Social Security Misconceptions

Social Security is an important part of retirement income planning, but many plan participants have misconceptions about the program and their benefits. The plan adviser can play a key role in educating them about the concepts that can affect their claiming decisions and retirement savings goals—ultimately, their retirement security.

Social Security is an important part of retirement income planning. Plan advisers can play a key role in educating participants about how to make the best decisions in order to maximize their benefits. Here are common misconceptions that many workers have about the program and that advisers can help dispel: 

1) Social Security benefits will be discontinued. Every year, when the Social Security Trustees’ report comes out, headlines proclaim that the trust fund is running out of money. This prompts some people to take benefits early for fear they will lose out entirely if they wait. That is not what would happen, however.

Instead, if a shortfall occurs in 2035, as predicted, benefits would be reduced only slightly—just 20%, the Social Security Administration has estimated, notes Tim Steffen, director of tax planning, private wealth management, for Robert W. Baird & Co. “As long as there are people working and paying taxes into the system, there will be money to pay benefits,” he says.

“As long as there are people working and paying taxes into the system, there will be money to pay benefits.”

2) It makes no difference when a worker first claims benefits. Beneficiaries may file for Social Security as early as 62 and as late as 70. But, for the early filers, monthly payouts will be permanently reduced by 25% to 30% of the potential full amount; by waiting, the filer’s monthly payments increase by 8% for every year past full retirement age. Joel Schiffman, head of strategic partnerships at Schroders, recommends reminding participants to review their Social Security statements yearly; these show the different monthly payout estimates based on the year they make their initial claim.

3) Full retirement age is still 65. For all those born between 1943 and 1954, their full retirement age is 66; the age gradually increases by a few months for every birth year, until it tops out at age 67 for people born in 1960 or later. The full retirement age not only affects the size of benefits, but also has an impact on other issues. For example, taking benefits before the full retirement age could affect survivor benefits for a spouse. Also, if a recipient is working and younger than full retirement age, Social Security benefits may be temporarily reduced if the person earns more than a certain amount from employment. But, after full retirement age is reached, earnings have no effect on benefits.

4) Medicare age has changed with the full retirement age. “If you’re retired, you need to apply for Medicare at 65, even if you choose to delay Social Security to age 70,” says Steffen. Plan participants receiving early Social Security benefits before age 65 will be enrolled in Medicare automatically. But everyone else needs to enroll in Medicare themselves at the SSA website during the initial enrollment period, which begins three months before the month they turn 65 and extends for three months afterward—even if they are not yet ready to start taking Social Security benefits.

Unless the beneficiary or spouse is still working and has health insurance from a current employer, that person needs to sign up for Medicare at age 65 or be subject to a late enrollment penalty. If the health insurance is from an employer with fewer than 20 employees, participants may still need to enroll in Medicare at 65 to avoid coverage gaps. More information about the Medicare enrollment rules can be found online.

5) Medicare and Social Security are unrelated benefits. If both Social Security and Medicare are being received, in most cases Medicare premiums are subtracted automatically from Social Security benefits.

Most people do not pay premiums for Medicare Part A, because they or their spouse paid Medicare taxes from working for at least 40 calendar quarters—i.e., 10 years. But most will pay $164.90 per month for Medicare Part B next year. High earners pay more. Single people with a modified adjusted gross income as of the last tax return on file—generally 2021 for 2023 premiums—of more than $97,000, or more than $194,000 if married filing jointly, must pay a high-income surcharge. Called an “income-related monthly adjustment amount,” this boosts monthly premiums to $230.80 or to $560.50, respectively, next year, depending on income. Withdrawals from tax-deferred retirement savings are included in the adjusted gross income calculation—which can be one reason to consider saving some money in Roth accounts.

If income has changed since the last tax return on file due to certain life-changing events such as retirement, divorce or death of a spouse, the filer may ask the SSA to base premiums on more-recent income and reduce or eliminate the surcharge.

6) Social Security benefits are not taxed. The taxation of Social Security benefits is tricky, but many people pay taxes on at least part of their benefits. “The good news is that some portion of your Social Security benefits will be tax-free,” says Steffen.

If a person’s “combined income,” which includes adjusted gross income, plus nontaxable interest and half of Social Security benefits, is from $25,000 to $34,000 for single filers ($32,000 to $44,000, if married filing jointly), they may have to pay tax on up to 50% of Social Security benefits. If your total income is above those levels, up to 85% of your benefits may be taxable.

Knowing these tax rules can be important for retirees to keep in mind when deciding which accounts to tap for income each year, especially if they have some tax-free money in a Roth that will be excluded from this calculation. “If they just retired and are looking to generate income, which levers can they pull?” says Keri Dogan, senior vice president of retirement income solutions for Fidelity Investments. They can look at various withdrawal options and the impact on taxes and other benefits, she says.