Myth Busters! Seven Myths About Social Security

Dan Galli, CFP |

Social Security retirement benefits will be a significant part of your retirement income picture. It’s not uncommon for people to dismiss Social Security retirement benefits as either something they won’t receive or that will be too small to matter. Others feel that if they had control of the contributions made from their paychecks over the years, they could have more retirement income.

Let’s look at the facts. Social Security is not a 401(k) or other type of savings program. Rather, it’s insurance. Like any insurance, we pay a premium via paycheck deductions. Our employer matches that amount. Whether a covered worker becomes disabled, dies, or actually makes it to retirement, Social Security ensures they, their spouses, and their children won’t be destitute. 

Here are seven common myths.

1. Social Security won’t be there for me. Social Security benefits are primarily paid through the payroll deductions we all make into the system. Over the years, more money has been paid in than has been paid out in benefits, and the surplus has been held in a trust account.

Based on the large number of Baby Boomers now starting to retire, that trust fund will be used up by 2033. If that happens, Social Security benefits would have to be cut by approximately 25%. This was also scheduled to happen in the early 1980s and Congress made changes to the system to extend the trust fund for fifty years. Congress can do the same thing again before 2033. In either case, benefits will continue in some capacity.

2. If I delay collecting benefits, I have to wait until age 70. Social Security allows us to begin collecting as early as age 62 or as late as age 70 or anywhere in between. Once we start collecting, payments will continue for life. Beginning payments early means more, but smaller, payments. Delaying payments until later means fewer but larger payments. 

3. Once I start collecting benefits, my benefit could be reduced. If you start collecting before your Full Retirement Age (usually 66 or 67), earned income (that is, income from a job) over $21,240 could reduce your benefit. This is measured on a year-by-year basis. However, if this happens, once you reach your Full Retirement Age, Social Security recalculates your benefit to make up these reductions. Once you reach your Full Retirement Age, benefits are not reduced due to earned income.

4. Everyone should wait to begin benefits to receive a larger payment. The decision as to when to begin receiving Social Security benefits is different for everyone. For individuals who need the income right away, starting early may be the better choice. For others, waiting for full retirement age (FRA) or later may be smarter. 

5. Undocumented aliens are draining Social Security. Nope, it’s the Baby Boomers! There are around 70 million of them, and they are living longer (and therefore collecting benefits over a longer period of time) than previous generations. 

6. Social Security benefits are tax-free or completely taxable. Both are wrong. In each year of retirement, the level of your taxable income from half your Social Security and other taxable income is measured. If that number is low enough, Social Security benefits are tax free. If that number is higher, some of your Social Security benefits will be taxed. However, never more than 85% of your Social Security benefits will be taxed at the federal level. Further, most states don’t tax Social Security – only 11 of 50 states do.

7. Once I start collecting, my benefit can’t change. Once you start collecting benefits, your monthly payment won’t go down (with the exception in some cases for continuing to work – see myth #3). But…it can go up! Each year, benefits are increased based on inflation. This allows recipients to keep up with rising costs, such as Medicare premiums. Also, if you continue working, your benefit will be re-calculated each year and if it rises, your benefit will be increased.