Ten Myths and Misunderstandings About Social Security

By Carrie Schwab Pomerantz

Wednesday, August 14, 2013

Dear Readers, Social Security is a hot topic for young and old alike. And as with any frequently discussed issue, there's a lot of misinformation out there. So whether you plan to collect benefits soon or are worried there won't be anything for you to collect by the time you reach retirement, take a look at these 10 common myths and misunderstandings about Social Security. It's always best to have the facts!

1) I should start taking Social Security benefits as soon as I'm eligible.

This sounds good on the surface, but to max out your benefits, you need to dig a little deeper. Yes, you may be eligible to start collecting Social Security at age 62, but your benefit will be permanently reduced. Wait until what the SSA calls your "full retirement age" or FRA (66 if you were born between 1943 and 1954), and you'll get a larger monthly benefit. Plus, benefits increase by 8 percent for every year you wait to collect between your FRA and age 70. That's an extraordinary risk-free return in this interest rate environment! Benefits do max out at 70, so don't wait longer than that.

2) It's always best to wait as long as possible before taking benefits.

This is the flip side of number one. And while it generally makes financial sense to wait to collect benefits, it depends on your situation -- and your expected longevity. If you collect early, you get a smaller payment for a longer time period. Collect later and you get a larger payment for a shorter time period. So you have to do the math and consider your options. Also note that a spousal benefit doesn't increase past your full retirement age. So if you're collecting on your spouse's earnings record, take it at your FRA.

3) I'm not eligible for Social Security if I'm still working.

Yes, you are -- but with some strings attached depending on your age. If you file at age 62, in 2013 $1 in benefits is withheld for every $2 you earn above $15,120. The year you reach your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $40,080. But this reduction is temporary, similar to withholding. At your FRA, your benefit is recalculated and you'll get the money back in the form of a higher monthly payment. Once you reach your FRA, there's no reduction.

4) If my spouse earns more than I do, I should take the spousal benefit.

The spousal benefit can be a real boost for a nonworking or low-earning spouse. But remember, it's only 50 percent of the higher-earning spouse's benefit. Once you file, the SSA will automatically give you the larger of either the spousal benefit or your own benefit.

5) Once I marry, I'll always be able to collect based on my spouse's record.

If your own benefit would be lower than the spousal benefit, generally you can collect on your spouse's earnings record. But there are a few things to be aware of. First, you generally must be married for one year to collect spousal benefits. To collect survivor's benefits, you must have been married for at least nine months. And if you get divorced, you must have been married 10 years to collect on your ex's record.

6) You don't pay income taxes on SS benefits.

This is a big misconception. In reality, 50 to 85 percent of benefits may be taxed depending on your modified adjusted gross income. Currently, the income range is $25,000 to $34,000 for single filers and $32,000 to $44,000 for married filing jointly.

7) If I'm disabled, I can collect SSDI along with SS benefits.

Unfortunately, there's no double dipping. If you've been collecting SSDI benefits, you're automatically switched to your SS retirement benefit once you reach your FRA. You don't receive both.

8) Benefits are based on your 10 highest earning years.

While it takes a minimum of 10 years to qualify for SS benefits, your individual benefit is based on your average indexed monthly earnings (AIME) in your 35 highest-earning years after age 21. These figures are tallied at age 62 and then indexed for inflation (meaning past earnings are converted to current dollars). If you worked fewer than 35 years, the missing years are counted as 0, bringing your average down. In other words, it's best to work a minimum of 35 years to receive the highest benefit.

9) Social Security is only for the elderly.

Not true. About 36 million retired workers receive benefits, but so do 2.9 million spouses and children of retired workers. Another 8.7 million people receive benefits as disabled workers, and 2.1 million children and spouses of disabled workers receive benefits. A total of 3.3 million children under age 18 receive Social Security. Plus, in 2013, the SSA paid benefits to 6.3 million survivors of deceased workers, including 2 million children.*

10) Social Security is going broke.

I put this last, but it's probably the most common concern. According to the SSA, Social Security had a surplus in 2012 and projects surpluses through 2020. A recent report states that full benefits can be paid until 2035. Let's hope changes will be made to increase revenue before then, but even if no changes are made, payroll taxes at current rates are projected to cover about 75 percent of all future benefits.