With fewer than 20% of companies today offering employee pensions, many older Americans will rely on Social Security and retirement account savings. For those 65 and up, Social Security benefits make up over one-third of their income, according to the Social Security Administration (SSA).
However, the ratio of workers paying into Social Security and retirees collecting it has decreased dramatically since the program’s founding in 1935. In 1940, there were 159.4 workers paying Social Security taxes per beneficiary. Fifty years later, in 1990, that ratio had dropped to 3.4 workers. Currently, there are 2.8 covered workers for each Social Security beneficiary, the SSA says. By 2035, the ratio will drop to 2.3 workers per beneficiary. Small wonder, then, that people are anxious about the future of the program.
Mid and late-career professionals who have paid into the program for years and years worry their benefits will be reduced. Meanwhile, younger workers are concerned that there will be nothing left to collect by the time they reach retirement age. As a financial advisor or insurance agent, you are a retirement planning specialist. Since you have the knowledge, make sure your clients understand how Social Security works. This may involve clearing up misconceptions they have. With that in mind, here are three common myths about Social Security.
1. Social Security covers retiree living expenses
Many people believe they can get by on just their Social Security benefits. But as AARP explains, it was designed to supplement pensions and other retirement funds. It wasn’t meant to be a sole source of money.
In fact, you need 70% of your pre-retirement income to live comfortably, according to the SSA. For people with average earnings, however, Social Security benefits will replace only about 40% of that. If you’re a high earner, it drops to 30%. Many folks do seem to know the minimum age to claim benefits is 62.
They also are aware that the longer you wait, the more money you collect. According to AARP, the average Social Security retirement benefit for 2019 is $1,461 a month. By comparison, the maximum monthly benefit this year is $3,770. However, you must be 70 to receive it.
2. Social Security is running out of money
Our second myth is nearly as stubborn as the first. Kiplinger points out Social Security is funded not only by workers, who contribute 6.2% out of each paycheck, but also their employers, who match the amount. Therefore, the program cannot go bankrupt.
What gives this belief staying power? Until 2010, payroll taxes brought in more than enough money to cover retirees and others receiving benefits. The extra was placed in a trust fund and invested in securities; and the fund collected interest on Treasury securities, along with taxes on some benefits.
However, as MarketWatch explains, since 2010, more money has gone out in benefits than has come in via payroll taxes. To fill the void, the government began using the interest on the securities. If this continues, in 2020, the securities will have to be tapped. And if nothing is done to address the shortfall by 2034, the trust fund itself will be depleted.
But even if this were to happen, Social Security won’t be bankrupted, because payroll taxes will still be generated. And while it’s possible benefits could be reduced, that is highly unlikely. Experts agree Congress must eventually deal with this issue. Legislators will have to consider how seniors will react to losing any of their benefits – and how Americans will feel about paying more taxes to fund the benefits.
This brings us to myth number three…
3. People don’t pay taxes on Social Security
The short response to this one is: it depends. According to the SSA, about 40% of those collecting must pay income tax on their benefits.
They provide some examples:
- You file a federal return as an individual and have a combined income between $25,000 and $34,000, you might have to pay taxes on up to 50% of your benefits.
- If your combined income is higher than $34,000, that increases to as much as 85%.
- On the other hand, if you file a joint return, if you and your spouse have a combined income of $32,000 to $44,000, you could have to pay taxes on 50% of your benefits. (That goes up to 85% if your combined income is over $44,000.)
- Finally, if you are married and filing separately, you are likely to pay income tax on your benefits.
Note: the SSA defines “combined income” as the total of your adjusted gross income, plus non-taxable interest, plus half of your Social Security benefits.
Educate your clients
We have now examined three of the biggest myths surrounding Social Security. Whether Congress will make changes to this massive government program, remains to be seen. As a financial advisor or insurance agent, it’s important that you familiarize your clients with the basics. To establish yourself as an authority on this subject in your community, consider LeadingResponse turnkey workshops. This is an ideal platform for you to share valuable information with prospective clients and grow your business.