Social Security Administration is not only the largest federal spending program, but also one of the most intricate and frequently misunderstood systems. With a budget of $1.2 trillion, this behemoth program impacts every single American. In the previous year, the US government spent a total of $1.196 trillion on Social Security Administration. However, with approximately 10,000 baby boomers retiring each day, and an 8.7% increase in monthly payments tied to inflation this year, the projected costs are set to skyrocket. It’s easy to see how the numbers can quickly add up.
The majority of people are aware, or should be, that they can start receiving Social Security Administration benefits as early as age 62, provided they meet specific requirements such as having worked and contributed to the system for a sufficient amount of time. However, this process can be quite complex. Fortunately, the Social Security Administration has provided a one-page guide to help individuals determine if they qualify (which is likely).
Social Security is not sustainable and will not be available for me in the future
Contrary to the myth, Social Security will still be available to individuals upon retirement. However, the question remains as to what extent it will be available. The Social Security Trustees, under both the Trump and Biden administrations, have issued stark warnings that the program’s Trust Fund is paying out more than it is taking in. Based on current projections, the surplus will be depleted by 2035. Without changes in the financing of Social Security, the Trustees predict a 20% reduction in monthly payouts when the surplus runs out in 2035, unless steps are taken to strengthen the program.
Why the predicted 20% reduction in payouts? This can be attributed to demographics. With millions of Americans retiring, there is a shortage of workers due to the lowest birth rate in decades and ongoing disputes regarding legal immigration. As a result, the funding of Social Security, which relies heavily on payroll taxes, has been significantly impacted. Should I wait or claim Social Security now?” However, Social Security is a multifaceted system that goes beyond this decision and is often misunderstood or inadequately portrayed in the media. Let’s examine some of the most significant myths surrounding Social Security and the corresponding realities.
It is more advantageous to start receiving Social Security benefits as early as possible
While it is possible to begin receiving Social Security benefits as early as age 62, many individuals opt to do so, as evidenced by data from the Center for Retirement Research at Boston College. However, starting benefits at age 62 does not guarantee the most advantageous outcome. It is simply the earliest age at which benefits can be claimed.
Many individuals choose to file for Social Security benefits as soon as possible due to a straightforward reason: they require the funds. The Social Security Administration provides the following statistics to consider:
- Social Security accounts for roughly 30% of income for the elderly
- Among elderly beneficiaries, 37% of men and 42% of women rely on Social Security for at least 50% of their income
- Within the elderly population, 12% of men and 15% of women depend on Social Security for 90% or more of their income
If Social Security benefits make up a significant portion of your income, it is reasonable to begin taking them at the earliest possible age. However, if you are able to delay, you will receive a greater amount.
To illustrate, let me provide my personal example. According to the Social Security Administration, if I wait until my full retirement age (67), I will receive a 46% larger benefit than I would at age 62. Additionally, if I wait until age 70, my benefit would increase by another 26%. In total, the benefit would be 83% greater between the ages of 62 and 70.
Ultimately, the decision to take Social Security early or wait depends on your individual circumstances. Taking it early means receiving lower payments for a longer period of time, while waiting means receiving higher payments for a shorter period. It’s worth considering life expectancy as well, which can vary based on factors like gender, ethnicity, and lifestyle. While the CDC reports an average life expectancy of 73.5 for men and 79.3 for women, individuals may find they’re likely to live longer by using the Social Security Administration’s “Life Expectancy Calculator.” For instance, a woman born in 1958 who turns 65 this year may be expected to live until age 86. However, as with car commercials, your results may vary.
Social Security benefits are not subject to taxes
It is a common myth that Social Security benefits are tax-free, but the fact is that they can be taxed. According to the IRS, taxpayers who receive Social Security benefits may have to pay federal income tax on a portion of those benefits. This includes monthly retirement, survivor, and disability benefits. However, SSI payments are not taxable and go to citizens who need extra help, such as adults and children with disabilities or blindness who have limited income and resources. SSI payments can also go to people over the age of 65 who meet specific financial qualifications. The IRS provides a clear one-page guide that explains the amount and type of taxes that may apply to Social Security benefits.