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An earlier version of this column misstated the amount of benefits withheld while working. It has been corrected.
It is by far the biggest source of federal spending—and arguably the most complex and misunderstood. I’m talking about Social Security, the $1.2 trillion behemoth that affects every single American.
Last year, Uncle Sam spent $1.196 trillion on Social Security. But this year, with some 10,000 baby boomers retiring each day, and monthly payouts tied to inflation up 8.7%—well, you do the math.
Most folks know, or should, that they are eligible to receive Social Security as early as age 62—if they meet certain criteria, namely if you have worked long enough and paid into the system long enough. This alone is somewhat complicated, and here is a one-page explanation from the Social Security Administration that can help you determine whether you are qualified (chances are you are).
But there are lots of things beyond this that are complex, misunderstood, and sometimes poorly explained in the media. Here are some of the biggest myths surrounding Social Security—and the facts.
Myth: Social Security won’t be there for me.
Fact: Actually, Social Security will be there when you retire. The question, however, is how much of it will be there?
This is because the Social Security Trustees, during both the Trump and now Biden administrations, have bluntly warned that the Social Security Trust Fund is paying out more than it is taking in. The current projection is that the current surplus will run out in 2035.
Without changes in how Social Security is financed, the surplus is projected to run out in 2035. What happens then? The Trustees say monthly payouts will be cut 20%—unless action is taken to shore up the program.
Why a 20% cut? Demographics. Millions of Americans are retiring, but the lowest birthrate in decades and squabbling over even legal immigration has reduced the number of workers—and thus the payroll taxes upon which Social Security is funded.
Read: At last — somebody is trying to ‘save’ Social Security
Myth: It’s best to grab Social Security as early as you can
Fact: The earliest you can get Social Security is age 62, and more people in fact, began receiving benefits at that age than any other, according to the Center for Retirement Research at Boston College. But that doesn’t necessarily mean it’s the best age to start getting benefits. It’s merely the earliest age.
Many people file for Social Security as soon as they can for one simple reason: They need the money. Consider the following stats provided by the Social Security Administration:
- Social Security represents about 30% of elderly income.
- Among elderly beneficiaries, 37% of men and 42% of women are dependent on Social Security for 50% or more of their income from Social Security.
- Among elderly Social Security beneficiaries, 12% of men and 15% of women depend on Social Security for 90% or more of their income.
When you are that heavily dependent—90% of your monthly income or even 50%—it’s certainly understandable that you would start taking Social Security as soon as you can. But if you can afford to wait, you’ll get more.
I’ll provide my own example here. According to the Social Security Administration, if I wait until full retirement age (for me that’s 67). I’ll get 46% more than I would at age 62. And if I wait until age 70, I’d get an additional 26%. Between ages 62 and 70, the total increase is 83% higher.
Read: ‘When we retire, we lose a lot.’ How to avoid retirement shock.
Here’s what it comes down to: If you take the money at 62, you get paid less, but for a longer period of time. If you wait, you get paid more, but for a shorter period of time. By the way, average life expectancy for American men is 73.5 while for women it is 79.3, according to the Centers for Disease Control and Prevention. But these figures can vary significantly depending on a variety of issues such as gender, ethnicity, lifestyle and so forth. Not to get morbid here, but check out this Social Security Administration “Life Expectancy Calculator,” which predicts how long you’re likely to live. You may find that you’re likely to live much longer than the CDC’s averages. For example, a woman born in 1958 and turning 65 this year is likely to live until 86. But like they say in car commercials, your mileage may vary.
Myth: Social Security benefits are tax-free
Fact: Nope, they can be taxed. According to the Internal Revenue Service, “Taxpayers receiving Social Security benefits may have to pay federal income tax on a portion of those benefits. Social Security benefits include monthly retirement, survivor and disability benefits.” But supplemental security income (SSI) payments are not taxable. SSI payments go to citizens who truly need extra help, such as adults and children with a disability or blindness who have income and resources below specific financial limits. SSI payments can also go to people age 65 and older without disabilities who meet the financial qualifications.
Given that we’re talking about both the Social Security Administration and IRS at the same time, this is a tad complicated. But the IRS actually has a surprisingly clear one pager here that explains just what and how much could be taxed.
Myth: I can ‘double-dip’—earn Social Security and a paycheck at the same time.
Fact: True—but it’s complicated and depends on factors like your age and how much you earn. For example, let’s say you’re 62 this year and begin taking Social Security. Because you haven’t reached full retirement age, your benefit will be reduced by $1 for every $2 over the annual limit which this year is $21,240.
So let’s say your monthly benefit at age 62 is $1,250. You earn $30,000 at your job. Since you earned $8,760 over the earnings cap of $21,240, Social Security will withhold a little more than 3-1/2 months’ worth of benefits.
But fear not: when you reach full retirement age (66 or 67, depending on when you were born), Social Security will make up for its withholding by giving you credit for the months you lost benefits. And once you reach that age, guess what? “You can get your benefits with no limit on your earnings,” the government says. More details can be found here.
Yes, it’s a bit confusing. Which is why my best advice, as usual, is for you to discuss all of these things with an experienced and trustworthy professional. Most will advise you to do something you might not want to do—keep on working for as long as you can and delay taking Social Security for as long as you can. If you don’t want to work, or simply can’t, then tread carefully.
Do you have questions about retirement, Social Security, where to live or how to afford it at all? Write to HelpMeRetire@marketwatch.com and we may use your question in a future story.
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