Myth Busting

As I think about the world of finances, I’ve come to realize that, with so much misinformation, dis-information, and plain ole flat-out incorrect information floating around out there, sometimes the myths become part of our society’s knowledge foundation.  Much like the Greeks had their Mount Olympus myths, we have our Social Security myths so let’s do a little myth-busting.

At least once a month, someone somewhat younger than myself (chronologically at least) makes the comment that they aren’t counting on Social Security to be there when they retire since it will be broke by then. That thought, or some variation, forms the basis for Myth #1 in the world of Social Security myths: Social Security is going broke. Why is this a myth? In order for Social Security to go completely bust, the country, as a whole would have to stop working cold turkey. Given that a frightening percentage of families have less than $1,000 in their savings account as an emergency fund, the likelihood that they’ll all stop working and generating those payroll taxes is as much a reality as the Goddess Antheia showing up to clean up my back garden. Will Social Security benefits look the same in the future, probably not – benefits today don’t look like they did years ago and that’s not a terrible thing. Life changes and our financial support network should change as well.

Most of you know I do a fair amount of work in the divorce arena so this next myth pops up fairly frequently and sometimes quite vehemently – Myth #2:  Collecting a benefit based on your ex-spouse’s working history will reduce their benefit. Usually about three words into someone’s rant (or fearful reluctance to bring up the subject) I’m shaking my head (which doesn’t always help the situation but then again, I don’t play poker for the same reason). Regardless of the other person’s feelings about your financial wellness, if you’ve been married for more than 10 years, you can collect off your ex-spouse’s benefit history and it won’t matter one iota to their benefit. There are some rules about when you can collect but if one-half of that person’s benefit is better than yours then they have no say in which benefit you choose to collect.  They aren’t even notified so they won’t know unless you tell them.

Staying with the divorce theme a little longer, Myth #3 has to do with long-term support: The benefit I have now will always be my benefit.  If you are single and have always been single, then, yes, it is quite possible that the benefit you begin collecting will always be your benefit (along with the associated inflation). If, however, you’re married and your spouse pre-deceases you, then you are eligible for whichever benefit is better, theirs or yours (but not both, which we’ll call Sub-Myth #3). If you’re divorced, don’t lose track of your ex-spouse. If that person dies before you, even if you haven’t been married in years, you may still be able to collect on this “whichever is better” benefit. This should be a routine admission question for nursing homes given that I know of several older residents who did a little digging and ended up with better benefits than they had spent years living on. If you’ve been married twice, both for longer than 10 years, and haven’t remarried, then you get to pick the better option of the two ex’s so remember – if you are marrying for convenience, it’s not about the bank account, go for the better earning potential…

Myth #4 involves when to collect: Collecting early nets me more money in the long run / Collecting later nets me more money in the long run. Both statements are so full of variables that neither is really true. Unless you can tell me when you are going to have dinner with Hades (keeping with the Greek theme) then no one can possibly determine which collecting strategy is valid.  That being said, we can certainly put some qualifiers on the situation.  Collecting before your Full Retirement Age will definitely mean a life-long reduction in benefits. Simple math mandates that inflation on a higher amount, by collecting later, means more money in your pocket later in life.  If you have other income sources then you are very likely going to pay more in taxes on your Social Security benefits than if you didn’t, which reduces your collective total.  Here’s an interesting fact – there is no rule that says you have to collect Social Security. While your benefit stops appreciating at age 70, now that Required Minimum Distributions don’t start until age 72, you might want to wait and do some creative tax planning for those two years.

Finally, my favorite myth, Myth #5: I paid into the system so I’m owed this benefit. Setting aside how Kitty feels about the words “owed” or “deserve”, let’s do a little math here… Let’s suppose you earned the Social Security maximum amount for the 35 years the Administration includes in your formula. You would have contributed about $200,000 over that 35-year period. If you retire at age 67, live to 85 (average life expectancy), and collect the average monthly benefit ($1,767), you will have collected over $381k and that’s not including inflation.  If the thought of payroll taxes bugs you, consider it a savings account you are contributing to on a per-paycheck basis – right now, those Social Security deposits are paying you more than your high yield savings account.

Regardless of your feelings about social benefits, the left or the right, fiscal conservatism or New Deal(s), we need to remember that 65 million people collect on the Social Security system and that number is only going to increase so it’s important that everyone better understands the system that makes up the majority of the income of our elderly.