Social Security is the linchpin of the American retirement system. Nearly 40 million retired Americans receive an average of $1,335 a month from the program. For 64% of retirees, the check they receive makes up more than half of their total income. Without this retirement benefit, many of the oldest Americans would be destitute.
Yet for all its importance, Social Security remains a program that is shrouded in confusion and mystery. When Massachusetts Mutual Life Insurance Company quizzed people in 2015 on some basic facts about Social Security, only 28% received a passing grade. The 1,500-person survey revealed confusion about who could claim benefits, what the full retirement age was, and whether you could work and get benefits at the same time.
Being misinformed about how Social Security works is costing retirees. “Americans who lack the proper knowledge and information about Social Security may be putting their retirement planning in jeopardy,” Phil Michalowski, the vice president at U.S. Insurance Group, MassMutual, said in a statement. “In fact, many may be leaving Social Security retirement benefits they’re entitled to on the table, or incorrectly assuming what benefits may be available in retirement.”
Where do these myths about Social Security come from? While the basics of Social Security are fairly straightforward (work, pay taxes, get money when you retire), the devil is in the details. Confusion about how benefits are earned, how much you can get, and the best time to retire abounds. Politicians and the media add to the confusion when they make dramatic — and sometimes false — statements about the future health of Social Security. In some cases, believing the lies you hear about Social Security could cause you to make planning mistakes that jeopardize your future financial security.
Here are nine of the biggest whoppers you’ll hear about Social Security.
1. You have a personal Social Security “account”
Roughly one-third of Americans think the money they pay into Social goes into a personal account, according to a 2014 Pew Research survey. That’s a misunderstanding of how Social Security works. The contributions you make don’t go into a lockbox with your name on it where they sit and earn interest until you’re ready to retire. Instead, the money goes into a general trust fund, and is then used to pay benefits to current and future retirees. When you retire, the money you receive will come from contributions of those currently working.
“Social Security isn’t like a 401(k) or even a traditional funded pension plan. Your contributions are immediately paid out to current beneficiaries,” Erik Carter of Financial Finesse explained in an article for Forbes.
The Social Security Administration keeps track of how much you earn each year. When you retire, your benefit is calculated based on the 35 working years when you earned the most money. (Your past wages are indexed to bring them in line with current wage levels.) To get an idea of what your benefits might be when you retire, use the Social Security retirement estimator tool.
2. Private accounts are a better alternative to the current Social Security system
To be fair, this one is less of a myth and more of a hotly debated issue. Privatizing Social Security is periodically floated as a way to save what some see as a failing system. Former President George W. Bush was a big supporter of such a plan, arguing in his 2004 State of the Union address that “Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account.”
Bush’s proposal was controversial and ultimately didn’t go anywhere. But some still argue that letting people invest all or a portion of their Social Security would increase people’s savings and lead to a more secure retirement. Others argue that such a strategy is just too risky given stock market volatility and how bad many Americans are at managing money.
3. Younger workers won’t get a dime
Doomsayers sometimes claim Social Security is on the verge of going broke. Younger workers may never get their benefits, they warn, and future retirees could see their checks cut off. But the future of Social Security, while not exactly rosy-looking, isn’t quite so dire.
“The idea that the program is going to ‘run out of money’ or is ‘going broke’ is a zombie lie, one that deserves to have its head lopped off with a quick slice of Michonne’s katana,” Paul Waldman of The American Prospect wrote in The Washington Post.
It’s true current workers are paying less into the Social Security trust fund than is being paid out to retirees. By 2035, the reserves in the trust fund are projected to run dry. At that point, Social Security could pay about 77% of projected benefits to retirees from the income it receives from people currently working. Obviously, that’s not a great situation, but future retirees will still get some money — just as not as much as they were promised.
4. You have to be a citizen to get benefits
Provided you’ve worked for at least 10 years, are lawfully in the U.S., and meet all the other requirements, you can claim Social Security benefits when you retire, whether you’re a citizen or not. Even non-working spouses of non-citizens may be able to get benefits. In some cases, non-citizens can even receive benefits if they’re no longer living in the U.S.
Even if you haven’t worked for 10 years in the U.S., you may be able to get credit for work you did in another country if it has a totalization agreement with the United States, according to Investopedia. Those countries include, but aren’t limited to, Australia, the United Kingdom, Japan, and Germany.
Yet 75% of people surveyed by MassMutual believed you must be a U.S. citizen to get Social Security benefits. Millions of legal, non-citizen immigrants may be cutting themselves off from benefits they are entitled to because of this confusion. To find out if you might be eligible for Social Security benefits, you can use the SSA’s Benefit Eligibility Screening Tool or contact the SSA directly.
5. The retirement age is 65
Not exactly. Although 71% of people surveyed by MassMutual believed the retirement age was 65, the age at which you can claim full retirement benefits actually varies depending on when you were born.
For people born in 1937 or earlier, full retirement age is 65. If you were born between 1938 and 1959, full retirement age varies between 65 and 2 months and 66 and 10 months. For everyone born after 1960, full retirement is at 67.
No matter when you were born, you can start claiming early benefits at age 62. But if you claim early, your monthly benefit is reduced by 20% to 30%. If you wait until age 70 to claim Social Security, you could increase your monthly benefit by more than 30%.
6. You can’t get benefits if you’ve never worked
Even if you’ve never worked a day in your life, you may still be able to get benefits from Social Security. Non-working spouses may receive up to 50% of their husband or wife’s benefit amount. You can start claiming benefits as soon as your spouse files, and you can continue receiving benefits after his or her death. You can even get benefits if you are divorced and have not remarried. Your ex-spouse won’t even know you’ve filed for benefits under their record.
What if you were never married and don’t qualify for Social Security retirement benefits on your own? While you won’t be able to piggyback on a spouse’s working record, you may be eligible for Supplemental Security Income. This program provides cash benefits to low-income people who are blind, disabled, or over the age of 65.
Those rules mean the vast majority of older Americans are able to get something from Social Security. In 2010, the Social Security Administration (SSA) estimated only 4% of people between 62 and 84 would never receive benefits.
7. You should claim Social Security as soon as you can
Claiming Social Security as soon as you are eligible is tempting. But the best time to file for benefits depends on your situation. If you have health problems, can’t work, and have little in savings, you may have no option but to start claiming at age 62, even though the amount you receive every month will be lower than if you waited. But if you can afford to delay taking benefits until 65 or even 70, you’ll get a bigger check every month. Given that people are generally living longer, holding off on requesting benefits is often a wise move.
“The longer you wait, the greater amount you get each month,” Michael Lonier, retirement management analyst and head of Lonier Financial Advisory, told ThinkAdvisor. Nonetheless, roughly 40% of people start Social Security as soon as they are eligible, according to the Center for Retirement Research at Boston College.
Many financial experts advise waiting as long as possible to claim your benefits, arguing that you’ll earn a guaranteed return on your “investment” for every year you wait. But some argue claiming right away gives you more financial options, like using Social Security income to live on in the early years of your retirement and leaving your other retirement savings untouched.
“Waiting will make your income bigger, but Social Security retirement benefits cannot be left beyond a spouse,” Paul Tully, a financial advisor and founder of Eagle Wealth Strategies, told The Wall Street Journal. “A portfolio that’s been used as a bank account for eight years will have less capital to grow on in the years remaining, as well as less cash available for emergencies or special expenditures.”
8. You can work and collect full Social Security benefits
This one is half true. In 2016, the average retiree received about $1,300 per month from Social Security. Many supplement their Social Security income by working. In fact, 33% of retiree income comes from earnings, according to the SSA.
Working and collecting benefits at the same time is perfectly fine. But you may not get your full benefit if you’re drawing a paycheck. “If you are younger than full retirement age and make more than the yearly earnings limit, we will reduce your benefit,” the SSA explained. In 2016, the yearly earnings limit was $15,720. Once you reach full retirement age — that’s 67 for anyone born after 1960 — you can work and get your full benefits at the same time.
While your Social Security benefits are reduced if you are still working, they aren’t gone forever. You’ll get them back once you reach full retirement age. “If some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase starting at your full retirement age to take into account those months in which benefits were withheld,” according to the SSA.
9. Social Security is a Ponzi scheme
You’ll sometimes hear people dismiss Social Security as a Ponzi scheme. They’re comparing the program to the famous investment fraud perpetrated by Charles Ponzi in 1920. In a ponzi scheme, investors are lured in with promises of big returns with little risk. In reality, no investment exists. Instead, the first group of investors are paid with money gathered from a second group of investors, and so on down the line. Once the pool of investors dries up, the scheme collapses.
On the surface, Social Security does share some resemblance with a Ponzi scheme, since the earnings of today’s workers are used to pay benefits to those who are already retired. But there are important differences between the two, as outlined in this Politifact article. For one, no one is in the dark about the nature of Social Security. The program is transparent about the way it is funded and the state of its finances. A Ponzi scheme depends on the ignorance of investors to survive. Plus, as long as the government can require people to pay taxes, there will still be a source of new income, though it may not be enough to meet the promised payouts. With a Ponzi scheme, people will eventually wise up and stop investing, which causes everything to fall apart.
“What makes a Ponzi scheme a Ponzi scheme is that it’s a giant fraud. People think they’re investing in postal stamps. Their money is actually being invested in nothing. In Social Security, conversely, it’s perfectly clear what is going on,” Ezra Klein wrote in an article for the Washington Post.