Social Security is the most significant income stream for most people in retirement. Is it going bankrupt?
Creating income in retirement can be a tricky business, particularly when it comes to deciding when to take social security. There are several variables that come into play: age, financial state, health, marital status, and employment. The complexity can get overwhelming when one considers the rules, exceptions, and tax implications.
Social Security represents approximately 28% of retirement income for high net worth individuals; for 60% of 65-year-olds it is a majority of their retirement income. For a high-income married couple receiving benefits for 30 years or more it can amount to more than $2 million in income over their lifetimes. The bottom line is, when to take Social Security is one of the most important financial decisions people have to make. Unfortunately, only 4% of retirees make the optimal decision for their situation according to a report by financial firm United Income.
Social Security was created in the 1930’s during the Great Depression. The program had two purposes: provide modest retirement funding for retirees and to encourage older folks to leave the workforce to make room for the younger generations. At that time unemployment was 25% (our current rate is 6.2%), and life-expectancy was only 62. (Currently it is 78.7 years and women live, on average, 5 years longer than men).
How is Social Security funded?
Why do people think SS is going bankrupt? The answer is two fold. Many misunderstand how social security works and then of course, sensationalized headlines.
Social security benefits are funded by taxing the wages of current workers. If you are still working you are funding the social security benefits of today’s retirees. In 2016 the ratio of worker to retiree was 2.8:1. In the 1930’s it was 40:1.
Taxes are deposited into a social security trust fund that historically has had a surplus (because of the surplus of workers contributing). The funds are invested in special Treasury bonds guaranteed by the government. Because the current ratio of workers to retirees is low, (remember 40 to1 vs current 2.8 :1) the amount of social security taxes collected relative to social security benefits paid out is lower. It is this trust fund that is projected to dry up by 2034 if nothing is done by Congress to supplement it. If Congress were not to act (unlikely), there would still be workers paying taxes into the trust fund but the surplus needed to make up the difference between taxes-in and benefits-out would eventually be depleted.
When is the best time to take social security?
It depends. Full retirement age (FRA) for those born after 1954 is 66 + x months depending on the year of your birth. If you are born in 1960 or later, FRA is 67. If you enroll at your FRA you will get the full PIA (primary insurance amount. In other words, 100% of your benefit. If you delay benefits until age 70, you will receive an 8% annual increase for each year you postpone benefits. That means that if you wait until you are 70 to receive benefits your monthly payment will be 32% higher than if you took it at FRA. This can total more than $1,000/month, and if you receive benefits for 25 years you will have received $300,000 more in Social Security benefits.
If you take social security before FRA (you can take it as early as 62) you will receive a permanent haircut: up to 30% if you are born after 1960. Unfortunately, most people take SS before their FRA. In 2018 it was 57%. More importantly, what they don’t realize is that taking social security early creates a permanent haircut to the spousal benefit too. The spousal benefit is the amount that the surviving spouse could receive after the first spouse dies. In most cases, unless you absolutely need to take SS before FRA, it is best to wait until at least FRA.
There is Complexity
Social security benefits become more complicated if you are widowed, divorced, or earn certain types of income (government employees, farm workers, railway, etc).
The ssa.gov website has a full list of earnings-types. We highly recommend that you consult with your financial advisor or your local social security office. Social Security has more than 500 rules that govern benefits. This is why it is so important to do your homework.
Estimating your Benefits
The social security website has a tool to estimate your benefits. This is a good place to start, especially in the pre-retirement phase. Maximize My Social Security is a detailed software that digs deeper into your lifestyle, spending, and savings to provide the most optimal time and strategy on when to take benefits. It is available to consumers and the current price is $40.
Part of Mosaic Fi’s retirement planning service includes not only optimizing social security benefits, but also provides an annual detailed plan for creating and optimizing all of your retirement income in the most tax-efficient manner.
Jenifer Aronson is the Founder of Mosaic Fi.