Ten Misunderstandings/Myths Concerning Social Security Retirement Benefits
The following are 10 of the most common misunderstandings/myths concerning Social Security retirement benefits:
Myth 1. The Social Security system is going into bankruptcy and benefits will not be available to beneficiaries within the next 10 to 15 years.
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But even then, Social Security will not go broke. It will continue to collect tax revenue and to pay benefits. However, the system will eventually bring in only enough to pay 80 percent of scheduled benefits according to the latest estimate. Congress will need to take steps to avoid this outcome, just like Congress did 40 years ago in 1983 (the last time the program nearly depleted its reserves). Steps that Congress could take include raising the full retirement age (currently age 67) increasing the payroll (FICA) tax rate (currently 6.2 percent) and taxing the full amount of Social Security benefits (currently limited to taxing 85 percent of benefits).
Myth 2. The Social Security full retirement age (FRA) is age 65
FRA is the age that an individual who is “fully insured” (has earned a minimum 40 credits of Social Security and is therefore eligible for Social Security retirement benefits) qualifies to file and receive 100 percent of the benefit. When Social Security started in 1935, FRA was established at age 65. In the 1950’s the minimum eligibility age for receiving Social Security retirement benefits was lowered to age 62, at which time an individual could claim a reduced Social Security benefit. Age 65 remained the standard for full retirement. But things changed in 1983 when Congress made major changes to the Social Security system. Among the changes was that full retirement age (FRA) was raised to reduce Social Security’s costs. FRA was raised gradually over time from age 65 (applicable to individuals born before 1938) to age 66 (applicable to individuals born between 1943 and 1954) and then to age 67 (applicable to individuals born after December 31, 1959).
Myth 3. Military retirees - either military retirees from active-duty or military retirees from reserve duty – cannot collect a military pension and Social Security retirement benefits.
Both active-duty military retirees and military reserve retirees can collect their full Social Security retirement benefits and their military pension with no reduction to either.
Myth 4. A federal retiree who is collecting a Civil Service Retirement System (CSRS) annuity cannot receive a Social Security retirement benefit, even if the CSRS annuitant has earned the minimum 40 credits of Social Security and is therefore eligible to receive a Social Security retirement benefit.
A CSRS annuitant, a federal employee who retired under the Civil Service Retirement System and receiving a CSRS annuity, was not covered by Social Security while in federal service (did not pay FICA taxes). If the CSRS annuitant had earned the minimum 40 credits of Social Security (through other employment, working in private industry and/or active-duty military service) to be “fully insured”, then the annuitant is eligible to receive a monthly Social Security retirement benefit. Under the Windfall Elimination Provision (WEP), an individual who is receiving any type of a government pension - federal, state or local - in which the individual was not covered by Social Security, then the individual’s Social Security retirement will be reduced, but not eliminated by the WEP. The only way the individual’s Social Security benefit can avoid the WEP reduction is to have at least 30 years’ worth of “substantial’ Social Security earnings.
Myth 5. It is always better to start collecting Social Security retirement benefits as early as possible.
The earliest age a “fully insured” individual can receive Social Security benefits is age 62. However, the earlier an individual is when he or she starts receiving benefits, the lower the individual’s monthly benefit check. For example, if one’s full retirement age is 67 (he or she was born after December 31,1959) and the individual decides to start collecting benefits at age 62, then the monthly benefit will be permanently reduced by 30 percent to account for the longer period of time during which the individual will likely collect benefits. Collecting benefits as early as possible may not be feasible depending on personal circumstances, especially with respect to one’s health. If someone in their early 60’s is relatively healthy and the individual’s life expectancy is average or above, then waiting to file for benefits (at least until the individual reaches full retirement age) could mean not only a higher monthly benefit payment, but also a higher total lifetime payment.
Myth 6. Social Security is a retirement savings account.
Social Security was never designed and created to be a retirement plan. Social Security was established about 90 years ago to supplement an individual’s retirement savings in the form of a guaranteed pension (such as a CSRS or FERS annuity for federal employees), a military pension (for military retirees), a qualified retirement plan such as a 401(k) plan or the Thrift Savings Plan (TSP), individual retirement arrangements (IRAs) (including traditional IRAs and Roth IRAs), and tax-deferred annuities. Contrary to another common misperception, Social Security does not replace an individual’s entire work income. On average, Social Security retirement benefits replace about 30 to 40 percent of a beneficiary’s pre-retirement earnings. The formula for calculating benefits is weighted so that a larger percentage of income for lower-income workers and a lower percentage for upper-income wage earners.
Myth 7. Social Security benefits are not taxable
Before 1984, Social Security benefits were not taxed by the federal government or by any state. But when Congress overhauled Social Security in 1983, one of the new provisions affecting Social Security benefits was that starting in 1984, a portion of an individual’s Social Security benefit would be taxable depending on the individual’s income level. Specifically, an individual will pay federal income tax on up to 50 percent of his or her benefits if the individual’s income for the year is $25,000 to $34,000. A married couple filing jointly will pay federal income tax on their benefits if the couple’s income for the year is $32,000 to $44,000. Above these thresholds, up to 85 percent of benefits are taxable. Below these thresholds, beneficiaries do not pay any federal income tax on their benefits. Note the following: (1) These income thresholds have not been adjusted for inflation in 40 years, meaning that most Social Security beneficiaries pay federal income tax on their benefits; and (2) There are 12 states (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, Utah and West Virginia) that tax at least a portion of a state resident’s Social Security benefits.
Myth 8. A former spouse’s Social Security monthly retirement benefit comes out of the other higher earner spouse’s Social Security benefit.
If an individual is divorced, then the individual’s former spouse may be eligible to collect Social Security benefits based on the individual’s Social Security earnings record. As is true for a current spouse, these benefits can equal 50 percent of the benefit amount the individual is entitled to at full retirement age. However, the former spouse’s Social Security retirement benefit does not reduce the individual’s own Social Security retirement benefit. They are distinct payments and have no effect on what the individual is receiving in Social Security benefits each month.
Myth 9. When a Social Security recipient’s monthly benefit is reduced because the recipient is working (has earned income in the form or salary/wages or net self-employment income) and the amount of earned income exceeds the annual earnings limit, the reduction in benefits is permanent.
Social Security does have a rule called the “earnings limit” rule (the “earnings test”) that can temporarily reduce the Social Security monthly benefits of beneficiaries who continue to work. However, the “earning limit” rule does not apply to all working Social Security beneficiaries. Also, the rule does not apply once a beneficiary reaches his or her FRA.
The rule applies to beneficiaries who claim their benefits before they reach their full retirement age (FRA), continue working, and have earned income that exceeds a set cap. The set cap changes every year and differs depending on how close the beneficiary is to his or her FRA. For example, during 2023, a Social Security recipient who will not reach their FRA until a future year can earn up to $21,240 without losing any of their Social Security benefits. For every $2 they earn over $21,240 during 2023, their monthly benefit will be reduced by $1. If they reach their FRA during 2023, the formula is: For every $3 earned above $56,520, their Social Security monthly benefit will be reduced by $1. At the month/year a Social Security recipient reaches his or her FRA, the “earnings test” no longer applies and there is no benefit reduction, regardless of the amount of the individual’s earned income. Social Security also adjusts a beneficiary’s monthly benefit upward. This means that the beneficiary whose benefits were reduced earlier due to violation of the “earnings limit rule” will recoup the reduced benefits that were withheld.
Myth 10. Social Security benefits are calculated based on an individual’s specific period of employment.
In general, the Social Security Administration calculates an individual’s Social Security retirement benefit using the individual’s average lifetime earnings up to a maximum of 35 years of indexed wage earnings (indexed earnings are used in order to adjust past earned income for wage inflation to current dollars). Specifically, the indexing to wages earned applied to those wages earned before the individua’s 60th birthday. The 35 years need not be consecutive – the 35 years of wages is the highest number of total wages earned during a 35-year period, no matter when or which year the wages were earned.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
