3 Key Things About Social Security That Most Americans Get Dead Wrong
Social Security has been around for nearly 90 years. Roughly 66 million Americans receive Social Security benefits. Millions more will begin collecting benefits in the coming years.
With those numbers in mind, you might think that nearly every adult in the U.S. would have a solid understanding of Social Security. However, that's not the case, according to the Nationwide Retirement Institute 2023 Social Security Survey. Here are three key things about Social Security that most Americans get dead wrong.
1. Wrong: Workers must pay Social Security taxes on all of their income
Nationwide and The Harris Poll asked 1,806 U.S. adults ages 18 and older a wide range of questions about Social Security earlier this summer. In particular, the survey included 21 questions relating to general Social Security topics. Only eight questions were answered correctly by respondents at least 50% of the time.
One question was missed the most. A whopping 74% of survey respondents believed that workers must pay Social Security taxes on all of their income.
It is true that many workers do pay Social Security payroll taxes on all of their income. However, there is a taxable maximum (sometimes referred to as the contribution and benefit base). This threshold is $160,200 for 2023 but has increased nearly every year. Social Security payroll taxes aren't applied to any income above this level.
2. Wrong: You can't change your mind after claiming Social Security benefits
Choosing when to claim Social Security benefits ranks as one of the most important decisions for individuals approaching retirement. The highest benefits are paid to those who wait until age 70. If you begin receiving Social Security benefits before your full retirement age, you'll be penalized.
Around 71% of the respondents in the Nationwide survey answered "false" to the statement, "You can undo a claiming decision within the first 12 months." The correct answer was "true."
The Social Security Administration allows individuals to cancel or withdraw their benefits applications up to 12 months after benefit approval. Any benefits received up to that point must be paid back.
This "do-over" is allowed only once. However, it could be quite helpful for anyone who began receiving Social Security benefits before their full retirement age and later changed their mind.
3. Wrong: Social Security isn't protected against inflation
What was the most surprising thing about Social Security that most Americans got wrong in the Nationwide survey? Roughly 70% of the survey respondents didn't think that Social Security benefits are protected against inflation.
In reality, the annual cost-of-living adjustment (COLA) that Social Security recipients receive is specifically intended to provide inflation protection. For example, when inflation skyrocketed last year, beneficiaries received an unusually large COLA of 8.7% to help offset the negative impact of rising costs.
Granted, there's a pretty good argument to be made that Social Security isn't fully protected against inflation. Some believe that the inflation metric used to calculate COLAs -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- doesn't accurately reflect cost increases that impact seniors.
One other big misconception
There was also one other big misconception revealed in the Nationwide survey that wasn't included in the 21 general knowledge questions. Nearly a quarter of respondents (24%) agreed with the statement, "I will not get a dime of the Social Security benefits I have earned." Younger Americans were more likely to express this view than older individuals.
This take is almost certainly due to the fact that Social Security's trust funds are on track to run out of money in the next decade. However, even if this happens, ongoing payroll taxes will still be able to fund most of the scheduled Social Security benefits.
Also, benefit cuts aren't inevitable. Congress and the president have several options available to bolster Social Security and avoid cuts. Less than half (46%) of the Nationwide survey respondents believed that the government would make the needed changes to ensure their financial security in retirement. Only time will tell if they're right or wrong on this question.
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