50+ Lifestyles

Social Security Myths that Refuse to Die – Part 2

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. AARP recently published the facts behind 10 of the most stubborn Social Security myths. Last month we reviewed the first 5 myths. In review these are restated here with the next 5 myths continue.

Myth #1 Social Security is broke.

Myth #2 The Social Security retirement age is 65

Myth #3 The annual COLA is guaranteed

Myth #4 Members of Congress do not pay into Social Security

Myth #5 The government raids Social Security to pay for other programs.

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 is a popular complaint, but a false one. Non-citizens 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 nondocumented people are not allowed to claim benefits. There is some evidence that undocumented workers 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 #7: Social Security is like 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 based on how much money you earned over your working life, not how much you paid into the system. As noted earlier, those contributions fund benefits for current retirees (and their survivors, and people with disabilities). When you retire those still working will cover you benefits and so on. You might think of it less like saving for retirement – there are other vehicles for that and more like 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 misconception, Social Security is not meant to replace your entire work income. On average it provides about 40% of a beneficiary’s preretirement earnings. The formula for calculating benefits is weighted so that Social Security replaces a larger percentage of income for lower-wage workers and a lower percentage for upper-income earners.

Myth #8: You do not 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% of your benefits if your income for the year is $25,000 to $34,000 for an individual tax filer and $32,000 to $44,000 for a couple filing jointly. Above those thresholds, up to 85% of benefits are taxable. Below them, you do not owe the IRS anything on your benefits. Social Security counts as income the money you get from work, pensions and investments, nontaxable interest, and half of your Social Security benefits. Some states also tax Social Security income. Iowa and Illinois do not include Social Security benefits as taxable.

Myth #9: An ex-spouse’s benefits come out of 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% of the benefit amount you are entitled to at full retirement age. But those ex-spouse benefits don not 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 are entitled to based on your earnings history and the age when for 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 does not 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 chances every year and differs depending on how close you are to full retirement age. In 2021 your benefit is reduced by $1 for every $2 in income above $18,960 if you won’t hit full retirement age until 2022 or later. If you will reach FRA in 2021, the formula is $1 less in benefits for every $3 in earnings above $50,520. On the date when you fit FRA, the earnings test goes away – there is no benefit reduction, regardless of your income.

These are the 10 Social Security Myths recently published by AARP. Please contact us if we can provide additional information. Remember our monthly virtual Community Meetings continue during this month of August – see our ad this page. These meetings are designed for persons turning age 65 in 2021 and aging into Medicare.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.