Many of our clients have gotten inaccurate information regarding their Social Security benefits. There is a lot of information surrounding the subject, and it’s easy to see why some of the facts have been misconstrued. We hope to set some of those straight today.
Let’s talk about seven of the Social Security misconceptions that we hear most often.
1. Social Security Funds Won’t Last
As long as payroll taxes are being collected, Social Security will continue to have funding. The program operates on a pay-as-you-go system, meaning that the current revenue goes towards the current benefits being paid. Revenue comes in by way of FICA (Federal Insurance Contribution Act) and SECA (Self-Employed Contributions Act), which are paid by every working individual.
The caveat, and the reason there is a little truth to this misconception, is that we are currently paying out more benefits than the revenue that is coming in. At the end of 2020, the program actually had a $2.9 trillion surplus. However, more individuals are retiring than there are people entering the workforce and paying the taxes that contribute to the retirees’ benefits. That, paired with the fact that retirees are living longer, contributes to the possibility of Social Security not lasting past 2034.
This is not the first time that the program has faced funding issues. This also occurred in 1983. The possibility of depletion caused lawmakers to enact changes to increase funding, which included increasing taxes and the retirement age. Lawmakers will again have to consider options in the near future.
2. Full Retirement Age Is 65
Just like the first misconception we discussed, this one also started with the truth. When the Social Security program was first created in 1935, the full retirement age (FRA) was 65. However, the age was increased because of the funding problems they faced in 1983/84.
Full retirement age is the age at which an individual is eligible to receive 100% of their calculated benefits. When the program faced funding issues, they decided to increase this age over time. Those born in 1955 reach FRA at age 66 and two months. Over the next five years, the FRA is increased in two-month intervals, maxing out at age 67 for those born in 1960 or later.
3. Social Security Will Cover My Retirement
Social Security will offer individuals enough benefits to cover their entire cost of living during retirement. Individuals receive an average of 40% of their pre-retirement earnings. Those who earned high incomes receive less, and those with lower incomes may receive more.
Remember, current taxes pay for current benefits. Your payroll taxes do not sit in an account until you retire. Also, you do not receive benefits based on what you have paid into the program. Your benefits are based on the amount you earned over your lifetime.
4. My Ex-Spouse Is Getting My Benefits
Divorced individuals are eligible for their ex-spouse’s benefits, but it does not impact that person’s individual benefits. An ex-spouse can collect benefits based on your earnings, as can a current spouse. The benefits collected can be up to 50% of the amount you are entitled to. However, your benefits are not affected – the two accounts are separate.
5. Members of Congress Don’t Pay Into Social Security
This is another misconception that started out as the truth. Until 1984, members of Congress were not covered under Social Security and therefore did not pay FICA taxes. They were instead covered under a pension plan – the Civil Service Retirement System (CSRS).
As of 1984, members of Congress were included in Social Security and did begin paying FICA taxes. Even those in office prior to January 1, 1984, who were still covered under the CSRS still had to begin participating in Social Security.
6. Social Security Benefits Increase Every Year
The Social Security COLA is something that is considered each year. COLA is the Cost-of-Living Adjustment that is supposed to increase Social Security benefits in cases of inflation. In 2022, we will see a COLA of 5.9%.
COLA is based on a federal index of consumer goods and services. This index is called the CPI-W. It is calculated by looking at percentages from the third quarter of one year to the third quarter of the following year. If there is not an increase, there is no COLA. This has happened three times since the practice was adopted in 1975.
7. The Government Uses Social Security Funds for Other Programs
Revenue from Social Security is placed into one of two trust funds and is then invested in the U.S. Treasury securities (bonds). The Social Security trust funds are not part of the federal government’s fund, but the government is allowed to spend proceeds from the bonds on other programs. However, they must pay the money back to the program with interest. The government has never failed to pay back the borrowed money. In 2019, the interest alone increased the Social Security funds by over $80 billion.
Social Security is a complex system filled with confusing regulations and laws. It’s important for beneficiaries to understand the basics of how the program works, so they know what to expect in their retirement years.