10 Social Security Myths You Should Stop Believing Now
Social Security is one of the most well-known government programs in the U.S., yet many Americans don't fully understand how Social Security benefits work. Part of this confusion comes from the half-truths and misleading statistics tossed about in the financial press.
The reality is that while changes are definitely coming to Social Security, it's not vanishing in the immediate future, as many alarming news stories may suggest. Here's a look at the myths surrounding the future of Social Security so that you can make sound financial decisions based on accurate information.
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Myth: You Have to Claim Benefits When You're 62
Claiming Social Security benefits at age 62 is a common misconception. While it's the earliest age you can claim, it's not the only option. Your base benefit is determined by your full retirement age (FRA), which depends on your birthdate.
The Social Security Administration calculates your benefit based on your highest-earning 35 years. To find your FRA, visit the SSA website or check your statement. It's important to note that claiming benefits before your FRA results in a permanent reduction in monthly income.
For example, claiming at 62 means a 30% reduction compared to your FRA benefit. Waiting until age 70 offers a bonus, with roughly 8% additional monthly income per year delayed, up to age 70. Waiting from 67 to 70 increases monthly income by 24%, and waiting from 62 to 70 can increase it by around 77%. Considering all of this, you might think of maximizing your income for a potentially long retirement by delaying your claim.
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Myth: Your Benefits Are Calculated Using the Wages You Earned Before Age 65
To be eligible for Social Security, you need a minimum of 10 years of covered employment, equivalent to earning 40 credits in the system. Your benefit is based on your highest 35 years of earnings, which can include non-consecutive years and earnings after age 65.
Even part-time work after age 65 can contribute to your highest 35 years of earnings. If you have fewer than 35 years of earnings, zeros will be factored into the calculation.
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Myth: Social Security Will Become Fully Depleted Any Day Now
Since expenses now exceed revenues in the Social Security program, some pundits have referred to it as "insolvent." The reality is that current payroll taxes are not the only source of income for Social Security payouts.
Over the decades that Social Security has been operational, the Social Security Administration has built up a trust fund to help supplement payments. Although this fund is rapidly depleting, it's expected to last until 2034. This means that Social Security should remain fully funded for at least another 12 years.
Myth: To Fund Social Security, Benefits Need To Be Cut
Fixing Social Security requires action, but massive benefit cuts are not the only solution. While discussions have touched on targeted benefit reductions, such cuts are likely to be phased in and mainly affect high-income retirees. There's also the idea of raising the full retirement age, but this would be a gradual process.
It's important to note that cutting benefits alone is not the sole fix. Alternative approaches include increasing Social Security's revenue. Two popular ideas involve raising the maximum income subject to Social Security tax or imposing Social Security tax on income exceeding $400,000.
Myth: You'll Never Make Back What You Put In
While everyone's situation varies, it's possible to collect more from Social Security than you contributed if you live a long time. Social Security ensures an inflation-protected, guaranteed income stream, protecting against the risk of outliving your savings.
Even if you live past 100, you'll continue to receive monthly income, and if you pass away before your spouse, they will receive survivor benefits until their death. Your contributions, along with those of your employers, support current retirees and offer a guaranteed lifetime income benefit during retirement.
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Myth: Social Security Is 'Going Broke' in 2034
For those looking to retire in 2034 or later, the fact that the Social Security Trust Fund will be depleted by then certainly isn't good news. However, this doesn't mean that Social Security is "going broke."
Although the Trust Fund is anticipated to be depleted in that year, the bulk of Social Security funding still comes from the payroll tax on current workers. As long as American workers continue to pay into the program via the payroll tax, Social Security will remain viable. Benefits as currently projected will certainly be cut if nothing is done to change the system, but it's highly unlikely that Congress will simply do nothing over the next 12 years and let American retirees suffer.
The specifics of Social Security are likely to undergo large changes over the next decade or so, but there is no truth to the myth that Social Security will simply end entirely in 2034.
Myth: Social Security Is Working Perfectly
The ratio of reserves to annual cost is projected to decline from 253% at the beginning of 2021 to 85% at the beginning of 2030. Because this ratio falls below 100% by the beginning of the 10th projection year, the combined trust funds fail the trustees' test of short-range financial adequacy.
However, the deficit in payroll taxes that supplement the Trust Fund is so large that these excess reserves are being rapidly depleted. By 2030, reserves will only amount to 85% of annual costs. As this deficit will arrive in less than 10 years, it fails the Social Security Trustees' test of short-range financial adequacy.
This is essentially a warning flag that changes need to be made to keep the program funded.
Myth: Price Indexing Doesn't Help
Price indexing is a complex method that has been proposed to reduce future expenditures and help keep the Social Security program fully solvent. Currently, initial Social Security benefits are wage-indexed, meaning higher earnings translate to higher benefits.
Various proposals to institute a price-indexed system instead would reduce program expenses. The details are cumbersome, but essentially, benefits for higher-paid workers would be reduced on a relative basis compared with lower-income taxpayers. This would dramatically help the projected shortfall in the Social Security Trust Fund.
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Myth: The Government Is Quickly Depleting Social Security
When it comes to governmental programs, Social Security is something of a "sacred cow." The idea of reducing benefits is unpopular enough with the electorate, but if the government were to actually raid Social Security to pay for other programs, it would be political suicide for anyone involved.
The origin of the myth that the government uses Social Security to fund other programs likely comes from the fact that the Social Security Trust Fund is invested in U.S. Treasury securities. The government uses the proceeds from these purchases to fund a multitude of general expenses, but it always pays back what it borrows, with interest, just as it would to any other investor.
Myth: There's No Hope
Beginning in 2034, retirees will only receive 78% of the full benefit they expected if Congress doesn't find a way to fix the funding issues. It's an accepted fact that as things currently stand, the Social Security Trust Fund will be depleted by 2034. But that doesn't mean that Social Security recipients will be left high and dry in 2034.
Rather, it simply means that payouts will have to be funded solely with payroll tax revenue, rather than any reserves in the Social Security Trust Fund. In dollars and cents, that means the average Social Security recipient should only expect to receive 78% of their projected payout in 2034 -- unless changes to the program are implemented.
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John Csiszar contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: 10 Social Security Myths You Should Stop Believing Now
