Social Security: Separating Myth from Fact

As a Federal government program – and a large one at that – Social Security is a frequent target for critics. However, while the system does have its flaws, political rhetoric often overshadows a good understanding of the program’s valuable benefits. Below we address some common myths about Social Security.

Myth: Social Security may become insolvent and won’t be there when I need it.

This perception is far from the truth. The reality is that the Social Security trust funds currently hold large surpluses – nearly $3 trillion, in fact.[1] Over time, as more Baby Boomers enter retirement, the system is projected to hit a shortfall. However, those forecasts are built on a narrow accounting basis and don’t reflect the system’s true ability to meet its obligations. That is because, while Social Security relies on its trust funds in theory, the reality is that Social Security benefits are a really just another obligation of the United States government. In other words, regardless of the balances in those trust funds, the government has committed to paying benefits to retirees. So, while it is not impossible, it is hard to imagine a scenario under which the government would renege on its commitments to ordinary Americans, who rely most heavily on the system. In the most likely scenario, the government will just continue to make slow and incremental changes to trim benefits at the margins, as it has done in the past. A wholesale reduction, or elimination, of benefits, however, is extremely unlikely. As a result, today’s workers should have an orderly plan to structure their retirement in a way that includes and optimizes their benefits from Social Security.

Myth: If I want to work part-time in retirement, Social Security will penalize me by reducing my benefits.

This myth is based on a provision in Social Security’s rules known as the “earnings test” that can reduce a retiree’s benefits in certain circumstances. What is important to understand, however, is that the earnings test only applies to workers who choose to collect Social Security prior to their Full Retirement Age (between ages 65 and 67, depending upon the year in which you were born). Once you reach Full Retirement Age, Social Security does not reduce your benefits regardless of how much other income you earn.[2] In addition, and importantly, the earnings test only reduces benefits temporarily. Once you reach your Full Retirement Age, your monthly check will be increased to “reimburse” you over time for the benefits that were withheld earlier. As a result, you will never truly lose any benefits if you choose to continue working while collecting Social Security.

Myth: A dollar today is worth more than a dollar tomorrow, so I should start collecting benefits as soon as I am eligible.

This myth overlooks two critically important facts:

1. While everyone is eligible to begin collecting benefits at age 62, you can dramatically increase the size of your monthly check if you are able to wait, ideally until age 70. In fact, if you are able to wait, your benefit would increase by more than 7 percent per year, each year, between age 62 and age 70. As a result, the check you receive at age 70 would be more than 70 percent larger than the check you would receive at age 62.[3] Of course, you will, by definition, receive these larger checks for fewer years, but there is a “breakeven” point at a certain age (generally around age 80). After that, your total lifetime benefit will be larger if you wait until age 70 to collect. Unfortunately, the vast majority of Americans (more than 96 percent) choose not to, or are unable to, wait that long,[4] but if you are able to draw on other sources of income during the early years of your retirement, your monthly check will be that much larger. This may require you to draw down on other assets during the early years of your retirement, but this may be a worthwhile tradeoff to secure the guaranteed annual step-ups from Social Security.
2. Social Security provides a form of life insurance in that it will provide monthly benefit payments to survivors when a Social Security recipient dies. In the most common situation, a widow or widower can choose to collect 100 percent of his or her deceased spouse’s benefit at Full Retirement Age, if it is larger than his or her own benefit.[5] Social Security will also make smaller payments to the minor children of a deceased worker, subject to a family maximum. So, you should not rush to collect Social Security out of fear that you will be “shortchanged” if you die early.

Myth: Social Security checks are too small to make much difference to my retirement.

The following table illustrates the potential value of Social Security retirement benefits for a hypothetical retiree who begins collecting benefits in 2016. While the size of your own (and your spouse’s) benefits will depend upon your particular work histories, what is clear is that the benefits can be very substantial – and they are guaranteed by the U.S. government for life.

Age at Which Worker Elects to Collect Benefits	Annual Benefits[6]	Cumulative Benefits Through Age 90[7]
Age 62	$25,224	$731,496
Age 70	$42,912	$901,152

Myth: Social Security is just a retirement program.

Social Security is best known for its retirement program, but it is important to know that it can also provide disability and life insurance benefits to workers and/or their families. In fact, last year just 52 percent of new Social Security recipients were retired workers. The remainder included disabled workers (14 percent) and the spouses and children of workers who had died or become disabled (34 percent).[8] The reality is that Social Security is a very comprehensive program, providing benefits in virtually all situations.

Action Steps

As we have seen here, Social Security is a more generous program than it is often perceived to be. However, it is also a vast program with complicated rules – 2,728 “core” rules, to be exact.[9] For that reason, you will want to do careful research in order to fully understand the benefits for which you may be eligible. To get started, here are some recommendations:

• As a starting point, you should review your most recent benefits statement. If you don’t have one, you can access it online at www.socialsecurity.gov/myaccount. This will provide you with your estimated monthly benefit under a variety of scenarios, though not all.
• If you have basic questions about your statement, you can call the Social Security Administration, or you can visit one of their more than 1,400 field offices across the country. Keep in mind, however, that Social Security representatives are only permitted to provide information; they are not permitted to provide you with advice or guidance.
• It is critical to know that most of the choices you make around Social Security are irrevocable. Therefore, before making any decisions, it is vitally important that you review all of your options with a qualified and trusted advisor.

 

[1] “Fast Facts & Figures About Social Security – 2016,” Social Security Administration, page 4.

[2] “How Work Affects Your Benefits – 2016,” Social Security Administration, Page 3.

[3] Social Security Administration website: https://faq.ssa.gov/link/portal/34011/34019/article/3735/what-is-the-maximum-social-security-retirement-benefit-payable, retrieved September 20, 2016.

[4] Kotlioff, Laurence J. et al., Get What’s Yours, (New York: Simon & Schuster), 2016, page 21.

[5] “Survivors Benefits,” Social Security Administration, page 9.

[6] Social Security Administration website: https://faq.ssa.gov/link/portal/34011/34019/article/3735/what-is-the-maximum-social-security-retirement-benefit-payable, retrieved September 20, 2016.

[7] Author’s calculations. Note that cumulative benefits are presented in constant dollars.  In reality, your benefits would be higher because Social Security benefits increase with inflation.

[8] “Fast Facts & Figures About Social Security – 2016,” page 13.

[9] Get What’s Yours, page 15.