Since its inception in 1935, Social Security has been modified to reflect changing times and circumstances. Now, due to demographic shifts, it’s likely this safety-net program will require further modification in order to remain solvent.
Because of its size and complexity—and the fact that it could be altered by lawmakers at any time—Social Security has spawned many myths. Here are a few of the more stubborn ones you should ignore.
Social Security is a retirement plan. This belief is based on the misconception that the money you put toward the program is held in trust for you and that there is an account with your name and holding your contributions. This myth stems from confusing Social Security with other forms of retirement financing such as IRAs and 401(k)s. While Social Security taxes may be listed on your pay stub next to your 401(k) contributions, Social Security functions differently. A pay-as-you-go program, the money paid in by current employees funds the benefits of current retirees.
I will be able to live on Social Security. Social Security was never intended to solely fund your retirement lifestyle. The benefit is quite small compared to what most people will require in retirement—especially given the high out-of-pocket cost of health care. In NH, beneficiaries receive an average of $1,312 per month, a fraction of what most people require. Nevertheless, according to AARP, for three in 10 Granite Staters 65 or over, Social Security is their only source of income—a worrying trend.
I should wait as long as possible to file a claim. Assuming you can rely on other sources of income during retirement, such as withdrawals from an IRA or 401(k), waiting until you reach full retirement age can result in a significantly larger benefit. If you were born before 1954, the earliest you can file a claim is age 62. At that age your benefit would be only 75 percent of what you’d receive at your full retirement age of 66. If you can delay filing a claim until 70, your benefit would increase 32 percent over what you’d receive at 66. Waiting to file beyond age 70, however, yields no increase in benefit.
I’ll lose benefits if I work. It’s true that if you file before full retirement age and continue to work, your benefit will be reduced based on your earnings. However, that amount is not forfeited but rather delayed until you reach full retirement age. Once you reach full retirement age, your benefit will be increased to make up the difference. Moreover, your additional earnings may increase the benefit you qualify for. They may however be taxed, depending on your income, both earned and passive.
I never worked, so I don’t qualify. Just because you never worked outside the home does not mean that Social Security is not available to you. The program provides a spousal benefit, assuming that your spouse has qualified by working for at least 10 years. The spousal benefit is equal to half of the beneficiary’s benefit and can be claimed as early as 62 (assuming the beneficiary has filed a claim). Here again, waiting until full retirement age to claim spousal benefits will boost your benefit.
I’m divorced, so I don’t qualify. If you’re divorced but were married for 10 years or longer, you may still qualify for benefits, even if your ex-spouse has remarried. You may claim a spousal benefit as long as you have not remarried and your ex-spouse has qualified by working for at least 10 years. Of course, before claiming a spousal benefit, you want to ensure that amount is larger than what you would qualify for based on your own earnings history.
Self-employed people pay double. While there is some truth to this myth, it does not tell the whole story. As a self-employed person, you are responsible for the employer’s and the employee’s Social Security contribution. Thus, earnings up to $118,500 will be taxed at 12.4 percent (double what an employee alone would pay). However, you can deduct the employer’s half of the contribution when you file your business tax return, which will lessen the impact.
I can collect Social Security and still operate my business. That depends. If you’re self-employed and file a claim before your full retirement age, your benefits could be reduced if you provide “substantial services” through your business. According to the Social Security Administration, you are providing substantial services if you work more than 45 hours a month or if you work between 15 and 45 hours in a highly skilled occupation. Furthermore, there are limits to what you can earn through your business before your benefits are reduced (currently $15,720 per year).
After more than 80 years, this once-novel program has become the bedrock of retirees’ financial security. Therefore, it is important to find out and understand the many Social Security options available to you. It can make a big difference in the amount of money you receive. However, the best thing you can do, regardless of your age, is to start planning and saving for your retirement now as Social Security was never intended to provide your entire income in retirement.
Stephen G. Davis is the founder and president of S.G. Davis Financial Group LLC, an independent financial planning firm with offices in Concord, Nashua and Keene. For more information, visit sgdavisfinancial.com or call 603-715-2335.
Current Issue - May 2024