There are a lot of misconceptions surrounding the Social Security system. Here are four common myths and the truth about how Social Security works and its future prospects.
Myth 1: You Should Collect Benefits Early
This is one of the biggest Social Security myths. Many Social Security recipients begin collecting benefits before their full retirement age. This age is 66 for those born between 1943 and 1954 and gradually increases to age 67 for anyone born in or after 1960. You can potentially cost yourself thousands of dollars in additional benefits by collecting early. If you take Social Security between age 62 and your full retirement age, your benefits will be permanently reduced to account for the longer period you will be paid.
On the other hand, if you delay taking retirement, your benefit will increase by 6 to 8 percent for every year that you delay, in addition to any cost of living increases. There are a lot of factors to consider before deciding when to take Social Security benefits, but if possible, it's usually better to wait until your full retirement age or older.
Myth 2: Your Money Goes into an Account with Your Name on It
When you pay into Social Security, the money is not set aside in a separate account, as with a 401(k) or IRA. Instead, your contributions are used to pay current recipients. When you start receiving benefits, people paying into the system will be paying your benefits.
Myth 3: Social Security Will Be Out of Money Soon
Many young people believe the Social Security system will run out of money before they have a chance to collect anything. Currently, the Social Security trustees predict that the trust fund will run out of money in 2034. Politically, it seems unlikely that Congress and the President would let this happen. Changes will likely be made to the system by either raising taxes (such as by lifting the cap on income subject to Social Security tax), reducing benefits for high-income individuals, increasing the retirement age, or doing something else that will allow Social Security to be fully funded. However, even if the trust dries up and there isn't enough money to pay all the promised benefits, people will still be paying into the system, and Social Security will be able to pay at least 75 percent of benefits.
Myth 4: If You Haven't Worked, You Can't Collect Benefits
If you haven't worked outside of the home, you will not be able to collect Social Security benefits on your own record, but you may be able to collect them based on your spouse or ex-spouse's record. Spouses are entitled to collect as much as half of a worker's retirement benefit. This rule applies to ex-spouses as well, as long as the marriage lasted at least 10 years and the spouse applying for benefits isn't remarried.
Learn more about Social Security. If you're uncertain about the best time to take your benefits, reach out to an elder law attorney near you for answers.