The Social Security 2019 Trustees Report projects that the Social Security trust fund will be depleted by 2035. That report triggered “The sky is falling” recommendations from numerous sources that you start Social Security as early as you can, before the fund is exhausted completely.
But that would be a bad bet.
Setting the record straight
First, let’s clear up one misconception: Social Security won’t go bankrupt, even if its trust fund is depleted. As long as current workers are paying their FICA taxes, Social Security will use that money to continue paying benefits to current retirees and beneficiaries. The latest Trustees Report estimates that if the trust fund is depleted, benefits would need to be reduced by about 20 percent in aggregate, so that the revenue from FICA taxes could continue to support payments to retirees and beneficiaries.
Of course, a 20 percent reduction would definitely be bad news, particularly for retirees who are living on the edge financially. But at least you don’t have to worry about your benefits going to ZERO!
Why cynicism about Social Security’s future could be a bad bet
Are you really that cynical to believe that Congress won’t act to shore up Social Security’s finances to prevent a 20-percent cutback to retirees and beneficiaries? Social Security is the most popular program the U.S. government has ever adopted, and politicians have always been loath to reduce benefits and risk retaliation by tax-paying constituents.
But suppose you are that cynical and truly believe that retirees will receive a 20-percent cut in their future benefits. Also suppose you’ve reached age 62 and are eligible to start your Social Security benefits. Doesn’t it make sense to start them now, so you’ll receive the largest number of monthly checks before benefits are cut in 2035?
Actually, no – that would be short-sighted thinking. There’s a good chance you’ll be a loser with that bet, whether or not future benefits will be reduced. Let’s see why with a winners-and-losers analysis.
The Social Security winners-and-losers analysis
I prepared some projections for three workers who reach age 62 in 2019. Their Social Security full retirement age is age 66-1/2. All three have identical earnings records that result in a monthly Social Security income of $2,000 at their full retirement age.
- “Joe” decides to start his benefits exactly at age 62 and receives $1,450 per month, reflecting the maximum permanent reduction in his lifetime monthly benefit.
- “Mary” is more patient than Joe and has made plans to start her $2,000 monthly income at her full retirement age.
- “Sue” is the most patient and has made plans to take her Social Security to the max by waiting until age 70. Her monthly income at age 70 would be $2,560 per month.
Note that all of these monthly incomes for Joe, Mary, and Sue will be increased in future years based on Social Security’s cost-of-living adjustments (COLAs).
My yardstick for assessing a Social Security claiming strategy is to estimate the total Social Security income you’ll receive over your lifetime. This assumes that size matters — more income is better! For my analysis, I added up the amounts of lifetime Social Security income that Joe, Mary, and Sue would accumulate at each age in the future.
To keep it simple, my winners-and-losers analyses described below assume no future COLAs and no assumption for the time value of money. Who will be the winner? Let’s look at two scenarios.Scenario 1: Future benefits aren’t reduced
Suppose Congress acts to prevent a future benefit reduction, and Joe, Mary, and Sue receive the benefits they’ve earned so far indefinitely into the future.
Let’s first assume each of the people in our example all live to age 78, which is highly likely for people who are currently age 62. In this case, Joe loses to Mary at that age and his losses grow each year thereafter. Now let’s suppose that they all live to age 80, which is still very likely for 62-year-olds. In this case, Joe loses to both Mary and Sue at that age, and his losses will grow each year thereafter.
If Mary and Sue both live to age 82, Sue becomes the winner at that age, and her projected winnings grow each year thereafter.
Scenario 2: Social Security reduces future benefits
Now let’s assume that Social Security’s benefits will be reduced across the board by 20 percent in 2035, which could be one scenario if the trust fund is depleted in that year.
If each of our hypothetical people live to age 78, Joe still loses to Mary at that age, and his losses grow each year thereafter, even recognizing the 20-percent benefit reduction. Now let’s suppose that they all live to age 81. In this case, Joe loses to both Mary and Sue at that age, and his losses will grow each year thereafter.
If Mary and Sue both live to age 83, Sue becomes the winner at that age, and her projected winnings grow each year thereafter.
The reasons for these conclusions
If Social Security needs to reduce benefits to make the system sustainable, then your benefits will be reduced whether you started early or delayed – you don’t avoid the problem by starting early. Even if Social Security benefits will be reduced in 2035, there are still many years left for Joe, Mary, and Sue to receive their benefits. And after the assumed benefit reduction, Mary and Sue will receive many more years of higher monthly benefits, compared to Joe.
By the way, the results aren’t much different if you make assumptions for future COLAs or the time value of money. Adding an assumption for a future COLA decreases the projected winning age, and adding an assumption for the time value of money tends to increase the projected winning age. Adding assumptions for both tend to cancel each other out.
Respected retirement researcher and actuary Joe Tomlinson reviewed my analyses and conclusions. I also checked my conclusions with two Social Security experts, Larry Kotlikoff, co-author of Get What’s Yours: The Secrets to Maxing Out Your Social Security, and Andy Landis, author of Social Security: The Inside Story 2018 edition. All agreed that I was on track.
The bottom line: Don’t bet against Social Security. Most likely you’ll be a winner if you’re patient and wait to start your Social Security benefits after age 62, even if you believe that benefits will be reduced in the future. You’ll increase the odds of winning if you wait at least until your full retirement age. And the longer you wait, the higher your potential reward will be.