Navigating the complexities of Social Security can feel like traversing a minefield, especially with the abundance of misinformation circulating online. While well-intentioned, advice from non-experts can lead to costly mistakes that impact your retirement savings. To ensure a secure financial future, it’s crucial to rely on accurate information from trusted sources, such as the Social Security Administration (SSA) and qualified financial advisors.
Here, we debunk three persistent myths about Social Security that could potentially derail your retirement plans:
Myth 1: Social Security Benefits Are Tax-Free
A common misconception is that Social Security benefits are exempt from taxation. In reality, a significant portion of beneficiaries may owe federal income taxes on their benefits. Whether your benefits are taxable depends on your overall income and filing status.
The IRS provides resources and tools to help you determine if your benefits are subject to taxation. To assess your potential tax liability, you’ll need to calculate your “combined income.” This involves adding half of your total Social Security benefits received during the year to your other sources of income, such as wages, pensions, dividends, interest, and capital gains. For married couples filing jointly, combine half of each spouse’s Social Security benefit with their combined income.
According to the IRS guidelines, here’s a breakdown of when your benefits may be taxable:
- Up to 50% of your benefits may be taxable if:
- You’re single, head of household, or a qualifying widow(er) with a combined income between $25,000 and $34,000.
- You’re married filing separately and lived apart from your spouse for the entire tax year, with a combined income between $25,000 and $34,000.
- You’re married filing jointly with a combined income between $32,000 and $44,000.
- Up to 85% of your benefits may be taxable if:
- Your combined income exceeds the upper limits mentioned above.
- You’re married filing separately and lived with your spouse at any point during the tax year.
Furthermore, several states also impose taxes on Social Security benefits. As of the 2025 tax year, these states include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Residents of these states should familiarize themselves with their specific state’s rules regarding Social Security taxation.
Myth 2: You Must Be Fully Retired to Collect Social Security
Another widespread myth is that you must be completely retired to begin receiving Social Security benefits. While many people do retire before claiming benefits, it’s possible to collect Social Security while still working, although certain restrictions may apply.
If you haven’t reached your full retirement age (FRA), which is typically between 66 and 67 depending on your birth year, your benefits may be reduced if your earnings exceed a certain limit. Additionally, your benefits are more likely to be taxed if you are working because of the increase to your income.
The SSA sets an annual earnings limit for individuals who are collecting benefits but have not yet reached their FRA. For 2025, this limit is $23,040. If your earnings exceed this amount, the SSA will deduct $1 from your benefit for every $2 you earn above the limit.
In the year you reach your FRA, a different earnings limit applies for the months leading up to your birthday. For 2025, this limit is $62,160. The SSA will deduct $1 for every $3 you earn above this amount. However, once you reach your FRA, there are no limitations on how much you can earn without affecting your Social Security benefits.
The SSA provides valuable resources to help you navigate these rules:
- Retirement Age Calculator: Helps you determine your full retirement age.
- Retirement Earnings Test Calculator: Estimates how your earnings may affect your benefits before reaching FRA.
- Explanation of how work affects your benefits: Provides detailed information and examples.
Myth 3: Annual Cost-of-Living Adjustments (COLAs) Are Guaranteed
Many individuals assume that their Social Security benefits will automatically increase each year to keep pace with inflation. While Cost-of-Living Adjustments (COLAs) are common, they are not guaranteed.
The purpose of a COLA is to adjust your benefits to reflect changes in the cost of living, ensuring that your benefit payments maintain their purchasing power. While retirees typically receive a COLA each year (for example, the COLA for 2025 is 2.5%), the adjustment is based on inflation, and the way it’s calculated means it is possible for the COLA to be zero.
The SSA announces the COLA for the upcoming year in October, based on the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) calculated monthly by the Bureau of Labor Statistics.
The COLA is calculated as the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the previous year, rounded to the nearest tenth of 1%. If there is no increase in the average CPI-W after rounding, there will be no COLA for that year. This occurred in 2009, 2010, and 2015.
Furthermore, the increase in your benefit amount may not always precisely match the COLA percentage multiplied by your current benefit. This is because the COLA is applied to your Primary Insurance Amount (PIA), which is the benefit you would receive if you started collecting benefits at your FRA without any adjustments for early or delayed retirement.
By understanding these common myths and seeking guidance from reliable sources, you can make informed decisions about your Social Security benefits and build a more secure retirement. Don’t let misinformation jeopardize your financial future. Consult with a qualified financial advisor and utilize the resources provided by the Social Security Administration to ensure you’re on the right track.
