Top 7 Social Security Myths: Exposed

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Introduction

If you are confused by the advice some people are offering about Social Security benefits, you're not alone.

There is a ton of information out there, and misinformation regarding Social Security is consistently provided. As a result, people often make the wrong decision about when to start receiving their Social Security benefits.

Read on as we expose some of these Social Security myths.

It's Best To Start Benefits At Age 62

One belief is that by starting benefits as soon as you're eligible you can invest the money and have more down the road. The other belief is based on a fear that Congress will scale back benefits to strengthen funding, which also makes recipients want to take their benefits early.

In reality, if you start benefits before the full retirement age, you will receive permanent benefit reductions. Secondly, although Social Security benefits are not guaranteed and Congress can make any changes it wishes, it can be more difficult for Congress to reduce benefits of retired people who have already earned them. For more, read How Much Social Security Will You Get?

You'll Have More Money If You Start Early

Some financial pundits make claims such as: "Your breakeven age for starting Social Security is age 77." By this, they mean: If you were to start benefits at 62 instead of waiting until your full retirement age, you would have more money in hand through age 77.

In reality, there is no universal breakeven age, because the variable behind the calculation can change, including the time value of money and inflation. In addition, non-working spouses can expect to outlive their breakeven ages since they have a higher permanent benefit reduction.

You Can Lose Your Early Benefits If You Keep Working

You will not lose all your benefits, but it is true that Social Security reduces benefits by one dollar for every $2 of income above $13,560. This reduction continues until the start of the year in which you reach full retirement age.

However, any benefit reductions are only deferred, and Social Security will credit those amounts to your benefits record when you reach full retirement age. For more, see Stretch Your Savings By Working Into Your 70s.

Social Security Payments Go Into A Trust Fund

Many people believe that money taken from their paychecks goes into a trust fund and remains there, earning interest, until they retire and begin to receive Social Security.

In reality, the "trust fund" exists only as an accounting model, not as an actual funded account. Your cash goes into the general fund of the Treasury and is indistinguishable from cash received from other contributors. Politicians use these funds, and rely on future generations of taxpayers to repay the principal underlying the Treasury bonds.

You Won't Earn More Benefit Credits After A Certain Age

Most workers and their employers are subject to the Federal Insurance Contributions Act (FICA) withholding on earned income, regardless of the worker's age. Self-employed people pay the same rate in self-employment (SE) tax.

In reality, there is no disincentive to keep working after you start benefits. Social Security will automatically recalculate your primary insurance amount (PIA) every year in which you work. If one of your 35 highest indexed-earnings years is attained after you start benefits, then you will be credited with a higher benefit.

Tax On Social Security Is Minimal

In reality, modestly affluent seniors pay tax on up to 85% of benefits, and the tax impact should definitely be considered when making Social Security decisions.

For example, if a senior has a $20,000 annual benefit taxed at a 25% marginal federal tax rate, the tax on the benefits is $4,250 ($20,000 x 0.85 x 0.25). It is possible that the taxable portion could increase to 100%, and if the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) is allowed to expire at the end of 2010, regular federal income tax rates may increase 3% to tax levels seen in 2000. Read Avoid The Social Security Tax Trap for more.

Benefits Do Not Offset Inflation

This myth may arise from a lack of understanding about how the Social Security's annual cost of living adjustment (COLA) works. In reality, the COLA is perhaps Social Security's most powerful long-term planning benefit. Each year, all Social Security retirement benefits are adjusted dollar-for-dollar for Consumer Price Index (CPI) inflation, creating a direct offset against inflation.

For many retirement people, the COLA provides the only source of inflation-adjusted retirement income linked directly to the CPI. For more, read Maximize Your Social Security Benefits.

Conclusion

Knowing the reality about your Social Security benefits is valuable in making sound choices - especially regarding the decisions of when to start benefits and how to maximize their longevity and inflation protection.

For more on Social Security, see:

- 10 Questions About Social Security
- Avoid The Social Security Tax Trap
- Maximize Your Social Security Benefits
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