And Other Misconceptions About Social Security
There is a lot of talk about Social Security lately. With the new Payroll Tax Break, people wonder whether Social Security can continue to operate and provide benefits to retirees now and in the future.
As the debates rage on, one this is abundantly clear. The general public holds many misconceptions regarding Social Security. The debate cannot continue until these misconceptions are put to rest. Read below to learn the truth about Social Security. From there, it will become easier to understand how the tax cuts may or may not affect your retirement.
1. Social Security Is Not Bankrupt
Social Security is nowhere near bankrupt. The program collects billions of dollars every year from working individuals. Until 2019, the program collected billions more than it actually paid out to those collecting.
However, baby boomers are not reaching retirement age. Many are beginning to receive benefits as opposed to pay into them. Since the baby boomer generation was among the largest generation alive, Social Security is noticing a slight loss.
This loss is nowhere near enough to bankrupt the program. However, it may be enough to cause changes to the full retirement age (FRA). The FRA is the legal age to collect full retirement benefits.
This fact leads to the next misconception.
2. The Full Retirement Age is 66…for now.
If you ask most people how old they need to be to retire and receive Social Security, they will give you one of two answers: 65 or 67. These answers are both wrong.
As of today, September 12, 2020, the FRA to collect Social Security is 66. IN 1983, the FRA went from 65 to 66. People can retire early and receive a particle benefit. However, the age to receive the full benefit is currently 66.
However, Social Security laws anticipated an issue when baby boomers retired. Therefore, over the next five years, the FRA will increase by two months until it reaches 67 for anyone born in 1960 or later.
3. Undocumented Workers Actually Help Social Security Without Taking Any Benefits
Undocumented workers do not have a legal right to work in the United States. They do not have a social security number and do not pay taxes out of their wages. Therefore, they do not collect any tax benefits, such as Social Security, when they stop working.
However, while it is illegal and not condoned in any way, they may steal a social security number to obtain a job. If their employer does not verify their right to work, they will receive a paycheck with taxes deducted, including Payroll Taxes paying into Social Security.
Therefore, undocumented workers may pay into the system and help increase the revenue without ever taking from the system upon retirement.
4. Congress Is Not Exempt from Social Security
Well, they are not exempt anymore. The truth is Congress members have been part of the Social Security System since 1984. Under the Reagan Administration, Social Security received a major overhaul. As a result, Congress was included in the group of people now required to pay into the system and enjoy the system’s benefits.
5. Social Security May Be Taxed
Another misconception of Social Security is that people do not pay taxes on their benefits. This idea is partly true. Taxes are collected against social security if your income is over a specified threshold. Anyone earning between $25,000 and $34,000 (individual) and $32,000 and $44,000 a year in retirement can be taxed on 50% of their Social Security income.
If a person earns above this threshold in a year, 80% of their social security can be taxed. Furthermore, some states will also tax Social Security benefits. You must check with your state to determine if you will pay taxes on your benefits and the amount to be collected.
6. The Government Does Not Steal from Social Security for Other Programs
The Federal Government does borrow money from Social Security. However, the treasury issues an IOU. The IOU must get repaid every year with interest. As of 2019, the most annual IOU with interest was paid in full. This process has been commonplace since Social Security was enacted. The government has never taken money from the system without repaying it with interest.
7. You Can Work and Receive Full Social Security Benefits After FRA
IF you retire before FRA, you may receive a penalty on your social security if you take on a part-time job or work in any capacity. However, once you reach FRA, you can work and receive full benefits from Social Security. Many retirees take on part-time work or sub-contract services to earn extra income while collecting social security.
Social Security, like most government programs, is not perfect. It requires constant monitoring and changes to continue to work properly. However, it is far from bankrupt.
It may require some changes over the next few years. The last time a complete overhaul was enacted was over 30 years ago. The minimum FRA may need to be raised beyond 67. A high tax percentage may need to be enacted to keep up with the cost of living raises. However, these are small changes to keep the system running as usual.
To learn more about payroll taxes, the Payroll Tax Deferment Plan, and ways to help employees save for retirement beyond Social Security, contact the HR experts at Workplace HCM. Call (856) 334-9711 to speak with one of our HR professionals today!