4 Downsides of Social Security That Nobody Talks About

Andrew Lisa

Sat, May 20, 2023, 7:30 AM 4 min read

Any lawmaker who proposes cuts to Social Security is treading on thin political ice. According to the AARP, the program enjoys nearly universal support. The agency that administers it — the Social Security Administration (SSA) — boasts one of the highest approval ratings of any federal entity.

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Even so, there are a few downsides to America’s most successful social welfare and anti-poverty initiative.

Not Everyone Qualifies for Benefits

Social Security is popular across the political and demographic spectrums — at least for those who collect payments or one day will.

“Social Security is a significant benefit, but it’s essential to understand that only some qualify,” said Dana Ronald, CEO of the Tax Crisis Institute.

According to the SSA, about 3.5% of the population — 2.4 million Americans — will never receive Social Security benefits. About 86% of what the SSA calls “never beneficiaries” are late-arriving immigrants and infrequent workers.

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Immigrants who arrive at age 50 or older make up 45.8% of never beneficiaries. Non-late-arriving immigrants with insufficient earnings account for 39.6%. Another 1.2% of never beneficiaries die before they become eligible. The remaining 13.4% are non-covered workers, primarily government employees, which leads to the second downside of Social Security.

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If You Have a Government Pension, Prepare To Be Disappointed

If you have a pension through your job with a federal, state or local government, you might be planning to draw from that and Social Security for double the retirement income.

Don’t count your chickens just yet — a special provision reduces your Social Security benefits by up to half of your pension payments.

“It’s called the WEP — Windfall Elimination Provision — or as I call it, ‘Widows Effectively Plundered,'” said Paul Walker, author of “A Money Book Anyone Can Read.” “What the provision means is that for government employees who have a separate pension fund, the amount you can collect from Social Security is offset by your pension. This applies to spousal and widow benefits, as well.”

Your Benefits Can Be Taxed — Maybe More Than Once

You pay into the Social Security system through payroll taxes during your entire working life. If you’re self-employed, you pay double — but even that doesn’t get you out of the Taxman’s crosshairs.

According to the Social Security Administration, your benefits are subject to taxation if you earn income past a certain threshold:

Single filers: If you earn $25,000-$34,000, the IRS can tax up to 50% of your benefits, or up to 85% if you earn more than $34,000.
Joint filers: The IRS can tax up to 50% of your benefits if you earn $32,000-$44,000 and 85% if you earn more than $44,000.

It might not stop there either. “Social Security benefits are subject to federal taxes and can be further taxed by states like Nebraska,” said Ronald.

In fact, a dozen states hit some beneficiaries with a second round of taxation.

There Are a Few Ways Your Benefits Can Shrink

If you earn enough for the IRS to tax your benefits, it treats the taxable portion as ordinary income, which could lead to yet another hit.

“In some cases, this can push you into a higher tax bracket, which could decrease the amount of money you receive from Social Security,” said Ronald.

And, of course, it would subject all your income to a higher tax rate. However, earning too much can ding your monthly check in other ways, too.

Extra Income Is Always Helpful — Until It Isn’t

The so-called earnings test reduces payments for those who claim benefits before their full retirement age. “For example, if you work after retirement and earn more than $21,240 a year, your benefits will be reduced by as much as $1 for every additional $2 you make,” said Ronald.

Even if you’ll reach full retirement age later this year, the SSA still docks you one dollar in three over $56,520 — and that’s on top of the reduction that applies to all early claimers.

You Have To Pay To Live the Dream of Early Retirement

Whether they earn income or not, the SSA reduces early claimers’ benefits by 5/9 of 1% for 36 months and 5/12 of 1% beyond that until what would have been a $1,000 monthly at 67 becomes $700 at 62.

In the end, the program is popular because it works — but it works best for those who know which pitfalls to avoid.

“The best thing to do is to understand your situation and consult a knowledgeable professional who can help you navigate the complexities of Social Security,” said Ronald.

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