5 Social Security Myths -- Debunked!

By Keith Speights Markets Fool.com

Some myths are positive. For example, millions have been entertained through centuries of hearing about the ancient Greek myths about Odysseus, Hercules, and Prometheus.

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Other myths aren't so positive. There are plenty of inaccurate stories floating around about Social Security that can lead to confusion and worry. Here are five of these Social Security myths that can be easily debunked.

Image source: Getty Images.

1. Social Security will go bankrupt in a few years.

Perhaps the most widely circulated myth that you've probably heard about Social Security is that the program will run out of money in a few years. Some versions of this myth peg the number of years at 10 or less. Other versions place the looming insolvency further down the road. The reality, though, is that Social Security won't go bankrupt at all.

As with most myths, there is a grain of truth behind this one. The combined Social Security Trust Fund, which includes theOld-Age and Survivors Insurance (OASI) program and theDisability Insurance (DI) program, will become depleted in 2034, according to the latest Social Security trustees report.

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However, this trust fund is only one source of income for Social Security. Taxes and other continuing income would be enough to fund 79% of scheduled benefits. Considering how popular Social Security is among Americans, it seems likely that Congress will take action to plug the gap before 2034 arrives. Even if they don't, though, Social Security won't go bankrupt.

2. The maximum Social Security payment is around $2,600 per month.

This myth is closer to the truth than the belief that Social Security is going broke. It is correct that the maximum retirement benefit for individuals who retire at their full retirement age is currently $2,687 per month. Those who retire before their full retirement age will receive smaller checks. If you delay retirement past your full retirement age, however, you will be eligible for higher monthly benefits.

What is the full retirement age? It depends on when you were born. (Click here to see the Social Security Administration's table showing the age at which you can receive full benefits.)

Delaying retirement until age 70 provides the highest monthly Social Security benefits. Americans who paid in the maximum contributions to Social Security and who retire at age 70 currently receive $3,538 per month in benefits.

3. Social Security benefits are based on your last several years of work.

Some people think that their Social Security benefits are based only on the last years of their working career. That could be true, but not necessarily so.

Social Security calculates your monthly benefits based on the 35 years when your annual income was the highest. For many Americans, those 35 years occur later in their careers. However, if you take a lower-paying job a few years prior to retirement, it's entirely possible that your salary from earlier in your career will be used for Social Security benefit calculations.

4.You don't have to pay taxes on Social Security benefits.

It's true that you might not have to pay taxes on your Social Security benefits. But many Americans do have to pay some taxes on their benefits.

Whether or not you have to pay taxes on your Social Security benefits -- and how much you have to pay -- depends on how much money you make overall in retirement. The following table shows current tax rates for different levels of income.

Type of filing No tax on benefits Tax on up to 50% of benefits Tax on up to 85% of benefits
Individual return Combined income <$25,000 Combined income $25,000-$34,000 Combined income >$34,000
Joint return Combined income <$32,000 Combined income $32,000-$44,000 Combined income >$44,000

Data source: Social Security Administration.

Your combined income, by the way,is the sum of your adjusted gross income from your 1040 tax return plus nontaxable interest plus half of your Social Security benefits.

5. If you retire then go back to work, you'll lose most of your Social Security benefits.

The key word in this myth is "most." If you retire then go back to work, you might forego some of your Social Security benefits -- but certainly not most of them. And it all depends on when you retire.

If you retire prior to your full retirement age, Social Security will reduce $1 in benefits for every $2 you earn above the annual limit (which is $16,920 for 2017). In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you make above the cap. But here's the good news: Once you reach your full retirement age, you can work without losing any of your Social Security benefits.

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