A thought that many workers including many approaching age 62 (the earliest a worker can file for social security on their work record) is “social security is going broke, I should claim benefits as soon as I can”. Trust in our government and faith in its financial stability is not at high levels currently. However, this natural thought is also one that can be extremely detrimental long-term. I am not going to go into depth here on the benefits of claiming social security benefits at various ages but instead focus on the question of the social security system’s financial stability.
One thing to remember is that social security is a “pay as you go” system. It isn’t a pension system where your taxes paid in are saved and invested for when you will retire. Your taxes were paid out to retirees receiving benefits while you were working. That might leave you feeling uneasy. We have recently received word that the social security trust fund is projected to run out of funds in the year 2033. So “the end is near”, right? Not really but yes, there are major issues with the finances of social security. But the fact remains that if no changes are made and the trust fund runs out, the taxes of workers 10 years from now will still cover 72-75% of the funds necessary to pay retiree benefits (according to research by kitces.com). A 25% haircut would surely not be welcome if that came to pass but it is definitely not the 100% reduction that many fear is coming.
The above assumes no changes are made but changes are likely coming to social security. What form these changes take remains to be seen. Some possible changes include:
- Increasing the cap on earnings that are subject to social security tax (currently $142,800). This could take the form of a simple higher level subject to tax or instead taxing income above a certain amount (i.e., the first $142,800 are taxable and incomes higher than $1 million).
- Increasing the social security tax rate (currently 6.2% for both the employee and employer).
- Raising the full retirement age. Life expectancy has increased since this was last adjusted in the early 80’s.
- Changing the formula for calculating annual cost of living adjustments.
- “Means testing” benefits (the “why should Bill Gates get benefits” argument). It should be noted that benefits are already means tested to a significant extent. Lower wage earners receive a much higher % of their earnings in benefits than do higher earners. Further, retirees with higher earnings are taxed on a larger portion of their benefits than are lower earning retirees.
There are lots of strong opinions on how or if social security should be changed but we don’t see it going away. Always remember that retirees are a segment of the population that gets out to vote on a very regular basis and politicians know this.
The bottom line is we still believe that most (not all) retirees should wait until at least full retirement age (age 66 to 67 depending on your age) and for a married couple, it often makes sense for the higher earning spouse to wait until age 70. These are general recommendations and a more detailed analysis of your specific situation should be made.