Social Security is vast and intricate, disbursing over $102 billion every month to 66 million retirees, persons with disabilities, and family members.
More than ninety percent of U.S. Americans across the political spectrum approve it, as it is vital to the financial health of elderly Americans, with 80% of those questioned expecting to rely on Social Security in their later years.
Given the significance of Social Security, questions regarding its present and future status are natural and pervasive. Some of these concerns have given rise to Social Security myths regarding its funding and operation.
Demystifying the Underlying Social Security Myths
Apparently, there are many myths surrounding social security.
Following is an explanation of the most common ones, as well as why you should ignore them altogether:
Myth 1: Social Security Will Run Out of Money
As long as employees and businesses continue to pay payroll taxes, Social Security will remain solvent.
Social Security faces budgetary difficulties. For decades, it received more revenue than it gave out, accumulating a $2.85 trillion excess by the end of 2021. But the system is beginning to pay out more than it receives, mostly because retirees are living longer and expanding faster than the working population.
Even so, Social Security won’t fade away. It will continue to collect taxes and provide benefits. However, it will barely generate enough revenue to cover 80% of scheduled payments. To prevent this, Congress would need to strengthen Social Security’s finances, as it did in 1983, by increasing the full retirement age, increasing the payroll tax rate, and introducing tax on benefits.
Myth 2: Social Security’s Retirement Age is 65 Years
The current full retirement age is 66 and 4 months. At this age, a worker is eligible to receive 100 percent of the benefit based on lifetime earnings. It will gradually grow by two months over the next five years, reaching 67 for individuals born after 1960.
The 65-year-old age limit is a long-standing Social Security fact that has become a fiction. When Social Security became a thing in 1935, the qualifying age was set at 65. In succeeding decades, the minimum qualifying age for reduced benefits dropped to 62, but 65 remained the benchmark for full retirement.
This changed in 1983, when the retirement age went up to lower Social Security’s expenditures. The increase is a gradual implementation, and 2002 was the final year when those reaching 65 were eligible for the full benefit.
Myth 3: The Yearly Cost of Living Adjustment (COLA) is Certain
Since 1975, the law has required that Social Security payment levels go up yearly to account for inflation. However, this cost-of-living adjustment (COLA) is not required to obtain an annual rise.
The COLA has a link to the CPI-W, a government price index for specified consumer goods and services. Annual benefit adjustments are based on increases in the CPI-W between the third quarters of each year. In 2022, the index indicated a price rise of 8.7%. Therefore, benefits will increase by 8.7% in 2023.
Nevertheless, if the index does not indicate a statistically detectable increase in prices, there is no adjustment to benefits. Whether or not it results in a benefit increase, this procedure is automatic.
Myth 4: Members of Congress Don’t Contribute to Social Security
A typical criticism regarding Social Security is that Congress members do not work to improve the program since it does not cover them. Indeed, it does.
Members of Congress and the rest of the federal workers have been under the Social Security umbrella since 1984.
Before then, senators and representatives did not pay into Social Security. Instead, they had a pension plan cover called the Civil Service Retirement System (CSRS). Those in office on January 1, 1984 received the permit to continue participating in CSRS, but only in combination with Social Security.
Myth 5: The Government Drains Social Security to Fund Other Programs
The two trust funds that pay out Social Security payments — one for retirees and their survivors, and the other for those with disabilities — have never been part of the general treasury of the federal government.
Social Security is a distinct program that is self-funded. However, the federal government borrows from Social Security.
Myth 6: Illegal Immigrants Deplete Social Security
Some have blamed the depletion of the system’s resources by unauthorized immigrants for Social Security’s financial woes.
This is a common but bogus complaint.
Noncitizens who lawfully reside and work in the United States are eligible for Social Security under the same conditions as native-born and naturalized Americans. Illegal immigrants do not have the rights to collect benefits.
My 7: Social Security is Similar to a Retirement Savings Account
The government does not hold your payroll tax payments in a personal account to be withdrawn with interest at retirement.
Your benefit is not dependent on how much you put into the system, but rather on your lifetime earnings.
According to estimates by the independent Urban Institute, most persons get more from Social Security and Medicare than they put in. Still, you may view Social Security less as a retirement savings option and more as a government-guaranteed benefit that will provide you with at least some income in your later years.
Social Security does not completely replace your employment income. On average, it accounts for around 40% of a beneficiary’s pre-retirement earnings.
Myth 8: Social Security Benefits are not Taxable
This was accurate up until 1984.
The Social Security reform approved by Congress and signed by President Ronald Reagan the previous year contained a clause that made a percentage of Social Security payments taxable based on your income level.
50 percent of your benefits may be subject to federal income tax if your annual income is between $25,000 and $34,000 for individuals and between $32,000 and $44,000 for married couples filing jointly.
Over certain limits, up to 85 percent of benefits are subject to taxation. Below that, you owe nothing to the IRS on your benefits.
Myth 9: Your Ex-spouse Benefits are Deducted from Your Own
Your ex-spouse may be able to receive Social Security payments based on your earnings record if you get divorced (and vice versa). As with benefits for a current spouse, they can be up to 50 percent of your entire retirement age benefit entitlement.
However, these ex-spouse payments have no impact on your Social Security.
They are separate payments that have no bearing on the amount you receive each month, even if a current and previous spouse are both collecting them. You get the benefit to which you are eligible depending on your earnings history and your age at the time of your Social Security application.
Myth 10: If You Continue to Work, You Lose Your Benefits Forever
Social Security has a rule known as the “earnings limit” or “earnings test” that temporarily reduces the benefits of those who are still working. But it is not permanent and does not apply to all working beneficiaries.
The rule only applies to individuals who claim benefits before reaching full retirement age and continue to work. In this situation, Social Security withholds a portion of benefits if earnings from work exceed an annual limit that varies based on your proximity to full retirement age.