- 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
- Don’t Count on Social Security: Here’s Why
- How Does Social Security Work?
- What’s the Typical Monthly Benefit?
- What’s the Current State of Social Security?
- How Much of My Retirement Will Social Security Cover?
- How Should I Use Social Security Benefits?
- The coming collapse to Social Security as we know it
- Retirement boom
- Rock and a hard place
- Will Social Security Run Out Before I Retire?
- Why People Think Social Security Will Run Out (and Why They’re Wrong)
- Social Security: A Brief History and How it Works
- The Bottom Line
- Retirement Tips
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.
Don’t Count on Social Security: Here’s Why
When I speak at events across the country, people ask me all sorts of questions about retirement planning. And one subject seems to trip them up a lot—Social Security. People just don’t know how it works. Or when to apply. Or how much to plan on.
That lack of knowledge is all too common. In fact, nearly 70% of people who took a 10-question quiz on Social Security failed the quiz. And of the 1,500-plus respondents, only one woman got a perfect score!(1)
Folks, we have a problem. When people don’t know the facts about Social Security, they can make poor decisions about funding their retirement. And that’s not okay!
I understand how confusing government programs can be. The legal jargon alone can give you a migraine. But you need to know this stuff to make smart decisions for your future, so let’s take a look at the basics of Social Security. This is important, so pay attention!
How Does Social Security Work?
You and I give a percentage of every paycheck to the Social Security program. Ever notice that line on your pay stub that says “FICA”? That stands for Federal Insurance Contributions Act.
This tax includes contributions to both Social Security and Medicare. Your employer may list “OASDI” (Old Age Survivor and Disability Insurance)—that’s Social Security. Or Medicare may be shown as “Fed Med/EE.” In every paycheck, 6.
2% of your gross income goes to Social Security and at least 1.45% goes to Medicare.(2)
For 2020, you get a credit for every $1,410 you earn—up to a maximum of four credits a year. You need 40 credits to receive Social Security benefits when you retire. If you make at least $5,640 this year, you’ll earn all four credits. And if you continue getting all four credits for 10 years, you will be eligible to receive Social Security benefits. (3)
Even though you’ll ly earn those 40 credits pretty early in your career, you don’t get to start taking out Social Security payments until you reach a certain age.
You can start taking out a reduced benefit (70% of your full benefit) at age 62. If you were born in 1960 or later, full retirement age is 67.
If you were born before that year, full retirement age decreases slightly by month and year of birth.
Now, you can choose to delay receiving your benefits—and you’ll be rewarded for it. If you wait until age 70 to start receiving Social Security, you’ll receive between 124% and 132% of the full benefit, depending on your age.(4) That’s free money! So, if you’re in good health, delaying retirement a few years might be a great option for you.
What’s the Typical Monthly Benefit?
According to the Social Security Administration, the estimated average monthly benefit for retired workers will be $1,503.(5) That’s just over $17,500 a year. To put it in perspective, the poverty guideline for a one-person household in 2019 was $12,490.(6) You won’t be jetting off to Paris, France, on that kind of income. Maybe Paris, Texas.
many other government calculations, figuring out your expected monthly benefit is complicated. It’s how much you make throughout your career. Your earnings for the highest 35 years are averaged out, and then a benefit formula is applied. The end result is your monthly benefit from Social Security.
The good news is that each year the Social Security Administration will send you a letter that shows what your expected monthly benefit will be when you retire. If you’re young, it’ll be inaccurate because your salary will ly increase. If you’re getting close to retirement age, you can use that estimate to plug into your planning.
What’s the Current State of Social Security?
Uncle Sam has been giving away more Social Security money than he is taking in. Some projections estimate that Social Security will be insolvent (a fancy word for “run out”) by 2035.
(7) The future of Social Security isn’t looking so good. If Congress doesn’t plug the leak, benefits could drop to around 79% of the current amounts.
(8) And by the time that decade rolls around, who knows? It’s all up in the air—which is not a good place to be when you want to retire.
Because today’s workforce (anyone who’s currently working) is still paying FICA, Social Security won’t suddenly collapse. As long as FICA exists and money is coming in, qualified retirees will continue to receive Social Security benefits. There will ly be some money for you when you retire. The real question is: How much money will you actually get by then?
At this point, nobody knows. Simply put, if you’re counting on Social Security to pay for all your needs and wants in retirement, your future is in the hands of the people in Washington, D.C. Scary, I know.
How Much of My Retirement Will Social Security Cover?
Unfortunately, a lot of people still believe they can live off Social Security when they retire. And believing that myth could be costly.
A recent survey found that the majority of people over age 50 think Social Security will cover 50% or more of their expenses in retirement.(9) But Social Security is designed to replace only 40% of the average worker’s pre-retirement income.
And most financial advisors say retirees will need 70% or more of pre-retirement earnings to live comfortably.(10) Are you seeing the problem? I hope so!
How Should I Use Social Security Benefits?
You need to think of Social Security as the icing on the cake rather than the cake itself. It would be a nice bonus, but don’t count on it. You need a better, more reliable plan—one that depends on your hard work and dedication, not the decisions made by a bunch of politicians.
If you haven’t started saving for retirement, now’s the time. If you’re debt and have an emergency fund in place, you need to be investing 15% of your gross income for retirement. Your company 401(k) program (or something it) is a great place to start.
Another thing you need to do is talk with a financial advisor. These folks will help you create a plan to reach your wealth-building goals. If you don’t have a financial advisor, you can check out our SmartVestor service. It’ll give you a list of advisors in your area who follow the same solid financial principles as I do.
Mama Hogan used to say, If it is to be, then it’s up to me. Your retirement is in your hands, so don’t let your future slip through your fingers. Get to work!
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The coming collapse to Social Security as we know it
Border wall funding, a government shutdown (or a government showdown!), trade relations and tariffs between the U.S. and China, the Fed continuing to raise rates with a teetering stock market — there has been plenty to fret over this holiday season. But something else is happening quietly that is nevertheless one of the most important issues in the history of America.
I am referring to, what I label as, the coming disenfranchisement of our Social Security system, at least as we know it.
Disenfranchisement, quite a stark word, is defined as the state of being deprived of a right or privilege. As a lawyer, I should know better than to use this word in relation to Social Security, since the U.S. Supreme Court ruled in the 1960 case Flemming v. Nestor that the receipt of payments from the program was not a“right,” even where a participant had paid into the system for years.
Even so, the reality is that most Americans count on and expect that “their” Social Security, in its present form, will be there for them. But it will not – at least that is what the current math unfortunately tells us.
Make no mistake, Social Security is a pay-as-you-go system.
Even though there is an estimated nearly $3 trillion in the trust fund, this simply reflects accounting entries of the net surpluses the fund has been credited with, plus interest earned, since inception.
There is no actual money in the fund, just the special-issue Treasury bonds, which are in fact government IOUs. The real surpluses have been used by the federal government as a funding source of many things.
But no more – the days of surplus payments are over now and under the current system will be for the coming 75 years. For the first time since 1982, this year more benefits will be paid than revenues collected. This is no surprise to the government, as they have projected and forecasted these figures our demographics in the annual Trustee Report since 1941.
But as difficult as that is to swallow, that is not the issue I focus on. What consumes me is the much larger problem of what is coming.
When you break down the birth rates between 1946 – 1964, you see that births peaked in 1957, followed closely through 1964.
This means that about 70 percent of the Boomers have not even begun to retire yet, and beginning in 2022 the bulk of the generation will retire in a five to seven-year succession, one year after the next.
In other words, our system is now approximately 2 full time equivalent payors for every 1 recipient receiving Social Security benefits, 2-to-1, costing us more than we are taking in, and 70 percent of this great generation has yet to even be a recipient in the system. (2018 Trustee report showing 2.8-to-1 includes all workers who worked at all during the year, and is not reflective of true contributors to system.)
Keep in mind that every time a Boomer retires, they are a double negative to the federal budget as they go from being a positive contributor through payroll taxes to no contribution with their retirement (the 1st negative impact) and then they move onto the system as a recipient (the 2nd negative budget impact). The lower birth rates of Gen X and Millennials, comparatively, not including surplus immigration, does not help.
Before he was Speaker of the House, Paul Ryan asked the CBO to analyze these future problems back in 2008. The resulting report was unequivocal. If the benefits paid via Social Security, Medicare and Medicaid remained (at 2008 levels) with the retirement of the Baby Boomers, benefits would have to be cut, taxes would have to go up, or more ly BOTH.
Rock and a hard place
If you are one of those in the camp of “no politician will ever be elected that will cut our Social Security benefits,” as I so frequently hear in my work across the country, let me introduce you to another harsh reality. The timing of the mass retirement of our Boomer generation is colliding with the reality of our federal debt reaching an unsustainable critical mass.
At around $22 trillion and climbing, we will not be able to debt finance these benefits for a sustained time period.
Once we hit $30 trillion in total debt, which as forecasted could happen in less than 8 years with the projected $1 trillion annual deficits, interest servicing alone will cost us more per year than we spend on Medicare and the military combined – a simple impossibility for the United States.
Thus, it is clear that the proverbial can cannot be kicked down the road any longer. The road is ending, and the cliff lies dead ahead just the iceberg did for the Titanic.
We cannot borrow our way out. As I see it, it is a mathematical certainty that benefits will be cut (I believe on some kind of aggressive means tested basis) and taxes will go up (also ly dramatically, according to the math).
And hence the word… the coming “disenfranchisement” of Social Security – Americans being deprived of the privilege of the full benefit payments upon which they were counting.
It is no wonder that Congress has expressly reserved the right to alter, amend, or repeal any provision of the Act and the U.S. Supreme Court has established that it is not a right.
We must wake up and prepare accordingly.
Rebecca Walser is a licensed tax attorney and certified financial planner and author of the book Wealth Unbroken, who specializes in the strategic planning of maximizing lifetime wealth while minimizing tax through her practice, Walser Wealth Management . She earned her juris doctor degree from the University of Florida and her Master of Law degree in taxation from New York University. She is a frequent national media contributor.
Will Social Security Run Out Before I Retire?
While there are a lot of questions about the future of Social Security, the fact is that it is highly unly the program will ever actually run money. The federal government founded the Social Security program during the Great Depression. The program provides money to people after they’ve retired.
A tax that everyone pays while they are working provides most of the funds in the program. Today’s retirees use money today’s workers are paying; tomorrow’s retirees use money tomorrow’s workers will pay.
For more help with Social Security and any other financial questions, consider working with a financial advisor.
Why People Think Social Security Will Run Out (and Why They’re Wrong)
Social Security has become a hot button political topic in the past few decades.
Some even call it the “third rail” of American politics, implying that to dare touch the program means certain political death.
One of the biggest reasons it’s such a big deal is that some people think the money to fund the program is going to run out and leave tomorrow’s seniors, who are paying into the system now, out in the cold.
People believe the program will run money for many reasons, including:
- The Social Security trust funds going broke. It is true that the Social Security trust funds, where the money raised by Social Security taxes is invested in non-marketable securities, is projected to run funds by around 2034. The tax will still raise money each month, though. Projections show that even if nothing is done about the trust funds, the program will cover around 79% of its obligations through 2090. That is a funding issue to address. It doesn’t mean, though, that the program will go bankrupt.
- Undocumented immigrants taking benefits. This is simply not true. Undocumented immigrants cannot claim Social Security benefits, though they and their employers do often pay into the system.
- Demographic changes. Past generations had more children than we do today. People over 65 make up 12% of the population today. In 2080, they could make up 23% of the population. Also contributing to the larger elderly population is modern medicine, which allows people to live much longer than they used to. This means they are alive past the current retirement age for more years and thus are spending more years collecting checks. While this also could contribute to a funding crunch, there are proposals to solve it, including advancing the retirement age. It is unly this will lead to a full collapse of the Social Security program.
While Social Security is unly to run out, that doesn’t mean the government won’t need to take some steps to protect the security of the program in the coming years. Steps could include raising the age at which you can begin to receive payments or increasing the payroll tax that pays for Social Security.
Social Security: A Brief History and How it Works
Before explaining why Social Security is unly to die out, it helps to know a bit about how the program came to be. President Franklin Delano Roosevelt signed the Social Security Act into law in 1935.
That followed generations of Americans fighting for a social insurance program that could help support American workers once they reached retirement age.
Before that, there was no social welfare program designed to support people once they reached the age where it became difficult to work. The government first collected Social Security taxes in 1937 and payments began in 1940.
The Social Security Administration, an independent government agency based in Maryland, administers the program. The government has created other programs throughout the years, including Social Security Disability Insurance and Supplemental Social Income.
A dedicated tax on earnings pays for most of Social Security. The total is 12.40%, 6.20% of which is paid by the worker and 6.20% of which is paid by the company. There is a cap on taxable income of $132,900 for 2019, meaning that income above that level is not subject to Social Security taxes.
The cap is expected to rise to $137,700 in 2020. The money pays retirement benefits for retirees. Workers earn “work credits” total income earned during their career. These credits determine a person’s total retirement benefit. In retirement, a check arrives monthly.
Some people are also eligible for survivor benefits when their spouse dies.
The Bottom Line
It isn’t a stretch to say that Social Security is a program with some issues. Still, it is not in imminent danger of completely running money. While some changes will probably have to happen to make sure it is completely safe, young people who fear they will not be getting any payments from Uncle Sam in retirement are probably worrying a bit too much.
- Social Security won’t be enough to live on in retirement, so you’ll need to save on your own as well. SmartAsset’s financial advisor matching service will help you find someone to help. You answer a few questions and we match you with up to three advisors in your area, all fully vetted and free of disclosures.
You talk to each advisor and make a decision about whether you want to move forward with one of them.
- A 401(k) plan is a great way to to save for your retirement. If you already have one, see how much it could be worth when you retire with our 401(k) calculator.
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