In an age when faith in most institutions has cratered, Americans still love Social Security. But they’re anxious about the future of the 90-year-old retirement income program and how changes to it might affect their own personal finances and those of their parents and children.
With good reason. Around 2033 the Social Security Old-Age and Survivors Insurance Trust Fund (essentially a credit balance at the Treasury) will run dry. At that point, the Social Security tax dollars flowing in will not be enough to pay all the benefits. If Congress doesn’t act, retirement checks would have to be sliced 23% across the board.
This past week, I moderated a Forbes members event on The Future Of Your Social Security Benefits which covered not only that big cliff, but also practical issues such as how Social Security income is taxed and how the program’s current arcane benefits formulas work. (You can find even more advice in the stories below.)
Former Forbes editor William Baldwin, who writes often about the intersection of investing, taxes, retirement and government policy, pointed out that even if Congress doesn’t solve the Social Security financing problem in a timely fashion, it has a “stopgap” to head off a 23% benefits cut: borrowing some more money and adding to the deficit. “Probably the politicians, after exhausting all other possibilities, will do what’s right,’’ he observed. “And what’s right means something like this: They’re going to increase taxes a little bit. They’re going to increase the full retirement age from 67, gradually. They’re going to cut benefits a little bit for people who have large incomes. They won’t probably do any of these terrible things in a way that impacts somebody who’s already collecting benefits, or is about to collect benefits.”
As part of the last big Social Security reform (signed by President Ronald Regan in 1983), the full retirement age was very gradually raised from 65 (for those born in 1937 and earlier) to 67 (for those born in 1960 or later). You can start retirement benefits anywhere between age 62 and 70, with your monthly check growing for each month you wait. But any increase in the “full” or “normal” retirement age means all beneficiaries born in a given year take a hit. That’s because the size of reductions in your monthly benefit for early claiming and of increases for waiting are based on your full retirement age.
“The most common and largest mistake that I see is people getting the ‘when to file for benefits’ question backwards from a risk point of view,’’ said panelist Michael Piper, a Missouri registered investment adviser, CPA and author of Social Security Made Simple.
“They think to themselves, ‘I don’t know how long I’m going to live…and therefore I’m going to file for my benefits as soon as I can in order to make sure that I get at least something.’ And the first time you think about it, that intuitively sounds like it makes a lot of sense. But when you dig into it, it turns out that that’s literally backwards, it’s 180 degrees away from correct.” The scarier risk in retirement planning, he explained, isn’t dying too early, but living too long and running out of money—a risk a bigger, delayed Social Security check protects against. “Waiting is the safer decision.”
Both Baldwin and Piper offered savvy financial moves that can go along with delaying Social Security benefits. Baldwin described how lower taxable income years between retirement and the start of Social Security benefits can be used to convert some of your traditional pre-tax retirement accounts into tax free Roth accounts. As he detailed, there might be good reasons not to convert (for example, you’re going to give the money in the pretax IRA to charity), but lower income years present an opportunity.
Piper recommended that you reconsider the allocation of any investment funds you’ll be spending to tide you over between when you stop earning a paycheck and when the Social Security benefits start flowing. That money shouldn’t be in the volatile stock market, where prices might be down just as you need to sell. “What you do,’’ said Piper, “is you take your portfolio and you carve out a specific piece of it and you allocate it to, in most cases, a ladder of TIPS” –that is, Treasury Inflation-Protected Securities maturing at different dates. That gives you a stable source of fixed income to fill in the gap. Simpler still, said Baldwin, is to buy a mix of exchange traded funds (ETFs) that own TIPS.
Piper noted the case for waiting to claim Social Security is particularly strong for the higher earning spouse in a married couple. Benefits are keyed to the top 35 years of a worker’s earnings, with bigger checks going to higher earners (who, to be fair, paid more Social Security taxes each year). But if the higher earner in a marriage dies first, the lower earner gets to take over their bigger check as a survivor benefit, in place of their own smaller earned benefit. “It’s an even better deal than it is for a single person, for the higher earner to wait,” he observed. “When the higher earner waits, it increases the household income for as long as either of the two people is still alive.”
But beware: That transition doesn’t always go smoothly these days. The Trump Administration has chopped the Social Security Administration’s staff, creating problems for some folks —like those applying for Social Security survivor benefits—who actually need to talk to a human being at the agency. Forbes senior writer Kelly Erb recently recounted how her own 77-year-old mother went without any Social Security benefits for five months when she applied for a survivor benefit after the death of her husband last October. Even though Erb is a tax and estate lawyer experienced in dealing with the SSA, she ended up contacting her mom’s Congressman for help getting the matter resolved.
Transitions were much on the mind of attendees watching the event, who asked dozens of questions, including about Social Security’s treatment of divorced seniors—a hot issue considering the surge in gray divorce (i.e. the breakup of long-term marriages among those over 50).
The good news for those who split: If you were married to someone for at least 10 years and haven’t yourself gotten remarried, you’re entitled to the same benefits as a spouse, even if your ex has tied the knot again (or multiple times). That means that if your higher earning ex dies, you can claim a larger survivor benefit instead of your own earned check.
Good for the divorced, but not so much for taxpayers. “That’s kind of perverse, to be subsidizing divorce,’’ Baldwin said. “But that’s how it works.”
