Most Americans will collect Social Security benefits at some point in their lives, but there are many things about the Social Security program that are not well-understood. Just to name a few, do you know how much of your living expenses will be covered by your Social Security benefits? Or do you know what would happen if Social Security ran out of money?
These are important questions for Americans to know the answers to before they retire, in order to help make smart retirement-planning decisions. So let's take a look at a few common Social Security misconceptions, and the truth behind each one.
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1. How much of your living expenses will Social Security cover?
According to a Social Security survey by Nationwide Retirement Institute, future retirees expect Social Security to cover 53% of their living expenses, on average. Recent retirees have even more optimistic expectations, and anticipate paying 59% of their living expenses in retirement with their Social Security benefits.
In reality, Social Security is designed to replace just 40% of the average retiree's income. Since most experts suggest that retirees will need 80% (or more) of their pre-retirement earnings for a comfortable retirement, this implies that Social Security will cover half of the average retiree's expenses. So it's fair to say that many future and recent retirees have an optimistic expectation for their Social Security income.
One possible reason for this is that future retirees may be overestimating their Social Security benefits. The Nationwide survey found that the average future retiree expects to receive $1,578 per month from Social Security, while the average recent retiree actually receives $1,487, or nearly 6% less. Forty-one percent of the future retirees surveyed said they came up with their number from an online Social Security calculator, while another 17% simply guessed. Only 30% contacted the Social Security Administration or checked their Social Security statement for an accurate estimate (which you can view by creating an account at www.SSA.gov).
2. Will Social Security run out of money?
Nationwide's survey also found that 78% of future retirees are worried about Social Security's funding running out. Thirty percent said that they expected benefits to be reduced by the time they reach full retirement age, and 17% of future retirees even went so far as to say that they don't believe Social Security will be around at all when they reach full retirement age.
Let's set the record straight. First of all, there's some truth to the belief that Social Security isn't exactly in the best financial shape. While the program has more than $2.8 trillion in reserves right now and is forecast to run a surplus for the next few years, the ongoing retirement of the baby boomer generation is expected to deplete the program's reserves by 2034.
However, even if that were to happen, Social Security's incoming payroll taxes would still be enough to cover more than three-fourths of benefits. In addition, any type of benefit cuts to Social Security are extremely unpopular, and if history is any indicator, something will be done to fix the problem before mandatory across-the-board cuts will become necessary in 17 years.
3. Can you work and collect Social Security at the same time?
Only 41% of future retirees knew that "After your full retirement age, there is no limit on what you can earn by working" is a true statement.
Social Security benefits are restricted by the "earnings test," but many Americans don't realize that this only applies to people who have not yet reached full retirement age.
For a little more clarification, when it comes to working and collecting Social Security at the same time, the Social Security Administration effectively splits beneficiaries into three groups.
- Beneficiaries who will reach their full retirement age after the current calendar year have the strictest limitation. For 2017, their Social Security benefits are reduced by $1 for every $2 they earn in excess of $16,920 for the year, or $1,410 per month.
- Next, Social Security recipients who will reach their full retirement age during the current calendar year are subject to the earnings test, but a much more generous version. This group can earn up to $3,740 per month, and excess earnings only reduce the benefit by $1 for every $3 over the threshold. Only the months before full retirement age will be reached are considered for this test.
- Finally, Social Security recipients who have already reached full retirement age have no limitation whatsoever on the amount of money they can earn. Their Social Security benefit will not be reduced as a result of their earnings.
Know the basics before you retire
The bottom line is that the smartest thing you can do to maximize your own Social Security benefits is to learn all you can about the program before you retire. For example, 42% of Americans don't know that Social Security benefits are inflation-protected, and 19% think that the benefit reduction for claiming early is temporary (it isn't).
Many others don't know how Social Security spousal benefits or survivors benefits work, nor do they realize that Social Security income is taxable in many cases.
In a nutshell, there's a lot more to Social Security than simply filling out a form and collecting a monthly check.
