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 76 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 15.76% would fully fund the program through at least 2095, 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 percent of the benefit calculated from lifetime earnings history - depends on your birth year. The FRA is 66 for those born during 1943 and 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. Notably, you can also delay claiming past your FRA (up to age 70) and receive an 8% increase in your benefits for each year you delay.
When Social Security was created in 1935, the age of 65 was set as the age of eligibility. The minimum eligibility age was then lowered to 62, when people could claim a reduced benefit, but 65 remained the standard for full benefits.
That changed in 1983, when the retirement age was raised to reduce Social Security's costs. The increase is being phased in over time; 2002 was the last year in which people turning 65 could claim their full benefit.
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 2021, the index showed a 5.9% increase in prices, so your benefits are 5.9% higher this year.
But 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.
Myth #4: You don't pay taxes on Social Security benefits
The facts: This was true until 1984. Congress passed a Social Security overhaul including a provision making a portion of Social Security benefits taxable, depending on your income level.
You will pay federal income tax on up to 50% of your benefits if your income for the year is $25,000 to $34,000 for an individual filer and $32,000 to $44,000 for a couple filing jointly. ("Income" counts as money you receive from work, pensions and investments; nontaxable interest; and half of your Social Security benefits.) Above those thresholds, up to 85% of benefits are taxable. Below them, you don't owe the IRS anything on your benefits.
Myth #5: An ex-spouse's benefits come out of your own
The facts: If you are divorced, your former spouse may be eligible to collect Social Security benefits on your earnings record (and vice versa). Just like benefits for a current spouse, these can be up to 50% of your full retirement benefit (offset by their own benefit).
But those ex-spouse (or spouse) benefits don't reduce your benefits. They are distinct payments and have no effect on your monthly benefit, even if both a current and a former spouse (or multiple former spouses) are collecting them. You get the benefit you're entitled to, based on your earnings history and the age when you file for Social Security.
Myth #6: 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 chose 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 2022, your benefit is reduced by $1 for every $2 in earnings above $19,560, if you won't hit full retirement age until 2023 or later. If you will reach FRA in 2022, the formula is $1 less in benefits for every $3 in earnings above $51,960. On 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.
This information is believed to be reliable, but investors should rely on information from the Social Security Administration It is general information and not meant to cover all scenarios. Your situation may be different, so be sure to discuss this with the Social Security Administration prior to taking benefits.