Social Security—Not Going Anywhere

38068718_sWhen Susan and I teach courses for retirees and pre-retirees, we love to get questions. We have one rule—the questions need to be generic enough that the answers are helpful to everyone, rather than specific to a single individual. We love the questions because they give us an understanding of what concerns are on the minds of folks these days. Frankly, the questions provide many of the topics for this weekly column.
Susan and I have taught many of these classes over the years, and in every single one, without fail, someone asks our opinion on Social Security and how seniors should approach Social Security in terms of their retirement plans.
Social Security is now playing a central role in retirement planning for a few reasons. First, life expectancy is rising, and rising, and rising. Secondly, employer-sponsored pensions are disappearing. As a result, the retirement climate is leaving retirees searching for income more than ever. So we believe that maximizing Social Security should be part of a well-structured retirement plan.
One of the questions we hear is whether we think Social Security will be around for a while. The short answer is yes, we do believe that Social Security will continue to pay benefits. The Old-Age and Survivors Insurance Trust Fund is expected to be able to pay its bills for the next 20-some years. However, if no changes are made to the program, then beginning in 2037, based on certain assumptions, the Social Security Trustees expect to be able to disburse funds for only about 78 percent of the promised benefits, which is a serious problem. So what can be done about it?
For many people, problems that may occur in 2037 seem like someone else’s issue, but 2037 is only 22 years out. Although those problems may not affect you, well, they could affect your kids and your kids’ kids and their kids’ kids . . . you get my drift. But all is not lost. Policymakers are exploring ideas on how to right the ship. One such idea is to increase the full retirement age for younger workers/pre-retirees, forcing people to wait longer if they want to collect their full benefits. Honestly, I do not have a problem with this one. According to the Social Security Administration, when Social Security was rolled out in the 1930s, life expectancy for a male was 58 and a female was 62. In fact, in 1940 there were only 9.0 million folks age 65 or older. So while many folks in the 1930s paid into the system, few received benefits. Want to guess how many folks were over the age of 65 in the year 2010? According to US News there were over 40 million.
Along with the idea of raising the age, there are thoughts of tinkering with the benefit calculations, which would effectively reduce the amount of benefits people receive. Then there are some ideas involving taxes, like raising the taxable earned income cap and making changes to payroll taxes. Of course, as many of you know, the minimal Cost of Living Adjustment (COLA) is another way to keep benefit payments depressed. Heck, the Washington Wizards are already doing that, the 2015 COLA is only 1.7 percent. Does anyone actually think that the cost of living is only going up by 1.7 percent? Seriously?
Folks, you need to keep an eye out for any of these changes, or others, as political tides shift and we approach that 2037 deadline. Although many people think that Social Security will simply cease to exist, I disagree. Think about it this way: Would you ever vote to end Social Security? Nope, not me. Would you ever vote for someone who would end Social Security? Probably not. In my opinion, Social Security will always be there; I just don’t know what the program will look like in years to come.
People also ask what the best strategy is to collect Social Security. Many want to know when to start collecting. This leads to the famous answer of “it depends.” The optimal strategy will be different for every single person in that room. It depends on age, current income, a spouse’s age, other investments, and income needs. It really just depends!
Although the best strategy is always unique, we unfortunately see a lot of the same mistakes being made. The biggest one—not taking advantage of spousal benefits. Most folks are eligible to receive Social Security in some form, but many often only look at what is available to them individually.
An individual at their full retirement age (generally 66 by today’s rules) can collect up to 50 percent of their spouse’s primary insurance amount, or PIA (the monthly income available at full retirement age), while they delay taking their own benefit. That spousal benefit is reduced if they are not yet 66, but have met the minimum age of 62, at which point they will still be able to receive benefits totaling about 35 percent of their spouse’s PIA. (If an individual collects a spousal benefit before reaching full retirement age, any future benefits based on that individual’s own PIA will also be reduced.) All it takes is for one spouse to claim his or her benefits (or, file and suspend at full retirement age) for the other spouse to collect the spousal income benefit. Missing these benefits can cost a couple $40,000 to $50,000 in lost benefits.
Let’s put some numbers to this as an example: Frank and Sue are married. Frank’s PIA individually is $2,500 (per month). Sue’s PIA individually is $500. If Frank files at his full retirement age, and Sue, at age 66, delays collecting on her PIA, and instead takes the spousal benefit based on Frank’s PIA, Sue’s spousal benefit is $1,250. This spousal benefit is much higher than her own $500 benefit. Taking the spousal benefit gives Sue a $9,000 boost in just one year.
Folks, I don’t expect the questions that Susan and I receive about Social Security to disappear any more than I expect Social Security itself to disappear. But, the questions may change, the Social Security strategies may change, and the program may change. As we enter an election year, keep your ears to the ground. Susan and I will continue to do our best to educate you.
Be vigilant and stay alert, because you deserve more.