Social Security is one of the most important and widely used benefit programs in America, but it's also one of the most widely misunderstood. In fact, millions of Americans believe a few pervasive myths about Social Security that are just not true. Here are three of them.
1. It will go bankrupt
There's widespread fear among Americans that Social Security will go bankrupt, with as many as 67% of workers worried about the program's future. But the reality is that it can't run out of money unless it's restructured and Congress changes its funding source. That's because it collects billions each year from payroll taxes from current workers, as well as from taxes on benefits from around half of all current retirees.
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This doesn't mean Social Security isn't having financial problems -- it is. The program has a trust fund it can tap to cover any shortfalls when payroll taxes aren't enough to pay out all of the promised benefits. Unfortunately, the combined trust fund for Social Security retirement, survivors, and disability benefits is expected to run dry in 2035.
But even if this happens, which is unlikely since lawmakers will probably act to stop it, payroll taxes will keep coming in. If the trust fund does run dry, the revenue being collected should still be enough to pay out 76% of promised retirement benefits. Yes, this means a huge, painful benefits cut would happen if there isn't a financial fix -- but retirees will still get most of the money they were promised.
2. If you claim early, your benefits are recalculated at full retirement age
Social Security has designated an age between 66 and 67 that's classified as your full retirement age (FRA). Your FRA is based on your birth year, and you have to claim at that age to receive your standard benefit amount. Claiming before it would mean you're subject to early filing penalties, so your monthly check size is reduced while claiming after it would raise the amount of income you get due to delayed retirement credits.
Unfortunately, as many as four in 10 Americans believe that if they claim Social Security ahead of FRA, they'll have their benefit recalculated so it goes up when they reach full retirement age. That won't happen, though -- once you accept a reduced benefit, you're stuck with it for life (unless you undo your claim).
Filing ahead of FRA could result in as much as a 30% reduction in the size of your monthly checks. If you accept this benefit cut with the assumption your income will go up at FRA, you're going to be in for a very unpleasant surprise that could affect your financial security throughout your retirement years.
3. Benefits aren't taxed
Since you pay into Social Security your entire working life, you may assume the benefits you get as a senior aren't subject to tax. Unfortunately, if you make this mistake, you could be looking at some unexpected costs. That's because as many as 50% of senior retirees have to pay federal income tax on their benefits.
Benefits aren't taxed for everyone, but once your countable income reaches a certain threshold, you'll owe money to the IRS. Countable income includes half your Social Security benefits plus other taxable income. If yours is above $25,000 as a single filer or $32,000 as a married joint filer, you'll be taxed on up to 50% of your benefits. And if your countable income exceeds $34,000 as a single or $44,000 as a married filer, up to 85% of your benefits become taxable.
Thirteen states also tax benefits under at least some circumstances, although that number will be down to 12 by 2022.
Don't make decisions based on Social Security myths
The last thing you want is to make the wrong decision about claiming your benefits because you've bought into these myths. The reality is that the program will continue to provide benefits even if the trust fund runs dry, and the most surefire way to get smaller checks is to assume you can claim early without penalty.
Now that you know the truth, you can make better, more informed choices to maximize the money that's likely to be very important to you in your later years.
