The Financial Planner

Should I Take Social Security Now Before It Runs Out of Money?

The perception that Social Security is “going broke” has been promulgated in the news media. It is, of course, not accurate. The hype scares people and causes some to draw benefits sooner than they otherwise would. Drawing benefits too early may end up costing them thousands of dollars over the long run.

What is Really Happening with Social Security

Social Security will never run out of money entirely because ongoing payroll taxes fund it. As long as people pay taxes on salaries and wages, they are paying into Social Security and Medicare. However, according to the Social Security Board of Trustees, the trust fund reserves (our emphasis) will be depleted by 2033, one year earlier than previously projected due to the COVID 19 pandemic and the 2020 recession. After that, income from ongoing payroll taxes will be sufficient to pay 76% of scheduled benefits.¹ 

Again, Social Security will have enough money coming in to pay about 76% of projected benefits after 2033 when the reserve fund that has been making up the difference runs out. That still sounds scary. You may not know that the projection of a shortfall by 2034 was made back in 1983 when Congress made the last major change to shore up Social Security’s solvency. According to one expert, “That’s almost precisely what the actuaries were projecting more than 30 years ago. There’s no more of a Social Security funding crisis now than what was envisioned then after the 1983 changes were enacted."²

We will have to rely on Congress to implement a long-term fix, which they can do in several ways. On the revenue side, they can increase payroll taxes, increase the income threshold subject to payroll taxes, or increase the Medicare surtax. On the benefits side, they can increase the full retirement age, reduce benefits for the wealthy, or reduce COLA increases (cost of living adjustments). Other ideas include privatizing Social Security by having workers put their payroll taxes into IRA-like accounts and increasing taxes on benefits to high-income households. Congress could combine any of these ideas or even find a new funding source―it will take the will of Congress to get this done.

What Should We Do?

As financial planners, we look at each person’s situation to determine an appropriate recommendation. However, we are guided by a few Social Security general “rules of the road” that may be to your benefit.

1. Our first general rule for married couples is to have the higher earner delay taking benefits to age 70 or for as long as is practical. After the first one of you dies, the survivor will receive only one Social Security benefit―the greater of the two. This is a net reduction in household income. You are going from two benefit checks to one. By having the higher-earner delay, it provides a higher remaining benefit for the survivor in the future.

2. Our second general rule for a married couple is to have the lower-earner delay to their FRA (full retirement age) if possible. Starting benefits before FRA locks in a reduced benefit for life. If you take your own benefit at age 62, the reduction will be around 30% compared with waiting to FRA. If you as the lower earner take the spousal benefit at 62, it reduces your benefit between 33.33% and 35%, depending on your year of birth.³ Spousal benefits do have a greater reduction than one’s own benefit if taken early with the (old school) idea that the spouse will take over the higher benefit when the higher earner dies. The spousal benefit also does not go up beyond your full retirement age, so that is the optimal time to begin.

3. Our third general rule has just been revised. It was, don’t volunteer for less money for life if you can afford to delay. Now it is, don’t volunteer for less money for life if you can afford to delay, especially if you think benefits will be cut! If you are very worried that benefits will be reduced due to the trust fund reserve running out, would you really want to take your benefit early and get a 30% reduction, and later an additional 24% reduction if that happens.

• For example, if you were born in 1960 and are 61, a $1,000 per month FRA benefit would be reduced by 30% if you draw at age 62 to $700 per month. If it is further reduced by 24%, the benefit would be $532 per month in today’s dollars.
• If you waited to FRA, a 24% reduction would bring your benefit to $760.
• Calculating the break-even, you would start to earn more on a cumulative basis by delaying to FRA at around age 78 or 79. You may not think you are going to live that long, but you just might.  And, if you don’t, your spouse could (see Rule 1).
• Signing up for reduced benefits by filing early means COLA increases will have less impact on an actual dollar basis. A 3% COLA on $1,000 is $30.  On $700 it is $21. On $532 it is $16.

We suggest you plan for a longer life than you think and take advantage of the highest benefit that is practical for your situation. If you are older, base your decision on the rules that are in place rather than trying to anticipate what might happen. If you are young, plan for a retirement that is less reliant on Social Security. Please see your financial planner for specific advice.

References

1. Social Security and Medicare Boards of Trustees. (2021). Status of the Social Security and Medicare programs, a summary of the 2021 annual reports. https://www.ssa.gov/oact/TRSUM/tr21summary.pdf
2. Hulbert, M. (2019, February 3). Opinion: how likely is it that Social Security will go broke? MarketWatch. https://www.marketwatch.com/story/how-likely-is-it-that-social-security-will-go-broke-2019-01-07
3. Starting Your Retirement Benefits Early. (2021). Retirement Benefits, Social Security website. 
https://www.ssa.gov/benefits/retirement/planner/agereduction.html

Suzanne Tudor

Suzanne has over 35 years of experience in financial services, retiring in 2024. She was a senior investment consultant and director of financial planning at Allodium Investment Consultants, located in Minneapolis, MN. Suzanne was passionate about helping families and business owners to strategically develop and carry out their financial, legacy and philanthropic plans. Since retiring, Suzanne has had extra time for activities she loves, such as spending time with her family and making DIY home improvements.

The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.