3 Myths About Social Security That Can Cost You

When was the last time you heard about 9 out of 10 people agreeing on something -- anything? And yet that's what happened when AARP surveyed Americans aged 50 and older. A full 90% of those surveyed said they recognize the importance of Social Security to a financially secure retirement.

If you're among the 90% who consider Social Security an important contributor to retirement income, check out these three myths about the program that refuse to die. While they may appear harmless, buying into any misinformation surrounding Social Security can cost you dearly.

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Myth #1: Social Security is going broke

The Center on Budget and Policy Priorities (CBPP) calls claims of Social Security's impending "bankruptcy" highly misleading. Here's the actual state of affairs:

• Social Security was built to be self-supporting. Social Security is a "pay-as-you-go" program. That means today's benefits are funded mainly by payroll taxes. For example, in 2022, the Social Security system collected over $1 trillion in revenue and paid approximately the same in benefits.
• The trust fund remains. Over the course of three decades, Social Security built a large trust fund reserve, bringing in more in payroll taxes than it paid out. The Treasury Department invested that surplus in interest-bearing securities, eventually building the trust fund reserves to $2.9 trillion. Recently, the system has begun paying out more than it brings in, mainly due to an expanding retiree population. However, none of this comes as a surprise.
• Nothing will happen overnight. Payroll taxes continue to fund most Social Security payments, with shortages paid from the trust fund. Even if nothing changes, this payment method is estimated to cover full benefits until 2035. Because there is no imminent crisis, CBPP points out that policymakers have time to develop a new financing package that minimizes cuts to the program.

How buying into this myth can harm you: Buying into this myth could lead you to change how you plan for retirement. For example, if you believe that Social Security won't be there for you, you might be discouraged enough to put retirement planning on the back burner or abandon it altogether. In the meantime, policymakers are aware they have approximately 10 years to find a comprehensive funding solution.

Myth #2: An annual COLA is guaranteed

An annual cost-of-living adjustment (COLA) increase is not guaranteed. Since 1975, Social Security law has mandated that benefits be adjusted to keep pace with inflation. This is typically done through a COLA, which is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The CPI-W measures consumers' average prices for a representative basket of more than 200 goods and services. The Bureau of Labor Statistics calculates these average prices monthly and reports its findings to the Social Security Administration (SSA). Every October, the SSA announces whether there will be a COLA increase.

For a COLA increase to occur, the CPI-W must have increased by 0.1% or more from year to year. More specifically, they're looking for an increase in average prices between the previous year's third quarter and the current year's third quarter.

How buying into this myth can harm you: Every dollar counts in retirement, and expecting an annual COLA increase is a sure way to end up with less money than anticipated. A better option is to assume there will be no COLA increase and be pleasantly surprised when there is.

Myth #3: You don't pay taxes on Social Security benefits

In 1983, the Reagan administration determined that a portion of Social Security benefits should be taxable, and taxation began the following year. According to the SSA, about 40% of people who receive Social Security pay federal income taxes on their benefits.

The SSA provides this basic breakdown of recipients who may be faced with a tax bill:

Source: Social Security Administration.

If you live in one of the following states, you may also have to pay state taxes on your benefits:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

How buying into this myth can harm you: If you don't enjoy paying taxes, you're not alone. However, failure to plan for taxes can leave you short in retirement. Your best bet is to build a household budget that takes all potential taxes into account.

Myths have a way of sticking with us. However, it pays to focus solely on facts. When it comes to finances, it's verifiable facts that protect us from making decisions we may one day regret.

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