September 10, 2020
As if we all didn’t have enough on our plate right now, I am seeing growing concern that Social Security is now more likely to go broke sooner. Therefore, a lot of people are thinking it makes sense to start collecting their benefits ASAP if they are at least 62 rather than delay claiming to be able to collect a bigger benefit.
I think that delaying is still the far smarter move.
Let’s take this step by step.
For starters, Social Security is not going broke. That phrase implies that there will be no money to pay benefits to retirees. And nothing could be further from the truth. The worst case scenario—I repeat, the worst case—is that, if Congress does nothing, benefits would be cut by 25%. So if you are entitled to $1000, you would be paid $750.
I hear you, a 25% cut would be hard. But that is the worst case. Perspective my friends. There are plenty of ways Congress can step in and “fix” the cash flow shortfall. If you want to do something, why are you not calling, writing and emailing your Congressional representative and Senators to let them know you think reducing Social Security benefits is an insanely bad idea?
I happen to think that Congress will eventually fix the cash flow shortfall. There are many possible changes that would help. For example, one of the fixes is to make sure that the very wealthy pay their share into Social Security.
Right now, income inequality is a big reason there is a shortfall. Did you know that Social Security taxes are only collected on a set amount of your annual earnings? This year, the threshold is $137,700. So, if you earn less than that, you pay Social Security tax on 100% of your earnings. If you earn more…well, Social Security does not collect a penny on earnings beyond that annual threshold. This means the wealthy pay tax on a smaller portion of their earnings. If Congress raised the limit on how much of earnings can be taxed, it would go a long way to fixing the program’s current shortfall.
Which brings me to another important point: Will certain aspects of Social Security change? Yes, that’s likely. But not overnight. And the people who are least likely to be impacted are seniors. Back in 1983, the full retirement age (when you are entitled to claim 100% of your Social Security benefit) was raised from 65 to 67. But it wasn’t imposed on people in their 60s. Or even people in their 50s. It was and still is being slowly phased in. You want to know who saw their FRA jump from 65 to 67? People who were no older than 23 in 1983. And that wasn’t punishing younger people. It reflected the fact that we’re all living longer. The point is, changes are likely to be phased in and shared across all workers.
Now let’s focus on the value of delaying collecting your Social Security benefit. The benefit you can receive if you wait until you are 70 to start collecting will be 76% higher than the benefit that you get if you claim at age 62. That is a tremendous return. A recent analysis by a very wonky retirement expert ran the numbers to see if delaying would still work if there were some cuts. Emphasis on if. His conclusion: waiting is still a valuable retirement strategy.
I know things are very stressful right now. All I am asking is that before you make a decision based on rumor or fear, you slow down and look for the facts. I think planning to wait as long as possible to begin receiving your Social Security benefit is still a smart strategy. And just a reminder for my married friends: what’s important is for the spouse with the highest benefit to delay. It is less important for the other spouse to wait until age 70.