Myth 1: Social Security will cover all of your retirement expenses.
While Social Security provides an important income stream for most retired Americans, it provides much less than most people expect. Even from its original inception, Social Security was never intended to be the sole income source for retirees. Social Security was created with the intention of being one leg of a three leg stool comprised of Social Security benefits, retirement savings/pension, and personal savings.
Myth 2: Social Security only provides retirement benefits.
The Social Security Administration also offers disability and survivor benefits (also known as widower benefits). Additionally, if you receive retirement and/or disability benefits, your individual family members may be eligible to receive benefits as well. If you were to pass away while receiving Social Security benefits, your spouse, children, and/or dependents may be eligible to receive survivor benefits which can help replace lost income.
Myth 3: Social Security benefits are not taxable.
Depending on your specific situation, Social security benefits may or may not be federally taxable. If you had earned income from a job or investment income, it’s possible you may have to pay income tax on a portion of your Social Security benefit. Additionally, there are 13 states who may collect income tax on your Social Security benefit depending on adjusted gross income and other state specific criteria. States who may tax Social Security benefits include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Myth 4: If you earn income after you retire, you will lose your Social Security benefit.
Once you reach full retirement age, you can earn as much income as you want without affecting your Social Security benefit amount. However, if you receive Social Security benefits and have not reached your full retirement age, any earned income may affect the benefit amount you receive as follows:
- If you have not reached full retirement age, $1 in benefits will be withheld for every $2 you earn above the annual limit of $18,240 for 2020.
- In the year you reach full retirement, $1 in benefits will be withheld for every $3 you earn above the annual limit of $48,600 for 2020.
However, it is important to note you do not lose or forfeit the withheld amount. Instead your Social Security benefit will be recalculated once you reach full retirement age and you will receive a higher monthly benefit afterwards.
Myth 5: Social Security is bankrupt.
Social Security is not going bankrupt. Social Security is a “pay-as-you-go” system, meaning today’s worker’s fund today’s retirees through the collection of payroll (FICA) taxes. However, demographic changes in America are putting a major strain on Social Security. Better health care and longer life spans have resulted in an increasing number of people drawing Social Security benefits while the birth rate has been simultaneously decreasing. In other words, a shrinking number of workers must fund a growing number of retirees. As things currently stand, it is estimated Social Security can continue to pay 100% of its scheduled benefits through 2034. If no action is taken by congress between now and 2034, Social Security would only be able to fund an estimated 77% of scheduled benefits. While that is not the best news, it illustrates two key factors.
- As long as there are workers in the economy, Social Security will continue to pay benefits, albeit a reduced amount.
- Congress still has time to make changes in order to strengthen the program and address its projected shortfalls.
To learn more about this issue, please click the link to our earlier blog post, “Is Social Security Going Broke?” Click here to read.
Myth 6: You can only receive Social Security benefits if you paid into the program.
While it is generally true that Social Security is an earned benefit, meaning a worker must pay into the system for at least 10 years to collect Social Security, it is possible in many cases to still qualify for benefits despite not having met the required work time. If you paid at least some Social Security tax but did not meet the 10 year requirement, it is still possible to qualify for some disability benefits depending on age. Additionally, nonworking spouses, ex-spouses, children or parents may be eligible to receive spousal, survivor, or children’s benefits based on their respective family member’s earnings record.