Five Myths About Social Security

By A. Andrew Raub

True Peace of Mind Investors take the time to find out the facts—both in life and in their finances. Good or bad, we’ve all got to deal with reality, not run from it. Once you take an honest look at where you are, where your destination is, and what your roadmap offers you, you can then clearly figure out how to get from here to there. These steps apply as much to Social Security issues as they do to the rest of your life and finances. So much misinformation and confusion surrounds Social Security benefits that many people either avoid the subject all together or succumb to believing the myths—and suffering the consequences.

Let’s confront five common myths regarding Social Security so that we can then look at how it affects our plan to get to our destination.

MYTH: Social Security is taxed at 85 percent.

I have heard many people say they believe their Social Security will be taxed at 85 percent, or at least a higher than normal rate. In fact, some seminars even use this “fact” as a scare tactic to sell financial products. Well, the truth is all in the wording.

Generally, if your taxable income is above $44,000, and you are married filing jointly, 85 percent of your Social Security benefits are subject to income tax at your regular tax bracket rate—15 percent, 25 percent and so on.

That is very different than having the IRS take up to 85 percent of your benefits! In addition, you may find that far less than 85 percent of your benefits are taxable if you have a lower income.

MYTH: I should delay taking Social Security.

Unfortunately, no one-size-fits-all solution answers whether we should take Social Security early (age 62), at full retirement age (currently 65 to 67), or delay benefits until age 70. Anyone who says that one answer fits all for Social Security is selling a myth.

The basic issue is this: you can claim retirement benefits before your full retirement age, and you will receive a permanently reduced monthly benefit for a longer period of time—or you can wait to claim benefits until your full retirement age, and your monthly benefit will be unreduced and paid over a shorter number of years. You can also delay until age 70, the age when benefit amounts stop increasing. The important factor then becomes how long you expect to live.

So what’s the difference, and does it pay to wait? Today, a 62 year-old might receive a maximum benefit of $1,540 per month, a 65 year-old $2,050 per month, and a 70 year-old $2,740 per month. Benefits increase at about 6 percent per year between ages 62 and 70.

According to this calculation, the “break even” age for if you wait until age 66 rather than taking benefits early at age 62 is 75. However, this assumes you spend it all. A more realistic calculation assumes you take your benefits early and invest it at about 6 percent. In this case, the “breakeven” age is 83. The Social Security Administration estimates that men who reach the age of 62 will live until they are 80 on average and that women who reach age 62 will live until about 83.

Whatever the numbers, the decision to take Social Security early or at normal retirement age should depend on health, family background, retirement savings, and comfort level—and not the one “right” answer.

MYTH: I can’t work and receive Social Security at the same time.

You can work and still receive retirement benefits—but they might be reduced if you opt for early Social Security withdrawal. In this case, if you choose to work from age 62 to full retirement age, your Social Security benefit will be reduced by $1 for every $2 you earn above a certain amount. That amount is based on age but is generally between $10,000 and $12,000.

This reduction is also only in cases where you earn 1099 or W-2 income as a result of employment. It is not triggered by retirement plan income. And once you reach full retirement age, you can keep working and earn as much as you want and your Social Security benefits will not be reduced.

MYTH: Non-working spouses do not qualify for Social Security benefits.

This is simply not true. For retirement benefits, a spouse has the option of receiving any benefits for which they have qualified or one half of the other spouse’s benefit—whichever is larger. For instance, my wife has been fortunate enough not to work since our children were born. Therefore, her retirement benefit from Social Security would be very low. However, she can receive one half of my benefit while I’m alive.

At my death, she would generally receive my full retirement benefit as a widow’s benefit instead of the one-half retirement benefit as a spouse. The spousal death benefit is based upon several factors including the age of the deceased, age of the surviving spouse, and the income history of each spouse. As a general rule of thumb, if both spouses have reached full retirement age, the surviving spouse may receive 100 percent of the deceased spouse’s benefit.

MYTH: I need to get my Social Security benefits out now, or I’ll never see anything I put into it.

The long term future of Social Security is uncertain. In 1950, there were 16 people in the workforce for every Social Security recipient. In 2004, there were 3.3 workers per recipient. In order to increase the likelihood that Social Security will survive, Congress has enacted age delays for younger workers. A 25 year-old today will not be able to receive full benefits until age 73. Other ideas to reform the system have been proposed, but little action has actually occurred. The good news is that current recipients should continue to receive benefits without interruption or reduction through the early 2040’s. Current recipients should also continue to receive cost-of-living adjustments annually based upon increases in the Consumer Price Index.

The younger you are, the more I would advise you to build a retirement plan independent of Social Security. While the future of Social Security is uncertain, you can prepare other investments to finance your retirement in the time that you have. Don’t get caught unprepared.

It’s impossible to make wise decisions when you base your choices on myths. This is certainly true when it comes to Social Security. Remember, Peace of Mind Investing is knowing where you want to go and putting together a plan to get there. If you don’t have all the facts—about Social Security in this instance—then it’s pretty hard to create a good plan for your future.