Social Security is a godsend for older Americans, but the program also is very complicated. And that complexity has allowed myths to bloom that can send workers approaching retirement into full-blown panic mode or give them a false sense of security.
While a lot of good information is out there about how to get the most from Social Security, much of what you hear is just flat-out wrong.
It's time to debunk these 12 Social Security myths.
1. 'It’s smart to collect benefits as soon as you can.'
So-called experts cite a couple of reasons why you should believe this. Even if you don’t need the money for living expenses, they say, you could invest it and make even more money. They also ominously predict that benefits will disappear altogether someday.
You can take Social Security starting at age 62, but claiming early is not a smart strategy for most people. Early birds get only 75% of what they would at age 66, and the reduction can be permanent. People who hold out until age 70 collect the biggest payments.
Yes, Congress may scale back the program, but lawmakers would likely keep benefits at the existing levels for people who are already in or near retirement.
2. 'Social Security benefits are not taxable.'
This was true back in the early days of the program, but it wasn’t laid down in the law. In early rulings, the Treasury Department concluded that benefits were considered nontaxable "gratuities."
An act of Congress in 1983 officially allowed benefits to be taxed. If your income is above a certain threshold, you may owe federal taxes on a percentage of what you collect. And some states tax Social Security, too.
But it's possible to reduce the tax hit on your benefits. For example, IRA withdrawals can push your income and your benefits into taxable territory, so consider taking your IRA distributions before you start collecting Social Security.
3. 'Social Security is going belly-up.'
The program may be challenged, but it's nowhere close to going broke. It operates with a surplus of $2.9 trillion these days.
What has analysts concerned are the increasing numbers of retirees and decreasing birth rates. With fewer young workers replacing retirees in the workforce, less is being paid into the system.
According to the latest projections, Social Security's cash reserves could be drained by 2034. However, even if Congress does absolutely nothing between now and then, the system is capable of paying out almost 80% of promised benefits through 2090.
4. 'You can take reduced benefits early and get a bump-up later.'
When you take Social Security early and receive a lower benefit, there is no automatic increase in later years.
But you can lift your payments by suspending them when you reach your full retirement age, currently 66 for most retirees. You'll raise your benefits by up to 8% for each year the suspension remains in place, up to age 70.
Here's another way to increase the reduced benefits that come from claiming early: Just withdraw your claim within one year, and repay all benefits that you or family members received.
Then, wait to claim again at full retirement or later, to receive a larger payment. Note that you're allowed only one of these do-overs during your lifetime.
5. 'If you keep working, you’ll lose benefits.'
This is true only for people who claim benefits early. If your income tops a certain level, your benefits will be cut.
In 2019, the limit is $17,640. For every $2 you earn above that amount, you lose $1 in benefits — until the year when you turn your full retirement age. Then, $1 is withheld for every $3 earned over $46,920.
Once the month arrives when you hit full retirement, you income stops affecting your benefits. And, your payments will be adjusted so you'll gradually regain what you lost.
6. 'Divorce reduces your benefits.'
Nothing could be further from the truth. In fact, if your ex had a longer work record or significantly higher earnings than you did, you might be better off than you think.
If you’re at least 62, your marriage lasted at least 10 consecutive years and you’re currently unmarried, you may file for benefits based on an ex-spouse’s record. It doesn't matter if your ex remarried.
At your full retirement age, you'll be entitled to half of your former spouse's full retirement benefit.
7. 'One ex can drain the other’s Social Security.'
Vengeful exes everywhere wish this were so.
Fidelity Investments recently pitched this myth to 1,000 people, and more than half believed it. But the truth is that when an ex-spouse claims Social Security based on your work record, that has no effect whatsoever on your payments, or on what your current spouse can receive.
You won’t see any reduction in benefits. You won’t even be notified.
8. 'You must claim benefits immediately upon retirement.'
This is wrong, wrong, wrong. You can claim benefits as early as age 62 or as late as age 70, regardless of whether you're actually "retired."
Again, unless there are special circumstances, it pays to sit tight until at least full retirement age. If you have adequate savings, waiting until 70 is even better.
There’s no advantage to keep waiting after you turn 70.
9. 'You'll recoup only the money you paid into Social Security, plus interest.'
This myth is based on misconceptions about how the program works. No, there's no account with your name on it just sitting around somewhere.
Rather, the taxes you pay into the system fund retirement, disability and survivors benefits for millions of existing retirees. Your taxes may be supporting your parents right now. Your children’s taxes will support you in your old age.
Any surplus funds not used to pay benefits and administrative expenses are held in reserve and are invested in U.S. Treasury securities. Social Security expects it will have to start dipping into its reserves to help pay benefits starting in 2020.
10. 'You'll never get back everything you paid in.'
In the Fidelity survey, 70% of respondents believed this one. But it's not necessarily the case.
The Social Security benefits formula factors in the taxes you paid over your career, your age when you start collecting benefits, inflation, your marital status, and how long you live to collect.
In short, it has never been a dollar-for-dollar match. You could very well wind up with more than you paid in, if you live to a ripe old age.
11. 'If one spouse outearns the other, spousal benefits are always a good deal.'
Remember that spousal benefits amount to only half of a higher-earning spouse’s Social Security payments. If your work record is nonexistent or not especially impressive, then it would make sense to claim spousal benefits.
There are some conditions. You must be married for at least a year before you can collect spousal benefits, and your spouse must already be receiving Social Security.
If you do have a good work record, your payments will be based on that. Social Security will automatically do a comparison and give you the larger of either your own benefits or spousal benefits.
12. 'Social Security will be enough to live on.'
This may be the most disturbing myths of all.
Retirees collect, on average, $1,461 per month from Social Security in 2019. That’s slightly more than they’d earn flipping burgers full time at the federal minimum wage.
Social Security should merely supplement robust savings or a pension, if you're lucky enough to have one. If you’re concerned about your finances in retirement, increase your savings, tighten your budget and look for ways to earn extra income. Remember that you can collect benefits as you continue to work.