15 Common Social Security Myths Busted

Social Security pays out about $1 trillion a year to 65 million retirees in the U.S. It’s also one of the most popular government programs, with about 85% of U.S. adults saying it’s more important now than ever. With an average payment of about $1,555 a month, Social Security has become an essential part of many people’s retirement income.

The size and scope of the program also explain why there are many misconceptions about Social Security. Let’s look at a few of the most common myths and the actual facts.

Social Security is a pay-as-you-go system funded by worker and employer payroll taxes (FICA). As long as these taxes are collected, Social Security will continue to be funded. Social Security manages more money than it pays to participants. At the end of 2020, there was a surplus of $2.9 trillion in funds.

With more people living longer, it’s estimated the reserve (but not the entire program) could be depleted by 2034. Once the surplus is gone, Social Security estimates it will only be able to pay 78% of the program’s costs. However, there’s every reason to believe that Congress will prevent that from happening by enacting new legislation as it did in 1983.

You can receive benefits starting at age 62, but at a reduced percentage for each month before your full retirement age (FRA). The Social Security Administration calculates FRA based on the year you were born. For example, if you were born in 1960 or later, your FRA is 67. As a result, you would get a 30% reduction in benefits if you start collecting at age 62.

As you work on saving for retirement, Social Security can be part of your plan. However, it shouldn’t be your only source of income. Social Security typically replaces only about 40% of pre-retirement income and should be used in addition to an employer pension and your retirement accounts, such as a 401(k) or Roth IRA.

The Federal Government won’t tax Social Security benefits if you make less than $25,000 a year. If you earn between $25,000 and $34,000 a year, you may have to pay income tax on up to 50% of your benefits. If you make more than $34,000, that can go as high as 85%.

Additionally, 13 states tax at least part of Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, Utah, and West Virginia. However, whether or not you’ll owe taxes on your benefits depends on how much you receive from Social Security as well as other taxable income you earn for the year.

You can cancel your benefits within the first 12 months you start receiving them, although you must repay the total amount you or your spouse received. You can apply again later and receive a higher benefit up to age 70.

It is also possible to suspend your Social Security benefits anytime until age 70. If you’ve reached your FRA but are not yet 70 and you suspend your benefits, you may be able to earn delayed retirement credits, resulting in a higher benefit when you do start collecting again. If you stop your benefits, they will automatically start again when you turn 70.

You do not have to apply for Social Security in person. You can fill out an application for your benefits on the Social Security website. Be aware that your application can take up to three months to process. However, your benefits usually start the next month, so if you’re approved in May, your first payment will arrive in June.

If you were married for at least ten consecutive years, you might be eligible to receive benefits based on your former spouse’s work history. To qualify, your former spouses’ benefit amount must be higher than your benefit, and you’ll need to be at least 62 years old and unmarried.

You may still be eligible to receive benefits even if your former spouse hasn’t applied for their benefit yet, but check with your local Social Security office to confirm. You don’t need to contact your ex-spouse to claim ex-spouse benefits. Furthermore, if either of you is receiving benefits, it won’t reduce or affect what the other receives.

You can start to receive your Social Security benefits as early as age 62, but your benefits are reduced to 72.5% of what you would receive at your FRA. Waiting to file for Social Security until your FRA — or even until age 70 when you get delayed benefit credits — could work to your benefit. Make sure you work with a retirement expert to help you decide when to claim your benefits.

As you learn how to invest money and plan for Social Security, remember that you can still work and collect Social Security benefits. However, as of January 2022, if you’re younger than your FRA and earn $19,560 or more, you may temporarily have a portion of your benefit reduced by $1 for every $2 over your earned amount. For example, if you earn $23,920 ($4,360 above the $19,560 limit), Social Security would withhold $2,180 of your benefits ($1 for every $2 over the limit).

Only wages earned working for someone else (or your net income if you’re self-employed) count toward this total. Once you reach FRA, the earnings limit goes away, and there is no benefit reduction regardless of whether you continue to earn wages or are self-employed.

Beginning in 1973, a yearly Cost-of-Living Adjustment (COLA) was approved to help Social Security keep pace with inflation. However, if there hasn’t been a significant change to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), then there won't be a COLA for Social Security.

In 2021, the government approved a 5.9% COLA to Social Security benefits resulting in an average increase of $92 per month in benefit payments for 2022. This was the largest increase in benefits since the 7.4% hike of 1983. However, COLAs have generally been lower, averaging a 1.65% increase per year over the last 10 years.

Social Security is not an individual account with a certain amount set aside just for you. It’s a general trust fund meant to provide inflation-protected income for retirees, disabled people, and survivors of deceased workers. Benefits are based on the amount a person earned over their working life, not on how much an individual paid into the system. If you live a long time, you may actually receive more from Social Security than you paid into the program.

Your Social Security benefits are based on the 35 years you earned the most, even if that happens after age 65. Your highest earning years don’t have to be consecutive, and if you work past age 65, those earnings are included if they’re one of your 35 highest-earning years. That also includes part-time work.

While you can start claiming Social Security after age 62, you won't get the full amount until your FRA. Waiting for Social Security until age 70 will result in a higher benefit since you’ll accumulate delayed retirement credits for each month up to age 70. However, you can’t claim your benefits early (at 62 for example) and then receive a benefit increase at age 70.

Social Security is a self-funded program. The money collected from payroll taxes goes into the Social Security Administration’s trust fund, which is kept separate from the federal government’s general fund where other tax revenue goes.

To help increase its funds, the Social Security trust fund invests in U.S. Treasury bonds, which are a loan to the Federal Government that must be paid back with interest. To date, the government has always fully repaid the borrowed amount, including interest.

If you receive a government pension and Social Security taxes were withheld from your paychecks, then you are probably eligible to receive Social Security benefits without penalty.

A non-covered pension — or a federal, state, or local government pension that did not take Social Security taxes from your paycheck — may be subject to the Windfall Elimination Provision (WEP).

WEP affects about 1.9 million people, or 3% of Social Security recipients, and reduces Social Security benefits by up to half the amount you receive from your pension. Congress passed this legislation in 1983 to “prevent workers who receive non-covered pensions from receiving higher Social Security benefits as if they were long-time, low-wage earners.”

Social Security can be complicated, and the fear of the unknown can drive a lot of false information. Some of these myths only tell half the truth, while others are common misconceptions that stick around but can cause problems when you retire.

Being proactive and learning the ins and outs of Social Security can save you many headaches down the road. Make sure you do your research and work with a retirement professional to help you navigate the world of Social Security and your retirement income.