5 Social Security Myths That Refuse to Die

I recently saw this article in AARP about Social Security and the myths surrounding it.

Because Social Security is important, there are always concerns about its current and future state. Many of us worry about all the changes to the program in its 85-year history which has created a bunch of myths on how it is funded and how it works.

Here are the facts behind 5 of the most stubborn Social Security myths.

I have to admit before reading this I believed all of them!

Be Well,

Myth #1: Social Security is going broke…

The facts: As long as workers and employers pay payroll taxes, Social Security will not run out of money. It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out.

Social Security does face funding challenges. For decades it collected more than it paid out, building a surplus of $2.9 trillion by the end of 2019. But the system is starting to pay out more than it takes in, largely because the retiree population is growing faster than the working population, and living longer. Without changes in how Social Security is financed, the surplus is projected to run out in 2035.

Even then, Social Security won’t be broke. It will still collect tax revenue and pay benefits. But it will only have enough to pay 79 percent of scheduled benefits, according to the latest estimate. To avoid that outcome, Congress would need to take steps to shore up Social Security’s finances, as it did in 1983, the last time the program nearly depleted its reserves. The steps then included raising the full retirement age (see Myth #2), increasing the payroll tax rate and introducing an income tax on benefits (see Myth #8).

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Myth #2: The Social Security retirement age is 65…

The facts: Full retirement age, or FRA – the age when a worker qualifies to file for 100 percent of the benefit calculated from lifetime earnings history – is currently 66 and 2 months. Those born in 1955 reach the milestone this year (or the first two months of next year). Over the next five years it will increase by two months at a time, settling at 67 for those born in 1960 and after.

The 65 threshold is a longtime Social Security truth that became a myth. When Social Security was created in 1935, 65 was set as the age of eligibility. In later decades the minimum eligibility age was lowered to 62, when people could claim a reduced benefit, but 65 remained the standard for full retirement.

That changed with the 1983 overhaul, which raised the retirement age 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 government raids Social Security to pay for other programs…

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.

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Myth #4: 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 likely continue to “benefit the financial status” of Social Security.

Myth #5: 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.

In Closing…

It is easy to get side tracked on all the rules of Social Security. When in doubt consult your accountant or the social security website DIRECTLY.

Do not rely on other sites that tend to perpetuate the myths.

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