Five Myths about Social Security Benefits
Because many of us pay into Social Security, it's often something we think about. Unfortunately, there is a lot of misinformation about Social Security floating around, which can lead to some poor decision making. It can be such bad information that the Social Security Administration has chosen to publish articles at SSA.gov to correct some of that misinformation.
Here are five of the top items:
Myth #1: Social Security benefits only help people who are retired.
The vast majority of people receiving Social Security benefits are considered retired workers and their families. The numbers the Social Security Administration has shared on this show they make up 78% of the total beneficiaries. Of those who fall under this category, there are many people who are still working while receiving a Social Security benefit. In fact, when you are older than your full retirement age, there is no longer an earnings limit on benefits so many people take advantage of this and continue to work into their 70's while receiving their Social Security benefit.
In addition there are two other categories making up 22% of Social Security income beneficiaries. The two other groups of people who also benefit from Social Security payments are Survivors of Deceased Workers such as widows/widowers with young children (9%), and Disabled Workers and their families (13%).
Myth #2: Everyone who works is eligible for Social Security benefits
There are particular situations where this is not true depending on someone's employment. If you work as a public school teacher or are a railroad employee you most likely will not be eligible for Social Security benefits. In the event where you had a previous job and paid into the system, any benefit you may have earned can be greatly reduced due to having what's considered a "government pension".
Other ways that you can become ineligible for your Social Security benefit are:
1) Opting out of Social Security as a clergy member, member of a religious organization that qualified under the internal revenue code 1401 (such as Amish, Mennonites, or Christian Scientologists), or
2) Going to jail or prison for more than 30 days due to a conviction of a crime which will automatically suspend benefits for the duration of incarceration.
Myth #3: Social Security benefits are a tax-free income source.
Prior to 1984, this would have been a true statement. Unfortunately, at that point Social Security was facing a financial crisis (not unlike today), and President Reagan signed a bipartisan bill that hit his desk which amended Social Security.
According to the Social Security administration, approximately 60% of recipients of Social Security do not pay any tax on the benefits. That is now determined by income levels. For 2023, if you file your taxes single and make over $25,000 or file your taxes married joint and make over $32,000, you will most likely have to pay some tax on your Social Security benefits. All the way up to 85% of your Social Security benefits can be taxable depending on your income (over $34,000 if filing single and $44,000 if filing married joint).
In addition to paying income tax, your income can also make you pay more for Medicare by falling into the Medicare Income Related Monthly Adjusted Amount (IRMAA). If you are paying more for your Medicare (which for many people is deducted from their Social Security benefit), then you are getting even less of your Social Security benefit back from the government.
Myth #4: When a spouse passes away, the surviving spouse receives both benefits.
In general, as long as a surviving spouse is over age 60, they can receive a survivors' benefit, however, if they are already receiving a Social Security benefit, they will only be able to continue with the higher amount of the two benefits.
In certain situations, a surviving spouse can receive their deceased spouse's benefit for a period of time and let their own benefit grow, but this is only possible if the death occurred prior to the spouse receiving their own benefit.
Myth #5: Once you've filed for Social Security benefits, the decision is final.
If you've filed for Social Security, you may be stuck with that decision, but there are situations where you are not. To start, if you are within the first 12 months of collecting the benefit, you can undo that choice by sending back the money and filing the proper paperwork.
Another unique situation is if you have reached your full retirement age and are taking Social Security, you can choose to suspend your benefit up to age 70 and receive the increased benefit in the future. This is a significant option since by deferring the benefit from your full retirement age to age 70, you receive approximately an 8% increase in that benefit annually.
Last, but not least, is if you have taken Social Security earlier than your full retirement age, but you are working, you may run into the situation where you no longer qualify to receive your benefit and you have to repay it. For 2023, that income limit is $21,240. After that point, for every dollar earned you have to repay $0.50 back until all the benefit is due. If you do pay back some of your benefits, you are deferring those benefits to future years, so that can actually increase your future benefit calculation, even though you elected to take Social Security earlier.
Overall, there are many situations that require special planning when it comes to Social Security benefits. It's important to have someone in your corner that can help you sift through the misinformation and get to the truth of your situation. Discussing your situation with a financial advisor at Cremé Wealth can help you find the answers to your questions. Our team of financial professionals can assist you in considering the various factors so you can make well-informed, educated choices to plan around your Social Security benefits.
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Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Prior to making an investment decision, please consult with your financial advisor about your individual situation.