Top List Of Social Security Myths – Debunked

social-security-myths

Social Security is still filled with complexities and even misconceptions, especially on this verge of rising presidential campaigns.

Although the leading presidential candidates have not yet shed more light to this issue, this topic is still bound to seize the limelight soon.

Here are few of the misunderstandings and social security myths (and some correct conceptions) that you might be hearing across the election trails or anywhere else.

Top List Of Social Security Myths:

• Social Security is going bankrupt.

This is a myth although the validity of the claim is still based on how one describes bankruptcy.

Social Security has and will have the funds to pay all the retirement benefits even for the next decades,  and even without reforms.

Perhaps it’s just that the program might not have all the power to meet all of its obligations on time.

The trustees of Social Security have estimated that, even with no reforms, by the year 2034, it is capable of paying just around 75 cents on the dollar.

Reforms, of course, could still be established to make the Social Security even stronger. The sooner the reforms are approved, the better.

• All people have Social Security assets held in a dedicated investment account.

Again, this is inaccurate.

Social Security should not be seen as a form of investment fund but rather a “pay as you go” system which can transfer money from employees to retirees.

The taxes that the current employees and employers are paying do not go to their dedicated personal accounts.

Social Security also doesn’t represent an ROI.

However,

around a third of Americans think that they, indeed, have dedicated Social Security accounts.

• Social Security will still be existent for the young adults of today.

This is true.

In spite of all the skeptics believing that young adults will no longer receive money from the Social Security and in spite of all the funding issues that are leading to cuts in benefits, the program will remain at everybody’s service not until the Congress decides to dismantle it for good, which isn’t impossible.

• Social Security would’ve remained solvent if the Congress didn’t raid the trust fund.

This isn’t true.

The trust  fund has an excess of $2.8 trillion which has been accumulating for the past 3 decades from the payroll tax revenue that’s exceeding benefit payments throughout the course of that period.

This huge excess is being stored in exclusive Treasury bonds.

And then?

This is basically an “accounting fiction” and not an amount put away for the next generations. These excess funds will begin shrinking sooner or later.

The funds have been maximized to run various government programs.

It then can be contested that the congress and the different governmental sectors raided the trust fund.

But,

we have to take note that the entire $2.8 trillion is still owed by governmental bodies to Social Security and majority of the predictions state that it’ll be paid off through a combination of tax increases, reduced government spending, or federal borrowings.

• Taking a big IRA withdrawal could make your Social Security benefits taxable.

This is true.

The same thing goes for other sources of taxable income.

If Social Security is the sole income source you have, your benefits will perhaps be not taxable. However, if you’ve got other income sources, some of your promised benefits could be taxable.

For instance,

people who religiously save via the traditional IRA could feel the drawback by the mandatory withdrawals, which begin after the investors reach the age 70 1/2.

Your contributions are going into an account with your name on it.

Sadly, that is not the case.

Social Security is not like 401(k) or even the traditional funded pension plan. The contributions you make are readily paid out to the beneficiaries of today.

So where shall they get the money to pay your retirement benefits when the time comes?

The answer lies in the future taxpayers.

Social Security won’t be there for young Americans.

The trustees of Social Security forecast that the trust fund of Social Security will get depleted by 2033.

When that time comes, there will not be enough funds to pay all the retirees. That’s basically what people are trying to point out when they use the words “going bankrupt”.

Here is the good news.

There’ll still be taxpayers running the system. (Perhaps bad news on their end but good news on yours).

The trustees estimate that there should be enough funds to realize 70-80% of the promised benefits.

Your Social Security payments are based on your last 10 years of income.

This myth is probably based on the fact that you require 40 quarters (roughly 10 years) of Social Security Payments to start collecting.

But,

the amount of your payment is based on the highest 35-year inflation income.

That only means that working part time prior to retiring will not actually reduce your benefits.

Instead,

if you’ve paid less than 35 years to Social Security, it’ll increase the benefits by replacing whatever income you got with zeros.

The payments you made for Social Security are based on you average lifetime earnings.

For your retirement payments, the SSA refers to your best 35 years of work, which is indexed for inflation.

You will get Social Security benefits if you never worked outside the home.

You actually can.

You can acquire the benefits on your spouse’s, even ex-spouse, earnings; that is, if you’re married with him/her for 10 years minimum.

These spousal benefits are equivalent to 50% of your spouse’s (or ex-spouse’s) full benefits and collecting the money won’t affect your spouse’s full benefits.

You just have to take note that if you decide to divorce or remarry, you spousal benefits will  no longer be based on your ex-spouse but on your current spouse.

So, be careful who you choose to marry.

Your Social Security benefits are fully taxed.

Like any case related to the government, it is a little bit more complex than that.

At the worst case, the benefits you deserve may be partially taxable for up to 85% or not taxed at all.

This, however, depends on your income. You can check this formula. The good news is if your total retirement income is rather low, you might be able to keep the whole check.

Also, try to recheck before collecting while you are still working, which would possibly cause your Social Security benefits to be taxed.

Social Security will guide you throughout the process.

While most Social Security staffs do whatever they can to assist you, the final choice in claiming the benefit remain complex and there is no uniform solution for that.

Many staff of Social Security even don’t fully grasp their own rules.

Like us,

many of them also don’t totally understand the choices of benefits and end up giving people inadequate or wrong pieces of advice.

To stay on the right track, you need to be diligent in doing your homework in doing your own research.

You can also choose to get in touch with a financial consultant or planner who is expert with Social Security plan.

You must enroll in Social Security as soon as you are eligible.

You could begin collecting retirement benefits when you turn 62.

However,

financial consultants often discourage early receiving of benefits.

Each year that you wait till 70 will enable your check’s value to increase.

An employee who is going to retire this year at his full retirement age, for instance, is entitled to the maximum benefit of $2,663 monthly.

On the other hand,

if you retire as early as 62, you’ll only get $1,997 monthly.

You can enjoy 8% more a year if you decide to wait till your full retirement age. That is a 100% guaranteed return that everybody wants.

According to the current survey of Social Security, a man who has reached the age 65 is expected to live till 84.

However, waiting till 70 might not be applicable to all.

If you cannot live without cash or if you have health concerns or your family history tends to die early, you may consider getting your benefits early on, in case you won’t live that long to enjoy the 8% a year return.

You can spend the Social Security check you have.

No matter what, you cannot get rid of Uncle Sam.

In case your yearly income is more than $44,000 (for married people filing taxes jointly) or $34,000 (for people filing taxes individually), you will owe taxes on 85% of the provisional income you have.

This covers the income from tax free municipal bonds. Also, there are a handful of states which impose taxes on Social Security benefits.

• If you’re working while receiving Social Security, you will lose benefits.

This is mainly false.

Some benefits are reduced, give you’re under the full retirement age (from 66 to 67 for more employed people today).

The extent of deduction depends on your age and your income.

For 2016, if you remain below the FRA through the year, the Social Security deducts a dollar in benefits for every $2 earned over $15,720.

If you reach FRA in the year 2016, it deducts a dollar for each $3 earned over $41,880.

Nevertheless, these benefits are not lost but just delayed.

After you reach the full retirement age, your benefits increase to account for amounts kept back earlier.

And once you reach the full retirement age, you can keep all your benefits, even though you are still employed.

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ratetake

Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.