Should you Delay Collecting your Social Security Benefits?
Recently, I have received a few emails on my recent post (read it here) that I advised, in considering whether to buy a commercial income annuity, one should first delay collecting their social security benefits until age 70. These emailers believe this is the wrong advice for collecting social security. One of their concerns is that the social security program is going broke and you should start collecting benefits right away before they stop the program. The other view is that since you do not know how long you will live; you should start collect benefits right away to be sure you get as much as possible. I will address both of these concerns.
But first let’s do a quick overview of social security benefit payments. For those who qualify, your full benefit is available at age 66 or 67, which is your full retirement age. This is determined by your birth date. You can start collecting benefits as early as age 62, but at a discounted rate. If you want to start benefits at age 62, you will receive a 25% discount from your full benefits if your birth date makes your full retirement age 66, and a 30% discount will apply to your full benefit if your birth date makes your full retirement age 67. You can also delay collecting your benefits until age 70 and receive a higher monthly benefit. Your benefit will increase 8% for each full year you delay starting benefits past your full retirement age.
Should you worry that the Social Security Program will go broke?
In a word: YES! We should all worry about the social security program going broke, but we need to keep this potential outcome in context. There is a social security Trust Fund that holds assets from FICA payroll taxes deducted from each person’s paychecks over their working life. Current payroll taxes and funds from this Trust Fund are used to make the current monthly social security benefit payments. Last spring the Government agency that estimates the value of the social security Trust fund reported, I believe, that the Trust Fund will be exhausted in 2034. However, this estimate was published before all the fiscal spending caused by the Covid-19 pandemic. I imagine the social security Trust Fund exhaustion date has been moved forward a few years just from the government spending and loss of payroll taxes in response to the pandemic thus far this year.
But, to keep things in context, we have to ask; what assets are in the social security Trust Fund? Almost all of the Trust Fund assets are invested in US Treasury securities. As we all know the US government has over $24 trillion of debt, all of which is one form or another of US government securities. The Treasuries owned by the social security Trust Fund is part of this huge US debt. So, in reality, the social security Trust Fund has the same chance of going broke as the entire US government. So, if you are worried about the social security program going broke, what you should really be worried about is the entire US government going broke. For this reason, I think the social security Trust Fund is just a meaningless accounting exercise, since the assets in it are the same assets the US government owes to the Chinese government, Japanese Government, Wall Street firms, and US citizens. None of these Treasury debt owners have any priority over any other Treasury debt owner. The US government gets to decide who gets paid back first. In my opinion, however, none of this is going to matter. I believe the Federal Reserve will just print whatever money it needs and every Treasury owner will be paid in full. But in greatly depreciated/diluted/debased (whatever you want to call it) US dollars.
But this is getting ahead of ourselves. Before the social security program encounters trouble, I believe it is likely there will be changes to the social security program extending the date the Trust Fund is exhausted (to the extent that even matters). What might be some of the program changes? The ones that are talked about the most are, increasing the wage threshold subject to the social security payroll tax, increasing the full retirement age, reducing the annual inflation adjustment formula. I think one thing you can be sure will happen is, for higher income recipients, the social security program will be “means-tested,” meaning people with higher overall retirement income will see their social security benefit reduced.
The bottom line is I would not start up social security benefits early just because you are afraid the program will go broke and stop making payments. It is much more likely you will receive the payments as scheduled, but in a significantly depreciated currency.
Should You Start Collecting Social Security Early Because You may have a Short Life?
This answer to this question is maybe. The answer should be based mostly on your financial planning. The social security program is designed to payout benefits that total about the same lifetime amount if you live to the average life expectancy (about age 79-80) regardless of the date you start your benefits. So, of course, if you (and your spouse) are in poor health and are unlikely to reach the average life expectancy, then you certainly should start collecting social security benefits early. Also, many people need to start their social security benefits early as they need the income just to pay their basic living expenses in retirement. But for everyone who has a choice whether to start social security early or late, your retirement financial plan should determine your start date.
There are plenty of exceptions, but for most retired couples the best course of action is for the spouse with the higher social security benefit to wait until age 70 to start their benefits. The lower paid spouse can start benefits at age 62. This approach is best because the social security program allows the surviving spouse to receive the higher of the two benefits. So, this strategy ensures the surviving spouse has the highest benefit possible.
To measure the difference a delay to your social security benefits can make, I developed a detailed financial model using our retirement assets, social security benefits, other income, and many assumptions on future inflation, equity market returns, and our life expectancies. The goal of the model was to see how long our assets would last under the “worst-case scenario” with regards to very high inflation and very low market returns. I ran the model twice using two different assumptions. One assuming I started collecting social security at age 65 and another assuming starting benefits at age 70. For us, the worse-case scenario of me starting social security at age 65 rather than age 70 had us running out of money six years sooner. This financial model also told me that, whatever the economic scenario, we would end up with more assets remaining at the end of our lives if we bought a delayed income annuity from an insurance company than if we did not.
In our particular case, there are several reasons why we are waiting until I turn age 70 to start my benefit. The first reason is, because we do not have a generous employer pension, we needed to increase our “guaranteed” lifetime income stream in retirement to protect against longevity risk. Longevity is the biggest risk in retirement planning. So, my delay in starting social security is part of our longevity insurance plan that also involved purchasing a delayed income annuity from an insurance company as mentioned previously. A larger social security benefit meant we could purchase a smaller income annuity from the insurance company to reach our income goal.
Another reason for delaying my social security benefit is because this allows us to use the intervening years to make several Roth IRA conversions of Traditional IRA funds while we are in a lower tax bracket.
Finally, my wife is enrolled in Obamacare, the private individual health insurance marketplace. This is important because our lower income qualifies us for a significant subsidy in the form of a federal tax credit to lower our out-of-pocket health insurance premium cost. This federal subsidy has income limits of 400% of that year’s Federal Poverty Level (FPL). For a family of 2, the FPL in 2020 is $17,240. So, 400% of this amount is $68,960. If our Adjusted Gross Income (AGI) in 2020 is greater than this amount, by even just one dollar, our entire health insurance federal subsidy disappears. When I turn age 70, my wife will be on Medicare and losing this federal subsidy will no longer be a concern.
To summarize, in my opinion, if you can afford to wait to start your social security benefits, it is better to do so. However, there are exceptions. You should talk to your financial advisor about your specific situation.
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