There are many myths surrounding Social Security. With 65 million retired Americans drawing monthly benefits to the tune of $93 billion each month, it’s important to understand Social Security and dispel the misconceptions.
Social Security Is Going Away
This is probably the most common misconception about the Social Security program. This does have a glimmer of truth in it, but let’s talk about why this myth exists and why it’s not true.
The Social Security program is a pay-as-you-go service. Individuals who are currently paying zin FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) are contributing to the benefits that are being sent to current retirees. As long as there are individuals paying payroll taxes, there will always be funding coming in.
Now, here is where the glimmer of truth shines through. There are currently more benefits going out than coming in. Up until 2020, there was actually a $2.9 trillion surplus of funds. However, there are more people retiring than there are people joining the workforce. Plus, those retirees are living longer. At this pace, Social Security could face funding issues by 2034.
This is not the first time this has happened. The same issue surfaced in 1983. Changes were made to the program to resolve the problem. Those changes included increasing the tax rate as well as the full retirement age. Congress will need to decide how to resolve future issues.
Undocumented Immigrants Take from Social Security
There are ways for individuals to obtain a Social Security number under false pretenses. However, this doesn’t necessarily hurt the Social Security program. In fact, actuaries within the Social Security Administration believe that it helps the program’s bottom line.
Once an undocumented immigrant has obtained a Social Security number, they will begin paying payroll taxes, including FICA or SECA. Actuaries estimate that these contributions amounted to $12 billion in 2010. Anyone who obtained a Social Security number illegally will not be able to collect Social Security benefits in the future, including the undocumented immigrants who have done so.
Social Security Covers Retirement Expenses
This is a myth that needs to be squashed as it harms so many people in retirement. Social Security is not meant to cover every expense you may have during retirement. On average, it will only replace about 40% of your preretirement income.
Remember, your current payroll taxes actually go towards current retirees – they are not saved specifically for your retirement. Individuals who are paying taxes during their retirement years will be contributing to your retirement benefits. Plus, your benefits are not based on what you paid into Social Security. They are based on the amount you earn while working.
Once you reach retirement age, your benefit amount is calculated using a weighted formula. Those who earn less will have more of their preretirement income covered than those with much higher incomes. Everyone should employ other investment strategies outside of Social Security to save for retirement.
Social Security Benefits Aren’t Taxed
This is another myth that is understandable as it used to be true! We briefly mentioned the changes that occurred in 1983 and 1984 to help fund the Social Security program. One of those changes included the taxation of Social Security benefits.
Currently, individuals who earn between $25,000 and $34,000 or married couples who file a joint return and earn between $32,000 and $44,000 will be taxed on up to 50% of their benefits. Below those thresholds, individuals will not pay any taxes. Above them, they may be taxed on up to 85% of their benefits.
Some states also collect state taxes on Social Security. Those states include West Virginia, Utah, Vermont, Rhode Island, North Dakota, New Mexico, Nebraska, Montana, Missouri, Minnesota, Kansas, Connecticut, and Colorado.
Social Security Benefits Are Increased Each Year Through the COLA
Social Security beneficiaries will see a 5.9% increase in their monthly benefits starting in 2022. This is due to the Social Security Cost-of-Living Adjustment (COLA). COLA is a piece of legislation that was introduced in 1973. It allows for increases in Social Security benefits to keep up with the pace of inflation.
COLA increases are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The program looks at the percentage increases from the third quarter of one year to the third quarter of the next year. If there is an increase, Social Security benefits will be raised. If there isn’t, as has happened three times over the years, benefits will remain the same.
These aren’t the only misconceptions surrounding the Social Security program, but we hope it gives you a little more understanding of how the program works and what you can expect in future years.
