Social Security provides a welcome stream of guaranteed revenue in retirement, but you could be in for a rude awakening if you don't understand how the program works. There are a lot of misconceptions out there, which is understandable, because the program has changed over the years and more changes are on the horizon.
But it's time to set the record straight. Here are four of the most common misconceptions about Social Security that should be laid to rest.
1. You get your full Social Security benefit at age 65.
This was the case when Social Security was first created and for many years afterward. But as funding the program became more and more difficult, the government began moving the goalposts. Today, full retirement age is somewhere between 66 and 67, depending on when you were born.
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You can start Social Security as early as 62, but you'll receive a smaller amount per check to account for the extra months you're receiving benefits before your full retirement age. If you start at 62, you'll only receive 70% or 75% of your scheduled benefit per check, depending on your full retirement age. If you want the largest check possible, delay benefits until age 70 if you can. Then, you'll receive 124% or 132% of your scheduled benefit per check, again depending on your full retirement age.
2. Social Security is disappearing.
This is the most pervasive and disturbing myth for working adults today, but it's not true. Social Security is still going to be around for you and your children and possibly their children, too. That said, it's not all rosy.
Social Security's trust funds will be depleted by 2035, at which point it will only be able to pay out 80% of its promised benefits unless the government makes some changes. No one knows what those changes will look like yet, but some proposed suggestions include:
- Reducing benefits
- Raising the ceiling on income subject to Social Security tax ($132,900 in 2019)
- Raising the Social Security tax rate (currently 12.4%, split evenly between employee and employer, unless you're self-employed)
- Reducing the cost-of-living adjustments (COLAs) that help the value of Social Security keep pace with inflation
- Raising the full retirement age
The government might choose one or a combination of these strategies, but chances are good that Social Security won't be as valuable in the future as it is today. Retirees will have to rely more heavily on their personal retirement savings to make up the difference.
3. Social Security will cover all of your expenses in retirement.
This myth is far less common than the myth that Social Security is soon to be a thing of the past. But in case anyone still believes it, it's not true and it never was. The Social Security Administration only intended Social Security to cover 40% of the average earner's pre-retirement income, though it does not indicate what average earnings are.
Low-income households may find that Social Security covers more than 40% of their retirement expenses, but for most households, it will probably cover less than this, especially given the likelihood that its value will decrease in the coming decades.
You can estimate your Social Security benefit in today's dollars by creating a "my Social Security" account. Use this and your estimates of your annual living expenses in retirement to estimate what percentage of your retirement income Social Security will replace. Then, make a plan to come up with the rest on your own.
4. Social Security benefits are tax-free.
This is another myth that was once true. When Social Security was first created, the government didn't tax benefits, but this is no longer the case today. If your tax filing status is single, head of household, married filing separately, or qualifying widow(er) and your annual income exceeds $25,000, you could owe taxes on your Social Security benefits. The same goes for married couples filing jointly whose annual income exceeds $32,000.
The formula for calculating Social Security taxes is complicated and beyond the scope of this article, but here is a detailed explanation if you're interested. Depending on your tax filing status and your income, you could owe federal taxes on up to 85% of your Social Security benefits. Some states tax Social Security benefits as well, though each state has its own income thresholds to determine when Social Security benefits are subject to tax.
That doesn't mean you'll lose all of your benefits back to the government, but it could raise your tax bill in retirement. There are steps you can take to reduce your taxable income, like drawing more upon Roth retirement savings if you've got them, or limiting your spending in retirement, but you may not always be able to avoid paying taxes on your Social Security benefits. In that case, your next best option is to be prepared. Talk with a financial advisor or an accountant if you're unsure about how Social Security benefit tax may affect you.
Now that we've sorted out the truths from the lies, you can use this information to help you make educated decisions about when to start Social Security and how much of your retirement savings it will actually cover.
