when you retire.
2. Social Security's troubles are all the baby boomers' fault
Another pretty common Social Security lie is that Social Security's woes are a direct result of baby boomers leaving the workforce. Over a two-decade period, we're expected to witness a drop in the worker-to-beneficiary ratio from 2.8-to-1 to 2.1-to-1. There simply aren't enough new workers to replace the baby boomers leaving the workforce, and thus, they're often the scapegoats.
But are baby boomers at fault for Social Security's woes? Maybe a portion of it, but they're nowhere near its only problem.
For instance, life expectancies have been on the rise for decades. Over the past 50 years, we've witnessed the average life expectancy in the U.S. jump by nine years -- meaning seniors from all generations will be able to pull a payment from Social Security for a longer period of time, thus straining the program.
Income inequality probably deserves some blame, too. The rich often live considerably longer than the poor -- likely a result of their ease in getting and affording medical care -- and they're also receiving larger payments from the program, given their higher annual earnings throughout their working careers. This allows the rich to more quickly drain a program counted on by lower- and middle-income retirees.
We can also blame American's poor saving habits. Data from the St. Louis Federal Reserve in February showed that just 5.6% of total income is being set aside as savings, which is less than half of what was being set aside 50 years ago, and is well below the 10% to 15% recommended by financial advisors.
Sure, boomers may fall into some of these categories, but it's not solely their fault that Social Security is in trouble.
3. Social Security benefits aren't taxable
The third pervasive Social Security lie you've been told is that your Social Security benefits aren't taxable. While it's true that some beneficiaries won't pay a single cent in tax on their Social Security benefits, data from the Senior Citizens League (TSCL) suggests that a majority of current beneficiaries will owe at least some federal tax on their benefits.
There are two factors worth mentioning here: your income, and an out-of-touch group of lawmakers in Washington.
The taxation of benefits is entirely based on your annual income. An individual earning more than $25,000 annually, or a couple filing jointly with more than $32,000 in annual income, can have half of their benefits taxed by the federal government at ordinary income tax rates. A separate tier for individual taxpayers with income above $34,000 and couples filing jointly with income above $44,000, allows the federal government to tax 85% of your Social Security benefits. In 2015, the taxation of benefits contributed to 3.4% of the $920 billion in revenue collected by the program.
The real issue here is that the taxation of benefit thresholds haven't been updated for inflation in 34 years. The Amendments of 1983 exposed 50% of a beneficiary's Social Security income to taxation if they earned more than $25,000, or $34,000 as a couple. In 1983, this affected about 10% of all households. Today, per TSCL, it affects 56% of all households with seniors.
Then, to make matters worse, 13 states also tax Social Security benefits. If you happen to live in one of these states, you may have to hand back part of your monthly retirement stipend.
Long story short, unless Congress updates its taxation of benefit thresholds for inflation, your chances of owing federal tax on your benefits is probably rising with each passing year.