Social Security plays a vital role in the financial well-being of millions of Americans, yet it remains one of the most misunderstood systems in the country. Complex rules and conflicting information often give rise to myths that can lead to confusion and bad decisions about retirement planning. Today, we’re here to debunk the most common misconceptions about Social Security so you can better understand the program and maximize your benefits.
1. Myth: "Social Security Is Going Bankrupt"
This is perhaps the most widespread myth surrounding Social Security. While the program does face challenges, it is far from going bankrupt.
The Social Security Administration (SSA) is funded primarily by payroll taxes under the Federal Insurance Contributions Act (FICA). Current workers and employers contribute to the system, creating a constant cash flow. However, demographic changes—such as an aging population and fewer workers contributing for every retiree—have created funding gaps.
The Truth:
Social Security's trust funds are currently projected to be depleted by 2034. But here’s the critical part—this doesn’t mean the program will cease to exist. Payroll taxes will still cover about 77% of scheduled benefits even after the trust funds run out. While adjustments may be needed, such as increasing the retirement age or payroll tax rates, the idea that Social Security will vanish is unfounded.
What You Can Do:
Plan for the possibility of reduced benefits by diversifying your retirement savings through personal investments, 401(k)s, or IRAs to ensure you're not overly reliant on Social Security alone.
2. Myth: "You Can’t Work While Receiving Social Security Benefits"
Many people believe they must completely stop working if they want to collect Social Security benefits. This often discourages individuals nearing retirement from pursuing part-time or flexible income opportunities.
The Truth:
You can work while receiving Social Security benefits, but your earnings may temporarily affect the size of your benefits if you're below full retirement age (FRA). Here’s how it works:
- Before FRA: If you’re below the FRA and earning more than $21,240 (as of 2023), your benefits are reduced by $1 for every $2 above the limit.
- Year You Reach FRA: The earnings limit increases. For every $3 you earn above $56,520, $1 is withheld from your benefits.
- After FRA: There’s no earnings limit once you hit FRA. You can work without your benefits being reduced.
What You Can Do:
If you plan to work during retirement, consider delaying your benefits until after you reach FRA to maximize your payouts. Additionally, factor your potential earnings into your budget to avoid surprises.
3. Myth: "Social Security Covers Everything in Retirement"
Some believe that Social Security benefits are designed to cover the full costs of retirement. Unfortunately, this misconception can lead to inadequate retirement planning and financial shortfalls down the road.
The Truth:
Social Security is not meant to be your sole source of income. It was originally created as a safety net to supplement retirement savings, pensions, and personal assets. The SSA estimates that Social Security benefits replace about 40% of pre-retirement income for average earners—far short of the 70%–80% replacement rate financial advisors recommend for maintaining your standard of living.
What You Can Do:
Start building personal savings early. Employer-sponsored retirement accounts, individual savings, and low-risk investments are key to bridging the gap between your Social Security benefits and your retirement needs.
4. Myth: "You're Automatically Eligible for Full Benefits"
Many people think that simply reaching retirement age qualifies them for the maximum Social Security benefit. This assumption often leads to unpleasant surprises when they start their retirement calculations.
The Truth:
Your benefit amount depends on your earnings history and the age at which you claim. The SSA calculates your benefit using your highest 35 years of earnings. If you didn’t work for 35 years, the missing years are filled with zeros, which can drag down your average earnings and lower your benefit.
Additionally, claiming benefits before your FRA results in permanently reduced payouts—up to 30% less for some individuals. Conversely, delaying benefits beyond FRA increases payouts by about 8% per year until age 70.
What You Can Do:
Review your Social Security earnings record on SSA.gov. Correct errors and consider working longer or delaying benefits to boost your monthly payout.
5. Myth: "Social Security Doesn’t Tax Your Benefits"
Some retirees are shocked to find out that part of their Social Security benefits can be taxable, depending on their total income. This myth leads to confusion and can disrupt financial planning during retirement.
The Truth:
Whether your Social Security benefits are taxable depends on a calculation called your combined income, which includes:
- Adjusted gross income (AGI)
- Nontaxable interest (e.g., municipal bonds)
- Half of your Social Security benefits
If your combined income exceeds certain thresholds, up to 85% of your Social Security benefits may be taxable.
For 2023:
- Individuals with combined income above $25,000 may have up to 50% of benefits taxed.
- Couples filing jointly with combined income above $32,000 face the same threshold.
What You Can Do:
Consult a tax professional to understand how Social Security interacts with other income sources. You can also reduce taxable income by withdrawing strategically from retirement accounts.
6. Myth: "Your Benefits Stay the Same for Life"
Many believe that their Social Security amount is fixed once they start receiving benefits. This oversimplification often leads to worries about keeping up with inflation.
The Truth:
Social Security features an annual Cost-of-Living Adjustment (COLA) to keep benefits aligned with inflation. While COLA changes aren’t guaranteed every year, they’ve happened most years since their introduction in 1975. For example, in 2023, benefits rose 8.7% due to high inflation rates.
What You Can Do:
While COLA helps, it may not fully offset rising retirement expenses. Incorporate inflation protection into your financial plan by allocating some investments to inflation-protected securities or dividend-paying stocks.
7. Myth: "You Lose Benefits If You Move Abroad"
Retirees who dream of retiring overseas often worry that they’ll lose their hard-earned Social Security benefits, leading to a reluctance to take advantage of affordable and exotic retirement options.
The Truth:
U.S. citizens can continue collecting Social Security even if they live abroad in most countries. There are exceptions, however, so it’s crucial to check the SSA’s list of restricted countries. Keep in mind that foreign bank accounts and currency fluctuations could complicate benefit transfers.
What You Can Do:
Before relocating, consult the SSA’s Payments Abroad Tool to confirm your eligibility and ensure you comply with local tax laws.
