50+ Lifestyles

Social Security Myths that Refuse to Die

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Given Social Security’s importance, concerns about its current and future state are understandable and widespread. Some of those worries and the many changes to the program in its 85-year history have given rise to misconceptions about how it is funded and how it works. Here are the facts behind 10 of the most stubborn Social Security myths.

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 will not 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).

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% 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 5 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 annual COLA is guaranteed. The facts: Since 1975 Social Security law has mandated that benefit amounts be adjusted annually to keep pace with inflation. But there is no requirement that this cost-of-living adjustment (COLA) produce a yearly increase. 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 from the third quarter of one year to the 3rd quarter of the next. In 2020 the index showed a 1.3% increase in prices, so 2021benefits grew by that amount. But if the index doesn’t show a statistically measurable rise in prices – if there is effectively no inflation – then there is no adjustment to benefits. This has happened 3 times since the current benefit formula was adopted – in 2010, 2011, and 2016. Whether or not it produces a benefit increase, this process is automatic: it does not involve the president or congress. They would have to take separate action to change the COLA.

Myth #4: Member of Congress don’t pay into Social Security. The facts: A common complaint about Social Security is that members of Congress don’t bother fixing the program because it doesn’t cover them. Actually, it does. Members or congress came under the Social Security umbrella in 1984 along with the rest of the federal workforce, as part of the sweeping changes to the program enacted the previous year. Before that, senators and representatives did not pay into Social Security and were instead fully covered by a pension plan called the Civil Service Retirement System. Those in office on January 1 1984 were allowed to remain in

CSRS, but only in conjunction with Social Security. (If your curious, two senators and five House members remain from those days). Those elected since are covered by Social Security as well as a pension program that replaced CSRS. Either way members of Congress pay into Social Security just like most American workers.

Myth #5: 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.

We will continue with 5 additional myths in next month’s 50+. We continue with our virtual monthly Community Meetings for persons turning 65 and becoming eligible for Medicare. Our July meetings are July 20 and 22nd – at 10:30. Call our office 563.332.2200 to be included in these virtual meetings. Tuesday July 20 we focus on the basics of Medicare and the Medicare Supplement plans. On Thursday July 22 we again focus on the basics of Medicare and then concentrate on the alternative to Medicare – with the Advantage Plans. Call 563.332.2200 to arrange to participate in these meetings via your own home laptop or desktop computer.