Why I Haven't Started Collecting Social Security - Week 4

 

As you age, conversation topics with your friends definitely change.  For example, even a few short years ago, I was never asked about my plans for taking Social Security.  But now that I’m 65 and enrolled in Medicare, this has become a pretty common topic.  “Have I filed?” (No, I have not), “When do I plan to?” (No earlier than age 68) and “Am I worried about the health of the Social Security system?” (No, not really) have become common questions as of late.  I don’t find this a bit surprising.  Even if you have diligently saved for retirement, Social Security will be an important part of most people’s retirement income plan.  Approximately 50 million retirees receive social security payments every month.  For about 25% of all retirees, Social Security represents 90% of their retirement income.  About half of all retirees count on Social Security to provide at least 50% of their retirement income.  The numbers indicate that my wife and I will have a comfortable retirement.  But even for us, Social Security will represent about 40% of our retirement income.

Much has been written about the financial challenges the Social Security system now faces.  It’s currently estimated that the Social Security Trust Fund will run out of reserves in 2033 – less than 10 years from now.  To understand what that means, one must first understand a little about how Social Security works.  As every worker is painfully aware, 6.2% is deducted from everyone’s paycheck to fund Social Security.  We’re probably all aware of a first-time worker that wondered who FICA was and why was the FICA person getting some of their money.  In addition, your employer also pays 6.2% of your total wages, thereby making the total tax 12.4%.  For the longest time, the federal government collected more in Social Security taxes than it paid out in benefits.  The federal government took this excess money and placed it into the Social Security Trust Fund.  The Trust Fund used this money to purchase “special issue” U.S. Treasury Bonds that pay interest annually to the Trust Fund.  In essence, the Social Security Trust Fund lent its extra money to the federal government and the federal government gave the Trust Funds IOUs that could only be sold back to the federal government.  The Social Security Trust Fund had no ability to sell these “special issue” bonds (which I presume is why they were considered “special”), nor did it have the authority to buy anything other than these “special issue” bonds with its reserves.  Some have argued that this arrangement makes the Social Security system nothing but a Ponzi scheme since the extra reserves were lent to the federal government which then spent the money on other programs.  This would be true only if the federal government wasn’t obligated to pay off these IOUs when necessary.  But it is required to repay the Social Security Trust Fund.  In fact, it has been doing so since 2010.  2033 is the year during which it is estimated that the Social Security Trust Fund will run out of the “Special” bonds to redeem.  That does not mean that Social Security benefits will no longer be paid.  After all, workers and employers are still paying the 12.4% FICA tax.  However, Social Security is only collecting enough in annual taxes to cover 77% of all benefits.  This implies that everyone will see a 23% cut in benefits.  Unless Congress acts.  Which they will eventually because they won’t have a choice.

Given the risk, why have I delayed collecting Social Security?  I’ve certainly had more than a few friends advise me to “get it while I can.”  However, the longer I wait to collect, the more I get every month for as long as I live.  For example, if I wait just 21 months from now when I reach my full retirement age of 67, I’ll get 14% more each month than if I claimed today.  For each year I wait up to age 70, I get an additional 8% compounded.  My benefit starting at age 70 will be 25% more than my benefit if I start at age 67.  Because of the larger benefit, most financial advisors recommend that their healthier clients wait as long as they can to begin collecting.  In fact, some actually set up a temporary income plan so that their clients can afford to wait to collect Social Security.  Essentially, that will be my approach.  I have an inherited IRA that must be fully liquidated within 5 years.  Therefore, withdrawals from this account are what will allow me to postpone taking Social Security.

The argument can be made that even if you don’t need the income, start collecting it and invest it. If you can earn at least 8% on average each year, you would indeed be ahead of the game.  But now I’m back to that word “if.”  The younger me would be shocked at what I’m about to type, but the older me finds something very reassuring about knowing exactly how much my benefit will grow each year.

But what about the possibility that we all see a 23% cut in benefits?  I just don’t see that happening.  No politician is going to want to go home and face a bunch of pissed off Social Security recipients.  I’ll look into my crystal ball and give my prediction of how they will fix this in a subsequent blog.  For now, I’ll simply say that the solution will likely mean higher taxes and/or a need for younger people to wait longer to collect, the solution will not involve a direct cut in benefits.