Retirement

Worried About Social Security’s Future? Make A Plan For When To Start Your Benefits

The Social Security trust fund is projected to be exhausted in 2033, according to a recent report by the Congressional Budget Office. This report inspired the usual slew of hysterical misconceptions that Social Security will become bankrupt and you won’t receive any benefits.

Following the CBO report, several sources published articles that helped educate the public by pointing out that you’ll still receive about three quarters of your benefits if the trust fund becomes exhausted and if Congress does nothing to shore up the shortfall. While a 25% reduction in benefits is still bad news, it’s much better than receiving nothing, as the misconceptions might have you believe.

Social Security’s funding challenges received even more attention with the recent exchange between President Joe Biden and several Republicans at the State of the Union address, where both sides of the aisle apparently promised not to cut Social Security benefits.

Implications For Claiming Social Security Benefits

Many financial analysts suggest that the optimum age for starting Social Security benefits is to delay the start of benefits as long as possible, even to age 70, the maximum starting age. However, this conclusion is based on the assumption that future benefits won’t be reduced.

Suppose you’re pessimistic that our polarized politicians will be able to agree on a solution to close Social Security’s projected shortfall and you believe the 25% reduction will become the default. Further suppose that you’re approaching eligibility for Social Security at age 62 or that you’re currently eligible for benefits but haven’t yet started them. In this case, here are two important questions you should consider:

  • Should your pessimism influence your decision to claim Social Security benefits?
  • Should you start your Social Security benefits as soon as possible, so you at least receive some money before benefits are cut?

I posed these questions via email to Mike Piper, author of Social Security Made Simple and developer of Open Social Security, a free online system that analyzes optimal claiming strategies. Here are Piper’s answers: “It does indeed push the decision in favor of filing earlier, though whether that push will overcome the various other factors will vary case-by-case.”

Looking Deeper

After getting Piper’s input, I fired up his Open Social Security system to see how the optimum strategy could vary on a case-by-case basis. I looked at cases for people who were born in 1961 and will reach age 62 in 2023, and for people born in 1957 who will reach their full retirement age of 66 1/2 in 2023.

The Open Social Security system has a feature that allows you to assume a future reduction in your benefits. I assumed that benefits would be reduced by 25% in the year 2034, the year after the CBO projects that the Social Security trust fund will be exhausted.

To properly analyze someone’s optimal claiming strategy, Piper’s system needs an input for your monthly “primary insurance amount” (PIA), which is the projected benefit at your full retirement age. I assumed that the monthly PIA would be $2,000 for the primary wage earner and $1,000 for the spouse of a married couple. (Piper’s system shows how you can estimate your PIA, if you don’t know the figure.)

These analyses all show that the optimum financial strategy depends in part on your marital status and gender. Let’s take a look.

Analyses For People Born In 1961

I looked at three cases for people born in 1961: a married couple where both partners are the same age, a single man, and a single woman. During 2023, they all turn 62 years old, the earliest possible age at which to start benefits with the lowest possible Social Security benefit.

  • For the married couple, the optimum claiming strategy didn’t change by assuming a future benefit reduction. Either way, the optimum strategy was for the husband to start benefits at age 70, and the wife to claim benefits at age 62 and one month.
  • For the single man, the assumed future benefits reduction dropped the optimum starting age from age 68 and one month, to age 62 and six months.
  • For the single woman, the assumed future benefits reduction dropped the optimum starting age from age 69 and two months, to age 66.

Analyses For People Born In 1957

I also looked at three cases for people born in 1957: a married couple who are both the same age, a single man, and a single woman. If they were born in the first half of the year, then during 2023, they would all reach age 66 and six months, their full retirement age (FRA). People born in the latter half of the year would reach their FRA in 2024.

  • For the married couple, the optimum claiming strategy didn’t change by assuming a future benefit reduction. Either way, the optimum strategy was for the husband to start benefits at age 70, and the wife to claim benefits as soon as possible.
  • For the single man, the assumed future benefits reduction dropped the optimum starting age from age 67 and eight months, to filing right away.
  • For the single woman, the assumed future benefits reduction dropped the optimum starting age from age 68 and eleven months, to age 67 and seven months.

Piper notes the Open Social Security system bases its analyses on the assumption that people live to their expected lifespans. If you consider “live a long time” scenarios, then the analyses tilt the conclusions toward delaying the start of benefits.

One factor to consider with all these analyses is: Whether you claim Social Security benefits as soon as possible or you delay your benefits, either way you still won’t escape a benefits reduction if it takes place. But in many cases, it’s better to realize three-quarters of a larger benefit amount compared to three-quarters of a smaller amount.

For most retirees, Social Security benefits will be the bedrock of your financial security in retirement. It’s well worth your time to consider your optimum Social Security claiming strategy in light of your circumstances, and your optimism or pessimism that our politicians will take responsible action to shore up Social Security’s finances.

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