If you are nearing retirement, when should you take Social Security benefits? And if you currently receive Social Security, how much longer can you reliably count on the checks to keep coming before the overextended system gets tapped out?
In considering either question, you’d be wise to make your retirement decisions based not on hope or political pronouncements, but on facts.
A recent Congressional Budget Office (CBO) report found that the Social Security Trust Fund is in much worse shape than the Social Security Administration has ever let on publicly. The CBO projects that by 2020, Social Security’s reserves will be $800 billion smaller than what the Administration now assumes. (And at least as alarming, Medicare’s Hospital Insurance reserves are projected to be exhausted by 2020.)
What these numbers mean for Social Security beneficiaries is that the program will run out of money with which to pay them full benefits sooner than they’ve been told. The Social Security Administration’s own projections have grown progressively gloomier in recent years.
As recently as 2008, the official line was that Social Security would be able to pay out full benefits through 2041. But last year’s Trustee’s Report moved the doomsday date up to 2036. That’s still unrealistically optimistic, probably by a few years, in light of the CBO’s latest findings.
Are You Prepared for a 25% Reduction in Benefits?
After Social Security’s reserves run dry, it would still potentially be able to pay out about 75% of benefits, assuming payroll tax revenues trickle in as expected. But that’s subject to unforeseeable economic forces and political decisions.
The temporary payroll-tax reprieve of 2 percentage points, instituted to boost the struggling economy and renewed through this election year, may end up staying in place or even becoming permanent. While the payroll-tax break allows workers to keep more of what’s theirs and spend it into the economy, it deprives Social Security of $112 billion in revenues per year, accelerating its path to insolvency.
And remember, the so-called Trust Fund is really just an accounting artifice that consists not of real assets but of the government’s own IOUs.
In other words, the government’s ability to honor its own promises is the only thing keeping Social Security afloat today. The Treasury Department could theoretically default tomorrow – though in practice, it is a virtual certainty that the Federal Reserve would act to prevent such an eventuality by crediting the Treasury with all the digital dollars it needs to pay its bills.
Inflation or debt default are the only likely resolutions for Social Security’s insolvency. Neither are good for retirees. Now is the time to investigate ways to reduce living costs and/or develop additional sources of retirement income.
Should You Cash In Now – or Later?
For those who haven’t yet claimed Social Security benefits, you need to consider whether to take them early, at “full retirement age,” or postpone them for the promise of a higher monthly payout.
You can delay taking benefits until up to age 70 in exchange for a yearly benefit increase of up to 8%. If you are in a position to be able to do so, it may sound attractive in an environment where it’s difficult to earn 8% on your money. But the opportunity cost of postponing benefits is the wealth you can accumulate, grow, and safeguard from inflation and government default in the meantime.
If you were born before 1955, “full retirement age” is considered to be 66. If you were born in 1960 or later, it’s 67 (see table).
Regardless of when you are born, you can begin receiving benefits early at age 62. But your payouts will be reduced by 25% to 30% (depending on what your full retirement age is). They will be reduced less the longer you wait until you hit the age of eligibility for full benefits. The choice of when to take Social Security is ultimately an individual one that depends on your financial situation and your level of flexibility.
We do, however, offer this principle for your consideration: The less confident you are in the long-term viability of our economic and political system, and the more confident you are in your ability to invest prudently and profitably, the greater the likelihood that you’ll want to take what you can of your Social Security benefits as early as possible.