Riding The Social Security Merry-Go-Round
A big part of what I do is help our clients plan for those long lives to make sure they maximize any potential guaranteed lifetime income sources. And as most of you are aware, Social Security is a significant piece of that plan. So, understanding that benefit and the problems that Social Security faces should be important to everyone. Because even when we do not have control over certain things, we can certainly adjust our plans to work with the information we have.
A few weeks ago, Social Security's board of trustees issued its annual report, which stated that we have just 17 years left of solvent Old-Age and Survivors Insurance (OASI) Trust Fund and Disability Insurance (DI) Trust Fund (together referred to as the OASDI).
The guilty causes remain the same. Baby boomers continue to outnumber the working force, and simple math shows us that we can't continue to withdraw more than we put in. As mentioned above, we also have longer and longer life expectancies, causing people to pull from the system for more years after they retire, and we have lower birth rates. Currently, OASDI still ends each year in the black, if interest income is included, but around year 2022, the board expects to see that shift into the red. In their annual report, the trustees note that after 2021, "interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security's annual deficits until 2034, when the OASDI reserves will be depleted." After that, the board projects that if changes are not made, income earned from current workers will be enough to cover only about three-quarters of the scheduled benefits through the end of the projection period in 2091.
Now, there are some potential solutions to this solvency problem, none of which sound great to any of us. An obvious one is to increase the payroll tax that funds Social Security, contributing a larger portion of each person's earnings to the fund to offset the growing number of people withdrawing from it. Another solution would be to cut scheduled benefits for the younger generations. Theoretically, those younger generations have time to plan for their retirement, in light of any reduction in benefits. Of course, this would assume that everyone would be forward-thinking enough to make those necessary adjustments.
Another option sometimes discussed is to tax more of the Social Security benefits received by higher-income retirees. So, those high-income earners, who already paid a payroll tax to fund Social Security, would be paying taxes on more of the money that they pull out from Social Security. Sounds like another "win-win" for Uncle Sam.
What Congress will actually do is unknown. It is likely we will see a combination of those ideas, but it will probably not be any time soon that we get that news. The topic of Social Security elicits strong opinions and emotions from politicians and the people they represent. And so very few want to suggest changes to the system that will result in fewer benefits to any demographic of people. But we all know it is coming.
For now, though, the rules have not changed. The earliest a person can start collecting Social Security benefits is age 62. However, full retirement age (FRA) is the age at which an individual can collect his or her full Social Security benefit, without being "penalized" for collecting early. A retiree's FRA is based on his or her year of birth. The FRA for anyone born between 1943 and 1954 is 66. The FRA for anyone born between 1955 and 1959 is between 66 and 66 and 10 months. For those born in 1960 or later, full retirement age is 67.
In our practice, we find that many a retiree's first instinct, especially when people hear that the Social Security fund may be running out, is to claim benefits as soon as possible, at age 62. But this is often a mistake. If a retiree collects Social Security before his or her FRA, the benefit can be reduced by 20 to 30 percent, based on his or her FRA. Alternatively, a person can wait to collect, even once he or she has reached FRA, until age 70, and can earn delayed credits for doing so. As I say, waiting can result in a pay raise. On average, waiting to file can earn an individual a 7 to 8 percent increase in benefits per year. (Lifetime benefits can potentially also be increased with certain spousal claiming strategies available to some married couples.)
My general rule of thumb, even with this announcement, has not changed: wait as long as possible to collect Social Security, assuming an average life expectancy. But always remember, each person's financial and family situations are unique, and so it is important to assess each person's most advantageous Social Security claiming strategy individually.