Personal Finance

The Big Lie About Social Security Baby Boomers Were Sold

David Beren

Published: November 28, 2024 2:33 pm

Key Points

• Many baby boomers are the victims of misconceptions about Social Security.
• One of the most common concerns is that Social Security is about to run out of money. 
• There is also a genuine misunderstanding about when you start receiving SS money. 
• Also: Are You On Track to Retire? Take This Quiz and Find Out ^(Sponsored) 

When you think about Social Security, it won’t be as surprising to learn there is a gap in myths versus realities. Some of these differences are generational, as it’s clear that baby boomers, the generation most dependent on Social Security, are often unclear on what exactly this program is, how it works, and how it will benefit them. 

Most concerning is the apparent misconception about the program’s sustainability. The constant fear-mongering on the news has created a myth that many baby boomers might think Social Security will run out of money before they can take advantage. For this reason, we want to look at some of the myths and realities of this critically important program. 

Misconception #1: Social Security Is Running Out of Money

It is important to start any conversation about Social Security around the misconception benefits will disappear in the next few years. First and foremost, Social Security is one of the biggest aspects of our federal budget, so there is funding, but there are concerns that funding could see a shortfall in the next decade. 

Congress unquestionably needs to agree on the best way to fund the program in the future. However, the origin of this concern no doubt stems from lots of talking heads coming onto weekend talk shows and explaining how Social Security will run out of money if their side of the aisle doesn’t get agreement from the other. 

To be clear, this misconception is more about politics than reality. While it is true that your benefit amount can go up or down, so long as Americans pay taxes, Social Security can sustain itself for baby boomers and future generations. Considering Social Security benefits bring at least 16.5 million Americans above the official poverty line, funding remains critical. 

Misconception #2: You Can Only Get Benefits At Age 65

Another common misconception is that there is only one retirement age and that you cannot receive benefits before this age. The reality is that there is no exact “right” retirement age and that you can start claiming benefits at different points. The origin of this misconception is likely just word of mouth. Someone who didn’t know the right information told someone else, and it quickly became a game of telephone. 

To be clear, your retirement age will differ from someone else’s, which means you will draw Social Security at a different point. If you want to work until you’re 70, go ahead, as you’ll receive more monthly. 

Adding to this misconception is that when the program was started in 1935, 65 was considered the “official” retirement age, which was later lowered to 62, a fact many baby boomers may need to be reminded of. 

Misconception #3: Social Security Will Fully Fund Your Retirement

When you start to draw on Social Security, far too many baby boomers believe that it can and will fully fund a retirement. The reality is that how much you draw from the program is based on how much you earn while working. In other words, you shouldn’t think of Social Security as saving for retirement; it is more about a way to benefit from all the years you have worked to aid your standard of living while retired. 

Yes, baby boomers can earn more if they hold off taking benefits until they turn 70. At this age, you will receive around 132% of your estimated amount if you start drawing benefits at 65. However, Social Security isn’t exempt from taxes, so it won’t be as much money as you imagined, and it’s best combined with our income sources, such as a 401K. 

This misconception also dates back to 1935, when the program was established to provide those suffering from the Great Depression with what they needed to survive. However, in the mid-1970s, concerns over the cost of increasing benefits began to shift the mindset. 

Maximizing Benefits: Wait Longer

Myths aside, if you truly want to maximize your Social Security benefits, one of the best ways to do so is to wait a little longer. Instead of drawing your benefits at 62, a financial advisor will tell you that if you wait until 70, your benefits increase by 8% for every year you delay. 

In other words, if you retire at 70 instead of your full retirement age of 66, you can compound four years of waiting by 8% each year and end up with a monthly benefit 30% higher than it would have been at 66. This adds up to hundreds of dollars in additional monthly benefits and thousands more per year. 

Maximize Benefits: Work More

One of the first things any financial advisor will tell you about maximizing your Social Security benefits is to work more. Baby boomers will discover that their Social Security benefits are based on the top 35 years of earning throughout their working lives. 

If you don’t have 35 total years, any missing years are counted as zero, dramatically impacting how much earnings you will receive when you retire. For anyone who doesn’t have 35 years to put into the Social Security pie, waiting until they are 70, according to leading financial experts, is the best way to maximize Social Security payouts. 

Maximize Benefits: Claiming Spousal Benefits

Any financial advisor familiar with retirement planning will tell you that one method to maximize Social Security is to claim spousal benefits. In other words, if one spouse has earnings much less than their spouse’s, the best option might be to claim spousal benefits, which could be as much as 50% more for the higher-earning spouse when they hit their full retirement age. 

The best part is that even if a spouse has no working history, they can still claim eligibility for spousal benefits. The only caveat is that both spouses must wait until the higher-earning spouse claims benefits to make an additional claim for spousal benefits. Even though these benefits can be claimed at age 62, waiting until 67 or 70 would maximize the payout. 

It’s also worth noting that a surviving spouse can claim 100% of a deceased spouse’s benefits if the dead spouse has already reached full retirement age. 

Preparing for Social Security Shortfalls

According to Merill Lynch, 60% of 18-44-year-olds believe Social Security will still exist by the time they retire, which bodes well for the program. However, you should never rely entirely on Social Security, especially with the understanding that there could be potential shortfalls sometime in the next decade. 

Because of this concern, you should start saving as early as possible. It would be best to take advantage of the first employer offering you a 401k. The same consideration applies to Baby Boomers, who should rely on savings from a 401K to make up for any potential Social Security shortfalls. 

Financial advisors may also recommend that you consider an annuity investment, which can provide a guaranteed income stream to supplement any shortfall from Social Security. Depending on the type of annuity, there are various levels of risk, so a financial advisor will help you consider your individual goals, risk tolerance, and liquidity needs that may stem from Social Security shortfalls.