Does the risk of a law change make it unwise
to wait until 70?
Wait as late as you can to take Social
Security. You’ll get more in the long run.
Unless Congress double-crosses you.
Late claiming has been the standard advice
coming from financial planners and from commentators like me. By starting at 70
rather than at 62 you get a higher monthly benefit, and the increment is good
enough to more than make up for the lost years.
The standard advice, however, assumes that
today’s rules on benefits and taxation of benefits continue. Maybe that’s not a
safe assumption. The Social Security System is insolvent. If benefits get slashed,
late claimers could wind up short-changed.
How insolvent? Well, you can’t call the system
a Ponzi scheme, because it doesn’t have enough financial integrity to be a
Ponzi scheme. With Ponzi, contributions from late players are used to pay off
early players. That used to be how Social Security was operated, but recently
the tax money coming in from workers has fallen short of the money going out to
retirees.
The shortfall is being covered for now via
some imaginary IOUs signed by the U.S. Treasury. Eventually even this source of
cash will evaporate. And then Congress will have to legislate an increase in
taxes or a change in the benefit formulas.
Some smart people claim benefits as early as
possible, even though they could afford to wait. They fear future cutbacks, and
figure that the only benefit checks safe from a congressional grab are the ones
they’ve already cashed. They have inspired me to take a closer look at the
arithmetic of deferred claiming.
What follows here is aimed at comfortable
retirees. I consider you comfortable if you have enough money saved up that you
are likely to be leaving a good chunk of it to charity or children.
Half of retirees have no income besides their
Social Security checks. For them there is no optimization strategy other than
squeaking by.
But if you’re comfortable, the game changes.
You’re playing blackjack with the government, and your objective is to maximize
your winnings.
Start by taking a look at your Social Security
asset. I have assembled a calculator that puts a value on it. Click on the
link, open the file in Google Sheets and make a copy. The copy will let you enter
ages and expected benefits.
Two things stick out from the software. One is
that the value of your Social Security account is large. It’s into seven
figures for a couple with long careers in well-paying jobs.
The other is that waiting to collect pays off.
The system was intended to be neutral between collecting a small benefit
starting early or a large one starting late, but that’s not the way it comes
out. For healthy retirees, the bonus for waiting is too generous.
If you were born between January 1943 and
December 1954, your “retirement age” is 66. For every $1,000 you’re entitled to
get starting then, you can start at 62 with $750 or at 70 with $1,320. Live
past 81 and you’re ahead with the late strategy.
For a wide range of ages and benefit amounts,
late claiming adds between 15% and 24% to the present value of a Social
Security payout stream. The present value I’m talking about here is the one
from the calculator. It takes into account all the possible years for your
death and your spouse’s. It discounts future payments for their improbability
and for the time value of money. It assumes no change in the laws.
Now, what happens when Congress addresses the
system’s coming financial collapse? For the big bucks necessary, it will have
to raise some combination of these three things: the Social Security tax rate
(now 12.4%), the wage base (now $132,900, inflation-adjusted) and the
retirement age (67 for those born after 1960).
For a small additional dose of
budget-balancing, Congress could get progressive. The system already has a fair
amount of income redistribution built into it. Congress could give us more of
that. It could go after people who don’t need benefits—people, that is, who
saved other money for retirement.
Would legislators cut a benefit once it has
started? Highly unlikely. But they could damage your plans in other ways. They
might raise the maximum fraction of benefits subject to income tax from 85% to
100%, and they might eliminate inflation adjustments for the well-off.
Suppose those rule changes are in your future.
You’d protect some of your payout from their effect by claiming now, at 62,
rather than at 70. But it’s likely that, even if you start at 62, you’ll live
long enough to collect most of your benefits after the new rules are in place.
So getting some of your money eight years early will give you only a little
protection against the redistibutionists.
Consider two healthy retirees. Hasty Harry
starts at 62, Patient Patty at 70. The best case for Harry is a law change
coming into play just as these retirees turn 70. That means roughly a third of
Harry’s payout escapes the crackdown while none of Patty’s does.
Higher taxes, modest inflation and a COLA kill
would trim the value of Patty’s Social Security by not quite a fourth and Henry’s
by a sixth. And yet Patty still beats Henry.
You can sketch out drastic scenarios,
involving nasty benefit cuts for people already in retirement or steep
inflation, that would vindicate Hasty Harry. I consider these scenarios
improbable.
I stand by my earlier advice: Most people
should claim late. Claim late if you are either (a) healthy or (b) married to
someone who is lower-earning and healthy.
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