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7 Myths of Social Security

Benefits lost forever, payment with interest, and other fallacies

Hinden SS Mailbox: Myths of Social Security, Gold Magnifying glass over social security


Social Security has a complicated set of rules and lots of exceptions to those rules, so it’s no surprise that myths have arisen over the years.

En españolSocial Security has a complicated set of rules and lots of exceptions to those rules, so it's no surprise that myths have arisen over the years about basic aspects of the program. We bust seven of the most common myths and misconceptions.

Myth 1: When you work and pay Social Security taxes, Uncle Sam puts your tax money in an account under your name. When you retire you get your money back with interest.

Fact: The fact is that Social Security is based on a "pay-as-you-go" system. The taxes that are paid by people who are working today provide the benefits that go to people who are retired. The Social Security taxes I paid during my career helped pay for the benefits received by my retired mother and father. And today, the Social Security taxes paid by my children are helping to pay for the Social Security benefits I receive each month.

Myth 2: Over their lifetimes, most people get back less money from Social Security and Medicare than they paid in Social Security and Medicare taxes.

Fact: Not so, according to a 2013 study by the Urban Institute that looked at the taxes paid and benefits received by seven categories of people, including single men and women and married couples at various wage levels. In all cases, the individuals and couples retiring at age 65 on average received more in benefits in Social Security and Medicare combined than they paid in taxes.

For instance, a typical single woman earning $44,800 in 2013 paid $407,000 in taxes during her working years and will receive $544,000 in Social Security and Medicare benefits over her lifetime. Likewise, a typical two-earner couple with each partner earning $44,800 in 2013 paid $816,000 in taxes and will receive nearly $1.03 million in benefits. However, in some scenarios younger beneficiaries, both singles and some two-earner couples, will pay more in Social Security taxes than they get out, although after taking Medicare into account, people in all cases come out ahead, according to the study.

Myth 3: If you become disabled by a serious rare disease, you'll still have to get in a long line with all the other applicants and wait a long time for disability benefits.

Fact: Not so. Social Security has a program called Compassionate Allowances, which was created to quickly provide disability benefits to people with rare and life-threatening diseases. Currently, more than 200 medical conditions are on the Compassionate Allowances list, ranging from "A" — Acute Leukemia — to "Z" — Zellweger Syndrome. The program permits Social Security to speed disability benefits to obviously disabled applicants about whom medical information can be obtained quickly. You can see the full list of conditions on Social Security's website.

Myth 4: A married man or woman who has never worked is not eligible for Social Security benefits.

Fact: The rules in fact permit people like these to receive Social Security payments based on the work records of their spouses. Nonworking spouses can receive benefits equal to up to 50 percent of the benefits of their working spouses. To be eligible, the nonworking spouse must be at least 62 years of age while the working spouse must generally be receiving retirement or disability benefits.

The spousal benefit opens the door to a number of strategies that can, over time, improve the Social Security income of a married couple. For instance, when the working partner reaches full retirement age, he or she can file for retirement benefits and then immediately suspend those benefits. Doing this allows the other partner to file for a spousal benefit. It also allows the earning spouse to keep working and collect delayed retirement credits of 8 percent a year. For more information, read "Retirement Planner: Benefits for Your Spouse."

Myth 5: If Social Security withholds some or all of your retirement benefits because you continue working and go over the earnings limits, you lose that money forever.

Fact: If you exceed the earnings limit, Social Security will recalculate your benefits after you reach full retirement age to give you credit for any months in which your benefit was cut for exceeding the limits. As a result, your monthly payments are likely to increase and return to you the money you didn't get.

By the way, the limits apply only to people taking benefits before full retirement age, currently 66. After that, the limits go away and you can earn as much as you can without penalty. The limit now is $15,720 a year until the year in which you reach full retirement age. For each $2 you earn above this figure, Social Security holds back $1 in benefits. In the year you'll reach that age, the cap changes to $41,880 for the months before the one in which you'll celebrate your birthday. This time the formula is $1 held back for each $3 that you earn over the limit.

Myth 6: When you start collecting your retirement benefits, they'll be proportional to how much you earned during your working life.

Fact: Not quite. When you to decide to take your retirement benefits, Social Security's computers will look at how much you earned during your career, with an emphasis on the highest 35 years. The computers will then apply various formulas and adjustments to your earnings history and will come up with your Primary Insurance Amount (PIA), your basic retirement benefit at your full retirement age.

One of the calculations that helps determine your PIA is the "replacement formula." This is basically Social Security's effort to level the playing field for retirement benefits among high-, medium- and low-wage earners. Thus, in recent years, high-wage earners ($72,138 and above) had about 35 percent of their working income replaced by Social Security, while low-wage earners ($20,289 and below) had more replaced, about 57 percent.

Another thing to consider: Income over certain levels ($118,500 in 2015) is not taxed for Social Security, nor does it figure in the calculation of your ultimate benefit.

Myth 7: The best retirement strategy is to take your reduced Social Security payments as soon as they're available at age 62. If you decide to wait a few years to get a larger benefit and you die before your benefits can begin, you will have lost many thousands of dollars.

Fact: Some myths, like this one, contain elements of truth — some people do pass away and never collect. But the fact is that most people don't die before the benefits begin and they go on to live for many years. Unless you're already in ill health or have a family history of limited longevity, fear of early death may be misplaced. Women on average live until 86, men until 84.

Happily, the longer you wait to begin Social Security benefits, the more money you receive in each check. Still, no matter when you take benefits, Social Security offers this comforting advice: "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70, or any age in between." For more, read "When to Start Receiving Retirement Benefits."

Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question? Check out the Social Security Mailbox archive. If you don't find your answer there, send an email to the Social Security Mailbox.

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