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8 Common Social Security Misconceptions


Today’s guest post is from Anum Yoon. You can see her bio at the end of the article. I’m on vacation until July 1st (Happy Canada Day!)

8 Common Social Security Misconceptions

If you’re planning on relying on Social Security income one day, then you should know that some of the buzz about the safety net program is less than accurate. People are known to spread stories about Social Security that range from simple misunderstandings to conspiracy theories.

Here are 8 common Social Security misconceptions.

  1. Social Security Benefits Are Based on Your Last 10 Years of Earnings

There’s a common misconception that your benefits are based solely on what you earned during the last decade before you retired. There are also variations on this theme, characterized as high-five or last three base of earnings.

It’s not true. All of your retirement benefits are based on your highest 35 years of earnings. Keep in mind, those earnings will be adjusted for inflation.

  1. Your Social Security Contributions Are Yours Alone

You might be under the impression that when Uncle Sam takes money out of your paycheck, it’s placed into an account with your name on it and that money is yours and yours alone. That’s inaccurate.

The fact of the matter is that Social Security is a pay-as-you-go program. That means that the taxes that you’re paying now are funding the benefits of people who are retired right now. When you retire, younger workers will finance your benefits with their contributions to the program.

  1. You’ll Probably Get Less Money in Benefits Then You Contributed to the Program

You might think about all of the FICA money that has been deducted from your paycheck over the years and think to yourself: “I’ll never get that much money back when I retire.”

In fact, the average person who retires at age 65 receives more benefits in Social Security and Medicare than he or she contributed to the program.

  1. You Can Take Reduced Benefits at 62 and Then Switch to Full Benefits Later

It’s not likely that you can take limited benefits at 62 years of age and then upgrade to full benefits later. If you file for any type of Social Security benefit before age 66, you have to file for all the benefits that are due to you at the same time.

There are exceptions to this, most notably for widows. If you’re unclear on your personal situation, you should consult an attorney.

  1. If You’re Struck With a Debilitating Disease, You’ll Still Have to Wait in Line to Get Your Benefits

It’s easy to think of any branch of the government as little more than a mindless bureaucracy run by people who ask visitors to take a number and get in line. However, that’s not always the case.

Social Security has a program called Compassionate Allowances. It exists to provide quick benefits to people with a confirmed diagnosis of a very severe illness, such as ALS or pancreatic cancer.

  1. A Married Person Who Has Never Worked Is Not Eligible for Social Security Benefits

In fact, married people can receive Social Security benefits based solely on the work records of their spouses. Previously unemployed spouses can receive benefits equal to as much as 50 percent of the benefits of the spouses who worked.

There are eligibility requirements, though. The nonworking spouse must be at least 62 years of age and the spouse who worked must be receiving benefits.

  1. Social Security Benefits Will Be Proportional to How Much You Earned during Your Life

While the Social Security computers will calculate benefits based on your highest 35 years of income, the systems will also use something called a replacement formula that basically levels the playing field between high-income, medium-income and low-income workers.

  1. If You Work After You Start Receiving Benefits, the Extra Taxes You Pay Will Increase Your Social Security Check

In fact, you’ll only receive that automatic increase if your current income is higher than the lowest annual income during the 35 inflation-adjusted years of your employment history.

Anum Yoon is a blogger, freelance writer and everything in between. She loves writing about personal finance, as seen on her blog Current on Currency. When she’s not budgeting for her traveling endeavors, she’s on Twitter, so check out her latest updates.

Related article: How early retirement will impact my Social Security Benefit

Image credit: Flickr by davic

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 15 comments… add one }
  • Mrs. Budgets @MrandMrsBudgets June 24, 2015, 6:34 am

    I think my generation, millennials, also think that social security won’t be around when we are in our 60’s. From what I read, this seems to be a misconception as well.

    • retirebyforty June 24, 2015, 10:16 am

      I’m hoping we’d get at least 70% of our estimated social security benefit. Who knows what can happen in 25 years.

  • Kat June 24, 2015, 6:41 am

    Great article. There is so much huff and puff about SS benefits. It’s very helpful to see some clarification on common misconceptions.

  • Dave June 24, 2015, 8:22 am

    This was an good post because it dealt with misconceptions in plain language. I am 51 and did some calcs after reading it and realized that I just hit 35 years! Whoo hoo, I always thought it was based on your “high-3.”

    Also, I think every generation repeats the “it won’t be around” syndrome. My entire working life, being a late-ish “boomer” everyone around me has recited the mantra of “it won’t be around, it won’t be around.” Even today, as I prepare to retire early, my financial planner refuses to base any calculations on projections from Social Security. I know he is being conservative and, in my case it won’t make much difference because I have saved enough and been debt free for so long, but it is frustrating to have a statement from the SSA that a planner won’t even look at (he is in his 30s).

    Finally, I have friends and family members who have spent a lifetime working “off the books” and thinking they were getting by with something. Most of them think they can get a job on the books for a some short period and use Social Security as a sole way to fund their retirement. That 35 year number is going to come as a huge shock to them when they go file for benefits. One of them (59 years old!), who is sad to me and who made me laugh out loud at the same time, actually told me she was taking a job at Walmart and then resigning after one month so that she could “get my Social Security check.” I tried to tell her about “quarters” of earnings and that you couldn’t take money under the table your entire life and then qualify for decades of benefits after one only month of working at a legit job – but she wouldn’t listen. For folks like that but younger this post is a very good thing – if they will listen.

    • retirebyforty June 24, 2015, 10:23 am

      I think you will get most of your social security benefit. 15 years isn’t that far off. Financial planner should not discount it completely. Maybe he wants to keep you working longer. 🙂

      You need 40 credits to qualify for Social Security retirement benefit. You can earn 4 credits per year so they need to work at least 10 years on the book. How will they support themselves in old age with no social security benefit? It’s going to be tough.

      • Cathy June 24, 2015, 12:10 pm

        I agree, I am 53 and my husband is 55. I plug about 75% of the SS estimates into my spreadsheet for planning purposes. Even this irritates me, changing the rules of the game in the forth quarter as far as I’m concerned.

        I have a related question about delaying social security. We are planning to retire when my husband is 59 and I will be 57. I will be eligible for a small defined benefit pension from my job at this point. I am assuming that we will live modestly on this pension and our savings until we decide to collect social security. Withdrawals from our retirement accounts may be 5-6% of balance during this early period, I’m estimating 8 years until my husband’s SS full retirement age (67), but should be more like 2-3% after we start collecting a larger social security benefit. It seems like this will also reduce our RMDs and tax liability later on. Is anyone else here considering a similar approach? Thanks!

  • Retire29 June 24, 2015, 9:15 am

    One particularly troubling note regarding #2 is the ratio of workers to beneficiaries. When OASI (Old Age & Survivors Insurance), or “traditional” social security, started, the ratio was over 40 workers to each beneficiary. Now that ratio is 2.9 to 1. In 2040, when the trust fund will be exhausted, the ratio will be an even 2 to 1.

    You can probably see where this is going. While current retirees are certainly getting more from the program than what they paid in, future retirees (>20 years away) will almost certainly not.


  • jim June 24, 2015, 10:37 am

    Great list.

    I’d kind of nitpick #7 because benefits are proportional to your earnings. They just aren’t directly proportional. But as I said I’m being nitpicky, so sorry.

    Mrs Budgets first comment is right. The biggest myth is that people think SS will be bankrupt when they retire and they wont’ get any benefits. I just can’t see any scenario that will happen (other than zombie apocalypse).

    • jim June 24, 2015, 10:39 am

      Actually, come to think of it, I think there is a decent change that SS will persist after a zombie apocalypse. At least if its the slow zombie variety, I think theres a fair chance civilization and government won’t crumble. I think the threat of slow zombies is exaggerated.

  • CM June 25, 2015, 6:59 am

    Of the 35 years that SS uses to determine your benefit, they must be substantial earning years. Obviously what was substantial in 1970 isn’t very much in today’s dollars. These years are adjusted for inflation, but you only need to make the unadjusted amount for it to count. Here is the chart: http://www.socialsecurity.gov/OACT/COLA/sga.html

    • CM June 25, 2015, 7:01 am

      Sorry, I posted the disability chart. I look for the other one and will post.

  • [email protected] Just One More Year June 25, 2015, 9:27 am

    A misconception that many people including myself may have is that there are only a couple standard ways to draw on your social security. The thought is that you get to a certain age and then it is available to you based on your past earnings (simplistic explanation).

    I have read articles and books that suggest that there are over 80 options to draw on your social security. Certainly, these will change as the years go by. I know that I will do a lot of research before I pick the way I draw against my account.

  • Stockbeard June 25, 2015, 9:52 am

    Thanks for the tips. I’m still trying to understand things for myself, given that I don’t plan on staying in the US for very long… the situation for people who travel, in regard to Social Security, is always a mess.

  • SimplyFinanciallyFree June 25, 2015, 10:37 am

    I am hoping to retire early (hence following this blog) so I will most likely not have 35 years of earnings, at least not 35 years working on a full time basis. I have never planned on receiving the full estimate of my social security but this means that what I might receive could be even lower as many years of part time income will end up getting averaged into this number. I guess there is not much I can do about it but it is certainly a bummer.

  • No Nonsense Landlord June 25, 2015, 6:54 pm

    Great and timely article. I hope the people know that is a company was set up like Social Security, it would likely be illegal. A Ponzi scheme…

    Having said that, I hope people work a long time to support me on social security.

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