Five Social Security Myths That Might Be Steering Your Clients Wrong

Social Security is one of those topics clients often think they know all about. And you know what that means—fertile ground for trouble and poor financial decisions.

Misinformation about Social Security is so pervasive that the Social Security Administration published articles, now archived on ssa.gov, to counter some of what was making its way around the internet.

I frequently run into Social Security “myths” when helping financial advisors and clients who want to know how to optimize their benefits. Here are five that come up time after time.

Myth #1: There are no taxes on Social Security benefits. 

Not true in nearly 40 years. But it’s still out there.

Benefits were not taxed until 1984 following President Reagan’s signing of a bipartisan bill of Social Security amendments. The changes resulted from a report by the National Commission on Social Security Reform, led by Alan Greenspan, set up to address Social Security’s financial crisis.

According to the SSA, about 40% of people who receive benefits must pay income tax. Income limits dictate who pays income tax on benefits and what portion of benefits are taxable.

For example, for people who file joint returns and earn a combined income of more than $44,000, up to 85% of their Social Security benefits are subject to income tax.

So, if your clients have income from other sources, such as investments or pensions, they’ll probably be subject to federal income tax on a good portion of those benefits.

There are other potential deductions from monthly Social Security payments.

If clients are signed up for Social Security and Medicare Part B medical insurance, their Part B premium will automatically be deducted from their Social Security monthly payments. And if they choose a Medicare Advantage or Part D (prescription coverage) plan, they can elect to have Social Security deduct and pay those premiums directly to their insurer.

Myth #2: Filing decisions are final. 

You may have clients stride into your next meeting with the news that they filed for Social Security—without consulting you. Their unexamined decision could cost them quite a sum in total benefits over their lifetimes and affect what they leave to survivors.

Stay calm. Social Security does allow beneficiaries some wiggle room.

Clients can change their minds about filing and withdrawing within the first 12 months of collecting. This is allowed only once, and they must pay back what they collected. Repayment includes any Medicare benefits they had deducted from their Social Security.

People who have reached their full retirement age but aren’t yet 70 can also suspend their benefits. They can earn delayed retirement credits for each month that benefits are suspended, leading to a higher benefit in the future.

Myth #3: Social Security is only for people who are no longer working. 

Age 65 is no longer a milestone in many people’s lives (except for becoming Medicare-eligible). Many work well into their 60s and even their 70s. And many are collecting Social Security while they work.

Here are the rules, in brief:

• If clients collect Social Security before their full retirement age (FRA), the SSA may deduct their benefit by $1 for every $2 they earn over an income cap set annually (for 2023, it is $21,240).
• In the year that clients reach their full retirement age, the income cap is higher ($56,520 in 2023), and $1 is deducted from their benefits for every $3 earned.
• Once clients reach full retirement age, there is no limit or penalty for earning income.

The income limits for working  Social Security beneficiaries are examined annually when Social Security determines the cost-of-living adjustment.

Myth #4: Every worker is eligible for Social Security benefits. 

Not true. Particular government and railroad employees do not pay the taxes used to fund Social Security benefits and are not eligible for them. Teachers at public schools and some universities are examples of these groups.

Of course, some individuals who fall into this category worked some of their careers in jobs where they did pay Social Security taxes. They may be entitled to Social Security benefits, although those benefits may be reduced.

This is a particularly complicated portion of Social Security regulations and one to be on the lookout for should clients fall into one of these categories.

Myth #5: When a spouse dies, the widowed spouse is eligible for both a survivor’s and their own benefit. 

I wrote about this in my last column, but it is such a pervasive myth that it’s worth a recap. In short, there’s no double dipping with Social Security.

A widowed spouse can receive survivors’ benefits at age 60 and not before. And there’s a full retirement age for survivors’ benefits that’s different from an individual’s FRA.

If a widowed spouse is eligible for their own Social Security benefit, they can collect a survivor’s benefit and then file for their benefit when they choose, perhaps at their FRA or age 70. A lot will depend on whether they are working or have other income sources.

These last two examples point out why spouses need to decide together on when each will file for Social Security. Remember that client who announced they’d filed for Social Security without telling you? It’s entirely possible they also didn’t examine that move with their spouse.

Bonus myth: ‘I might as well collect and enjoy my money now.’ 

How often have you heard that? Clients often don’t understand the financial implications of their decisions to collect Social Security early at age 62, at 65 ( “traditional” retirement age), or at their FRA (which maxes out at 67 for those born in 1960 or later). There’s a sizeable bonus for waiting until 70 if that’s feasible.

You can help clients make decisions with eyes wide open by asking them about their retirement plans and Social Security before their actual retirement. Using sophisticated Social Security and retirement income sourcing software, you can model different scenarios and help them make the best choice for themselves and their families.

Read the full article on FA Magazine here.