Eighty-eight years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nation’s most successful, effective and popular programs. About 67 million people — about one of every five U.S. residents — collected Social Security benefits in February 2024. Older adults make up about four of five beneficiaries, while the other one-fifth received Social Security Disability Insurance (SSDI) or were young survivors of deceased workers.
Social Security is typically used as a supplement to retirement savings and income. However, for many people, Social Security represents their only source of income, or most of it. In 2023, among elderly Social Security beneficiaries, 37 percent of men and 42 percent of women relied on Social Security for 50 percent or more of their income. At the very end of 2023, the average monthly retirement benefit was $1,767.03.
A lot of the information you might read about Social Security is incorrect. In this blog post,we debunk three common myths about Social Security. Hopefully, these clarifications can put your mind at ease.
Myth #1: Social Security is going to run out of money
Reports have been circulating that Social Security is going to run out of money. These rumors have created significant concern among people who are retired or nearing retirement. We want to assure you that this not going to happen!
As Tyson previously explained, Social Security is made up of two trust funds, collectively referred to as the “Social Security trust fund.” The Old-Age and Survivors Insurance (OASI) Trust Fund is the source of retirement and survivors’ benefits, and the Disability Insurance (DI) Trust Fund is the source of disability benefits. Both are funded by payroll taxes and interest earned on invested assets, and these funds are accounts managed by the Department of the Treasury.
The trust funds are invested in Treasury securities that are just as sound as all other U.S. government securities, held by investors around the globe and regarded as being among the world’s safest investments.
However, it is possible that Social Security could face a shortfall. If that happens, beneficiaries could receive a reduction in their benefits.
On May 6, 2024, The Social Security Trustees released their annual report on the program’s trust funds, revealing that the largest component of the federal budget is on an unsustainable path. Without reform, the Social Security trust funds will soon be depleted and unable to pay full benefits. Social Security’s OASI Trust Fund would be depleted by 2033, at which point benefits would be reduced by 21 percent. The program’s DI Trust Fund would not be depleted over the 75-year projection period. If the two trust finds were hypothetically combined, they would be exhausted by 2035 and lead to a 17 percent reduction in benefits at that point.
However, if lawmakers act soon to address the trust fund shortfalls, they will be able to phase in changes gradually and responsibly in a way that does not harm vulnerable populations.
Also, as long as workers and employers pay payroll taxes, Social Security will not run out of money. It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out.
It is important to know that, fortunately, a large, across-the-board benefits cut is the worst-case scenario. Congress has more than a decade to shore up Social Security’s finances, and lawmakers continue to generate proposals for doing that. Some of the options Congress has for how to fill the gap in Social Security funding include raising payroll taxes, lowering benefits and/or setting a higher retirement age.
There is power in numbers, and the growing population of retirees is likely to become an even more politically powerful constituency that will defend Social Security benefits and assure the system’s future.
As your financial advisors, we will monitor and track how much of an impact any changes to Social Security could have on your financial plan. We will regularly review and update your retirement income strategy to address any regulatory changes and make proactive adjustments.
Myth #2: You don’t pay taxes on Social Security benefits
Approximately 40 percent of people who receive Social Security have to pay income taxes on their benefits. According to the Social Security Administration (SSA), you will pay federal income taxes on your benefits if your combined income (50 percent of your benefit amount plus any other earned income) exceeds $25,000 per year filing individually or $32,000 per year filing jointly. You can pay the IRS directly or have taxes withheld from your payment.
There are two levels of taxation — people will pay tax on either 50 percent or 85 percent of their benefits that are taxable. You will pay federal income tax on up to 50 percent of your benefits if your income for the year is $25,000 to $34,000 for an individual filer and $32,000 to $44,000 for a couple filing jointly. Above those thresholds, up to 85 percent of benefits are taxable. Below them, you don’t owe the IRS anything on your benefits.
Most of our clients pay tax on 85 percent of their benefits. Keeping your income low will limit that taxation, but with that 85 percent taxation threshold for married couples filing jointly at only $34,000, the focus for tax planning with our clients is much more geared to being tax-minded on their non-qualified investments and fostering discussions around the timing of IRA withdrawals.
Now, that’s tax at the federal level. At the state level, nine states tax Social Security benefits in 2024: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah and Vermont. The amount of state tax you’ll pay depends on factors such as your adjusted gross income (AGI), tax-filing status and, in some cases, your age. Tax laws often change, and some states that currently tax benefits are looking to stop doing so.
Myth #3: You cannot work and receive Social Security benefits
A third common myth is that you can’t work while receiving Social Security benefits. You can do so, although there is a limit on how much you can earn and still receive full benefits.
If you are younger than full retirement age (FRA) and earn more than the yearly earnings limit, your benefit amount could be reduced. If you are under FRA for the entire year, the SSA will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit is $22,320. In the year you reach full retirement age, the SSA will deduct $1 in benefits for every $3 you earn above a different limit. In 2024, this limit on your earnings is $59,520. The SSA counts your earnings up to the month before you reach your FRA, not your earnings for the entire year.
Where the confusion seems to lie is in what we call the “corridor years,” ages 62 to normal retirement age (NRA), when earned income above the annual limit can penalize Social Security benefits. NRA is the age at which retirement benefits (before rounding) are equal to the “primary insurance amount.” It’s important to note that what we’re talking about here is earned income, not income from investments, rental properties, IRAs or pensions. “Earnings” are defined as your wages or net profit plus other compensation, such as bonuses, commissions and vacation pay. Many people don’t realize that the dollars the SSA takes due to penalties in those years will be added back to your benefits once you reach NRA.
We understand how important Social Security is to most people. If you have any concerns or questions about your benefits, whether you are already retired or not, please contact us.
We will look at your earnings history and help you understand what to expect in the coming years. Whenever you hear “news” about Social Security that concerns you, ask us about it, and we will separate fact from fiction and make sure you receive accurate information.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Tyson Ray and not necessarily those of Raymond James.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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