5 myths you shouldn't believe about Social Security

Understanding the role of Social Security in your retirement income strategy can help you prepare for what lies ahead. That’s why it’s important to separate myth from fact. Here’s what you need to know.

Myth #1: Social Security is going broke.

The facts: It’s true that Social Security is experiencing financial pressures, especially as the huge baby boomer cohort retires and collects benefits. Nonetheless, the system is certainly not going bankrupt. If no changes are made, it will need to make cuts in 2033, paying about 77 cents for each dollar of projected benefits, according to a recent report issued by the Social Security and Medicare trust funds. But this is still a big “if” — because a number of steps can be taken to shore up Social Security.

For example, raising the combined payroll tax from 12.4% to 15.84% would fully fund the program through at least 2097, according to the Social Security Board of Trustees. And other moves, such as changing the earliest eligibility age (currently 62) or the full retirement age (currently between 66 and 67), could also extend Social Security’s ability to continue paying full benefits. Ultimately, Social Security can be fixed, but for this to happen, Congress may have to make some difficult decisions.

Myth #2: The Social Security full retirement age is 65.

The facts: Full retirement age (FRA) — the age when you qualify to file for 100% of the benefit calculated from your lifetime earnings history — depends on your birth year. The FRA is 66 for those born during 1943 through 1954. For each year after 1954, the FRA increases by two months at a time. For example, it is 66 years and 2 months for people born in 1955 and 66 years and 4 months for people born in 1956. The FRA eventually settles at 67 for those born in 1960 and after.

While you get your full benefit if you claim at your FRA, you can still claim your benefits as early as age 62 no matter your birth date. However, if you claim benefits early, you will receive a reduced benefit amount — up to 30% lower. Notably, you can also delay claiming past your FRA and receive up to an 8% increase in your benefits for each year (up to age 70) you delay. 

The Social Security Administration has an online calculator that estimates your benefit amount based on when you start receiving Social Security for those interested in claiming before or after full retirement age.

Myth #3: The annual COLA increase is guaranteed.

The facts: Since 1975, Social Security law has mandated that benefit amounts be evaluated annually against the cost of living. But there is no requirement that this evaluation produce a yearly increase (called a cost-of-living adjustment, or COLA).

The COLA is tied to a federal index of prices for select consumer goods and services called the CPI-W. Benefits are adjusted annually based on changes in the CPI-W. In 2022, the index showed an 8.7% increase in prices, thereby increasing benefits by 8.7%. Importantly, beginning at age 62 and whether you have claimed benefits or not, the COLA will increase your benefit amount. However, if the index doesn't show a rise in prices (meaning no inflation), then benefits aren't adjusted. This has happened three times since the current formula was adopted — in 2010, 2011 and 2016.

So, while you can expect to see your Social Security benefits increase over time due to inflation, there is no guarantee that your benefits will increase each year.

Myth #4: Social Security will be sufficient for your retirement.

The facts: Social Security on average is likely to make up only about 30% (or even less) of your income in retirement.¹ As such, you could be responsible for generating a significant portion of your retirement income from other sources. Other sources could include pensions or annuities but will also likely include your investments. Therefore, it's important to talk with your financial advisor about the options available to you in order to develop a well-rounded income strategy in retirement.

Myth #5: You lose benefits permanently if you keep working.

The facts: Social Security does have a rule, called the ”earnings limit” or “earnings test,” that can temporarily reduce the benefits of people who still work. But it doesn’t apply to all working beneficiaries and is not permanent.

The rule only covers people who claim benefits before their full retirement age and choose to continue working. Social Security withholds a portion of benefits if earnings from work exceed a set cap, which changes every year and differs depending on how close you are to full retirement age.

In 2023, your benefit is reduced by $1 for every $2 in earnings above $21,240 if you won’t hit full retirement age until 2024 or later. If you reach FRA in 2023, the formula is $1 less in benefits for every $3 in earnings above $56,520. In the month when you hit FRA, the earnings test goes away — there’s no benefit reduction, regardless of your income. Also, your monthly benefit will be permanently increased based on how many months your benefit was withheld.