Social Security Myths You Need to Watch Out For

Millions of Americans rely on Social Security earnings in retirement for financial support. If your golden years are far off in the distance, you might not give a second thought to Social Security and what the program means for you.

But that can be a mistake. If you don’t understand Social Security now, you could be in for some unfortunate surprises after you stop working.

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For starters, the program might not be as healthy as you think. “Many estimates have the Social Security Trust Fund exhausting around 2034,” said Peter Donohoe, a Boston-based Certified Financial Planner at LPL Financial.

While experts are hopeful politicians eventually will act to shore up the system, there are no guarantees. So, to be safe, it’s wise to make some smart money moves now that could put you in a better financial position when you retire.

Discover 10 things everyone gets wrong about Social Security — and the truths you need to know to prepare for retirement.

Last updated: Oct. 11, 2021

If you’re 60 or older, three months before your birthday, the Social Security Administration will send you a recap of your annual earnings history. If you review this statement closely, you will see that the breakdown of benefits is based on your earnings to date. The statement gives you an estimate of benefits you will earn if you continue working until you reach a certain age.

Many people mistakenly assume their monthly Social Security retirement benefits will be the same no matter what age they retire. Retiring from work and claiming Social Security at a younger age can hurt you, though.

You’ll also see in your statement that you can get a bigger benefit by delaying retirement and claiming benefits after your full retirement age. The difference can be as much as a few hundred dollars more per month if you wait than if you retire at 62.

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Long before you retire, try to learn about the Social Security benefits for which you are eligible. Too many people overlook this step.

Learning more about Social Security benefits can help you make more effective financial planning decisions, and help you maximize your Social Security income. For example, you might be eligible for your ex-spouse’s benefits, yet not even know it. You can also earn a bigger Social Security check simply by delaying retirement beyond your full retirement age.

You can find a wealth of information about retirement planning on the “Retirement Benefits” page of the Social Security Administration website.

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Don’t assume you will automatically receive benefits as soon as you reach 66. Social Security rules have changed over the years. “The reality is that full retirement age was age 65, but is now based on your year of birth and may currently be up to age 67,” Donohoe said.

You still have the option of taking your benefits as early as age 62, but you will receive a reduced benefit — about a 30% reduction — if you do. If you receive a spouse’s benefit beginning at age 62, your benefit will be reduced by as much as 35%, depending on your birth year, compared to if you start getting the spouse benefits at full retirement age.

It is a myth that taking your benefit early always pays the highest lifetime benefit, Donohoe said. The reality is that many factors — including future cost-of-living adjustments and your eventual age of death — influence “which claiming date maximizes lifetime benefit,” he said.

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A big percentage of Americans misunderstand the rules for working when collecting Social Security benefits.

While you are free to work and receive Social Security retirement benefits, the government will reduce your benefit if you are younger than your full retirement age and end up making more than the yearly earnings limit. In 2021, that earning limit is $18,960. The Social Security Administration deducts $1 in benefits for every $2 you earn above that limit until you reach retirement age.

Things change a little as you get closer to full retirement age. In the year you reach your full retirement age, the Social Security Administration deducts $1 for every $3 you earn above the annual limit until the month you reach full retirement age. In 2021, this limit is $50,520. And once you are past your retirement age, you can keep working without any reductions in benefits — and there are no limits on your earnings.

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If you end up getting divorced during your lifetime, you are eligible to receive Social Security retirement benefits based on your ex-spouse’s earnings history, said David Freitag, a financial planning consultant with MassMutual.

The Social Security Administration lists the conditions of eligibility for these benefits. You must have been in a marriage that lasted at least 10 years and must have been divorced for at least two continuous years; be at least 62 years old and unmarried; and not be entitled to an equal or higher retirement or disability benefits. If, for example, the benefit you’re entitled to under your own work history is higher than the amount you’d collect in spouse benefits, you’re ineligible for spouse benefits.

If you start receiving benefits at your full retirement age, your spouse benefit is equal to half of your ex-spouse’s full retirement amount or disability benefit, according to the Social Security Administration. But, if you end up remarrying, you cannot collect benefits unless your next marriage ends by death, divorce or annulment.

In the event your ex-spouse dies, you’re might be entitled to 100% of your ex-spouse’s benefits, just as you would if you were your ex’s widow or widower. If you’re age 60 or older, your divorced surviving spouse benefit is unaffected by remarriage.

Even if your spouse has no earnings history or doesn’t meet the 40-credit requirement to receive benefits, he or she is eligible for Social Security retirement benefits simply because of your marriage, Freitag said.

To receive this spousal benefit, your spouse must be at least 62 years of age or have a qualifying child in his or her care. The total benefit might be as much as half of the primary worker’s insurance amount. The Social Security website can help you calculate this value. Spousal benefit rules can change, so it’s important to know what the benefit currently provides.

Don’t worry about getting to retirement only to end up disqualified for benefits. “It is more likely to accidentally ‘miss out’ on full benefits than it is to be disqualified for Social Security,” Donohoe said.

You can miss out on partial benefits if you get a part-time job before full retirement age and no longer pass the earnings test, Donohoe said. However, you’ll receive higher monthly benefits once you reach full retirement age due to those withholdings.

You might also miss out on benefits if you are eligible for a large widow or widower benefit when your spouse dies, but you then get remarried before you turn 60. If you are divorced and get remarried, you will miss out on a spousal benefit.

“Proper planning around life events and claiming is vitally important when claiming Social Security,” Donohoe said.

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First, the bad news: According to the Trustees of the Social Security and Medicare trust funds, current projections have the Social Security trust fund running out of money in 2034. The prognosis is not as dire as that projection would seem to indicate, however.

The Social Security trust fund is a surplus account; while that excess money will be depleted by 2034, the Social Security program will still be funded with payroll taxes on working Americans. The Social Security Trustees currently project that future payroll taxes will still fund 78% of scheduled benefits in 2034.

While receiving 78% of your expected benefits is not exactly good news, it’s a far cry from receiving nothing at all when 2034 rolls around.

While it’s true that some people don’t have to pay taxes on their Social Security income, benefits are taxable if you have, in the words of the Social Security Administration, “other substantial income.” The amount you have to pay is based on your filing status and the amount of your taxable income, which includes wages, self-employment income, interest, dividends and other taxable income. There are strategies to follow to keep your taxable income lower in retirement. Here’s the specific breakdown:

For those filing as an individual:

• If your income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxable
• If your income is more than $34,000, up to 85% of your Social Security benefits may be taxable

For those filing jointly:

• If your combined income with your spouse is between $32,000 and $44,000, up to 50% of your benefits may be taxable
• If your combined income is more than $44,000, up to 85% of your benefits may be taxable

If you are married and file separately, your benefits will likely be taxable.

When you pay into the Social Security fund, you aren’t depositing your money into a governmental savings account. Your funds are actually distributed to current beneficiaries of the system. The amount you get out of Social Security will not equal the amount you put in. Your payments are based on a combination of your earnings history and the age at which you claim benefits.

For 2021, the maximum Social Security benefit for workers retiring at the full retirement age of 66 is $3,113 per month. The average monthly payout for retired workers, as of June 2021, is just $1,555, however.

To check how much you’ve already paid into Social Security, sign up for a free account with the Social Security Administration. Once you’ve set up your account, you can see the estimated Social Security and Medicare taxes you’ve paid, along with estimates of your future Social Security benefits.

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Daria Uhlig and John Csiszar contributed reporting to this article.