- 10 Myths and Misconceptions About Social Security
- Myth #6: Undocumented immigrants drain Social Security
- Myth #7: Social Security is a retirement savings account
- Myth #8: You don't pay taxes on Social Security benefits
- Myth #9: An ex-spouse's benefits come your own
- Myth #10: You lose benefits permanently if you keep working
- Social Security
- Beneficiaries and Benefit Payments
- Sources of Trust Fund Income
10 Myths and Misconceptions About Social Security
The facts: The two trust funds that pay out Social Security benefits — one for retirees and their survivors, the other for people with disabilities — have never been part of the federal government's general fund. Social Security is a separate, self-funded program. The federal government does, however, borrow from Social Security.
Here's how: Social Security's tax revenue is, by law, invested in special U.S. Treasury securities. As with all Treasury bonds, the federal government can spend the proceeds on a variety of programs. But as with all bondholders, Treasury has to pay the money back, with interest. Social Security redeems the securities to pay benefits.
This borrowing fuels the notion that the government is raiding or even stealing from Social Security and leaving it with nothing but IOUs. But the government has always made full repayment, and the interest increases Social Security's assets, to the tune of more than $80 billion in 2019 alone.
Myth #6: Undocumented immigrants drain Social Security
The facts: Some have blamed problems with Social Security's financial health on undocumented immigrants draining the system's resources. It's a popular complaint, but a false one.
Noncitizens who live and work in the U.S. legally can qualify for Social Security under the same terms as native-born and naturalized Americans, but undocumented people are not allowed to claim benefits.
There is evidence that undocumented workers actually improve Social Security's bottom line.
Some do obtain Social Security numbers under false pretenses, and payroll taxes are withheld from their wages even though they are not eligible to later collect benefits.
A report by Social Security actuaries said that undocumented immigrants made a net contribution of around $12 billion to the program in 2010 and that their earnings would ly continue to “benefit the financial status” of Social Security.
Myth #7: Social Security is a retirement savings account
The facts: The government does not stow your payroll tax contributions in a personal account for you, to be paid out with interest when you retire.
Your benefit is how much money you earned over your working life, not on how much you paid into the system. As noted above, those contributions fund benefits for current retirees (and their survivors, and people with disabilities).
When you retire, those still working will cover your benefits, and so on.
You might think of it less saving for retirement — there are other vehicles for that — and more an earned benefit the government promises to pay so you have at least some income in your later years.
Emphasis on “some”: Contrary to another common misperception, Social Security is not meant to replace your entire work income. On average, it provides about 40 percent of a beneficiary's preretirement earnings.
The formula for calculating benefits is weighted so that they replace a larger percentage of income for lower-wage workers and a lower percentage for upper-income earners.
Myth #8: You don't pay taxes on Social Security benefits
The facts: This was true until 1984. The Social Security overhaul passed by Congress and signed by President Ronald Reagan the year before included a provision that made a portion of Social Security benefits taxable, depending on your income level.
You will pay federal income tax on up to 50 percent 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.
Above those thresholds, up to 85 percent of benefits are taxable. Below them, you don't owe the IRS anything on your benefits.
(Roughly speaking, Social Security counts as income the money you get from work, pensions and investments; nontaxable interest; and half of your Social Security benefits.)
You might also owe state taxes on your Social Security income if you live in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, Utah or West Virginia. Their rules on taxing benefits vary widely; contact your state tax agency to learn more.
Myth #9: An ex-spouse's benefits come 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). As with benefits for a current spouse, these can be up to 50 percent of the benefit amount you are entitled to at full retirement age.
But those ex-spouse (or spouse) benefits don't reduce your Social Security. They are distinct payments and have no effect on what you receive each month, even if both a current and a former spouse (or multiple former spouses) are collecting them. You get the benefit you're entitled to, your earnings history and the age when you file for Social Security.
Myth #10: 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 full retirement age and continue working. In this circumstance, 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 2020, your benefit is reduced by $1 for every $2 in income above $18,240, if you won't hit full retirement age until 2021 or later.
If you will reach FRA in 2020, the formula is $1 less in benefits for every $3 in earnings above $48,600. On the date when you hit FRA, the earnings test goes away — there's no benefit reduction, regardless of your income.
Social Security also adjusts your benefit upward to so that over time, you recoup the money that was withheld.
Graphics: Social Security's Long-Term Financial Outlook
The annual report of the Social Security Board of Trustees presents the actuarial status of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds. The table below outlines key measures of the actuarial status of the trust funds under the intermediate assumptions in the 2020 report.
The projections and analysis in this year's report do not reflect the potential effects of the COVID-19 pandemic on the Social Security program. Given the uncertainty associated with these impacts, the Trustees believe that it is not possible to adjust their estimates accurately at this time.
The outlook for the combined OASDI trust funds has worsened from the 2019 report. The projected actuarial deficit for the combined trust funds over the next 75 years is 3.21 percent of taxable payroll, 0.43 percentage point greater than last year.
The main causes are the repeal of the excise tax on employer-sponsored group health insurance premiums above a specified level (commonly referred to as the “Cadillac tax”), which slows the projected growth in real covered earnings and results in less payroll tax income, as well as lower anticipated fertility rates, consumer inflation, and interest rates.
As a share of the economy as measured by gross domestic product (GDP), the actuarial deficit over the next 75 years is projected to be 1.1 percent.
Depletion of the DI Trust Fund asset reserves is now projected for 2065, 13 years later than in last year's report. Disabled-worker applications have continued to decline since 2010 and disability incidence rates have been well below expectations. sustained lower incidence rates, the Trustees have again reduced the long-range disability incidence rate assumption for this report.
The OASI Trust Fund alone can pay full benefits until 2034, the same as projected last year, and the combined OASDI funds until 2035, also the same as in last year's report.
|SOURCES: 2019 and 2020 Trustees Reports.|
|a. Includes adjustments for prior calendar years.|
|b. Includes a small amount of payments to the Railroad Retirement Board.|
|c. Measured at end of year.|
A 2019 annual surplus of $2.5 billion increased the asset reserves of the combined OASDI trust funds to $2.90 trillion at the end of the year. This amount is equal to 261 percent of the estimated annual expenditures for 2020. The 2019 Trustees Report had projected a $1.0 billion increase in combined trust fund reserves during 2019 under the intermediate assumptions.
The Trustees now project that OASDI annual cost will exceed total income beginning in 2021—one year later than projected in last year's report—and continuing throughout the projection period. After the projected trust fund reserve depletion in 2035, continuing income would be sufficient to pay 79 percent of program cost, declining to 73 percent for 2094.
Beneficiaries and Benefit Payments
At the end of 2019, the Social Security program was providing monthly benefits to about 64 million people: 54 million from the OASI Trust Fund and 10 million from the DI Trust Fund. Total benefit payments for the year (excluding payments to the Railroad Retirement Board) were $1,048 billion: $903 billion from the OASI Trust Fund and $145 billion from the DI Trust Fund.
Sources of Trust Fund Income
During 2019, an estimated 178 million workers had earnings covered by Social Security and paid payroll taxes. Employees pay a 6.2 percent contribution from earnings up to a maximum of $137,700 in 2020, which their employers match. Self-employed workers pay both shares of the contribution, or 12.
4 percent. More than 40 percent of current beneficiaries pay income taxes on part of their benefits, and those taxes go to the OASDI trust funds and Medicare's Hospital Insurance Trust Fund.
The trust funds also earn interest ($81 billion in 2019 for the combined OASDI trust funds) on their accumulated reserves.