Social Security has been the main part of our country’s retirement income system since the program started in 1935 under the leadership of President Franklin D. Roosevelt. At this time, there was 150 workers for every one person receiving benefits. Now, there are three workers for every one person. Recent projections have the Social Security fund being depleted within several years unless changes are made.
There are several fixes which seemingly are taken three main avenues: we spend less money as a country and redirect those funds to Social Security, we raise taxes to replenish the Social Security fund or we reduce benefits. There are combinations of the three and even more possibilities, but that is the low hanging fruit.
For better or worse, I’m going to take a shot at what happens. The least likely is spending cuts as the federal government has ran a deficit for the better part of past several decades.
If you cut benefits that also means you cut consumer spending. The problem with cutting consumer spending is that 70% of our economy is based on consumption. We experienced the economic impact of money not being spent in March and April of 2020 when the onset of COVID was in full force. Quickly rewinding back to that time, in four consecutive weeks between March and April of 2020, our economy lost more than 25,000,000 jobs. In four weeks, it erased the previous 10 years combined of jobs created. The first week of the pandemic, the United States lost more than 3,000,000 jobs. This surpassed the previous record of 695,000 jobs lost in one week in 1982. Social Security is only one piece of the economy’s income puzzle though over $1 trillion dollars is paid out annually. It all adds up over time.
The path to cutting benefits for those at or nearing Social Security income age is a much harder sell. In the past, the line in the sand has been drawn for benefits to stay at or about the same for recipients age 50 or older. This age group votes and Social Security reform passes through Congress to eventually be signed by the President. Who would get voted in or remain in office if they ran their campaign to cut benefits to this group? Younger generations have no choice. To improve their life and raise a family, they have to work. Social Security benefits later in life may not even be on their radar.
Ultimately, it’s likely that Social Security becomes means tested based on your income, some benefits are likely reduced for younger workers and the Social Security payroll tax could be increased.
Until the fix happens, it’s going to be front page headlines every time it’s discussed, and there’s going to be a lot of kicking and screaming along the way. The sooner something is done, the easier it will be to stomach the repercussions. The longer this issue goes without attention, the steeper the actions will have to be taken. Ultimately, there are too many people’s lives riding on the outcome and something has to be done. For those that carry the Social Security torch forward, it will likely be a legacy much like it has become for Franklin D. Roosevelt who created it.
Social Security is an important source of retirement income for most Americans. Not only just recipients in retirement, but those that are disabled or are leaving survivorship benefits to their family. According to the Social Security Administration (SSA), nearly nine out of ten individuals age 65 and older receive Social Security benefits.
Income benefits are based on an individual’s 35 highest earning years adding in a factor for inflation/cost of living adjustments. The program is currently funded through a 6.2% payroll tax which is matched by an employer by the same 6.2% or 12.4% for those that are self-employed. A recipient can start taking Social Security retirement income at any point between age 62 to 70. The longer you wait to start your income, the higher it will be.
The term Full Retirement Age or FRA is important because if you’re under FRA and still plan on working, your benefits can be reduced further. If you’re under full retirement age, $1 in benefits will be withheld for every $2 you earn above a certain annual limit. In the year you reach FRA, $1 in benefits will be withheld for every $3 you earn above a certain annual limit until the month FRA is reached. After the year you reach FRA, you can receive full benefits and work as much as you want without any penalties.
What is your full retirement age (FRA) to receive Social Security income benefits?
65 and 2 months
65 and 4 months
65 and 6 months
65 and 8 months
65 and 10 months
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
Age 62, a person receives 75% of their benefit, 100% of benefit at FRA and 132% of their benefits at age 70. It pays handsomely to wait especially until age 70. Waiting also provides more time to work and shore up your nest egg to last three to four decades of a normal retirement lifestyle. When I use the timeframe of three to four decades, I often hear a response of “I’m not going to live that long.” Think about this: What happens if you do? We had a Client pass recently that lived 103 great years! The likelihood of a three-to-four-decade retirement is high, higher than you expect if you’re active physically and socially. According to the Social Security Administration, one out of three people age 65 will live at least to age 90 and one out of every seven will live to at least age 95. Married couples at age 65 have at least a 50/50 chance that one member of the couple will live beyond age 90. As our knowledge of the human body and medical advancements expand, thinking long-term is more important than ever. Planning to live a long, healthy purpose-filled life and enjoying the income to live it fully is much better than the alternative.
Delayed Social Security Credits Between Full Retirement Age and Age 70
Date of Birth
1943 or later
Yearly Rate of Increase
A second item that routinely arises when planning for Social Security is the so-called breakeven point. The breakeven point matters, it always will because none of us know how long we’re going to live. There is another way to look at it that’s past it being just about the numbers. If a Social Security recipient were to wait to take benefits at or past FRA, the recipient would have more income during the early stages of retirement/work optional lifestyle to live more of the life they want to live while they still want to go and do at a youthful pace. They would have more income to do more of the things that make them happy.
Age 62 vs. 66: the breakeven is between ages 77-78
Age 62 vs. 70: the breakeven is between ages 80-81
Age 66 vs. 70: the breakeven is between ages 82-83
Cost of living adjustments to Social Security income are determined annually. Our experience has been that indexed Social Security benefits do not keep pace long-term with the increases in cost of living over time. Four out of the last thirteen years, Social Security has had an annual yearly increase of .30% or lower. Three out of those four years, the increase was 0%. This is not how the real world works.
Social Security Cost of Living Adjustments (given for the following year)
The difference in Social Security income and the real cost of living typically does not show itself in the early years of retirement. A simple example suggests that if Social Security is growing at an estimated 1.5% and the cost of living is growing at 3%, it will take a few years for a retiree to notice a difference. An annually compounded difference of 1.5% per year will add up substantially over a decade’s long retirement. Some semblance of this equation is quietly working against your Social Security benefits behind the scenes undermining your income over time. Once you and your household expenses fully recognize what is happening, options will have already started disappearing without you knowing it. At this point, your knowledge base and skill set has likely diminished due to being out of the workforce for a significant amount of time and advances in technology. The last thing you want to think about is going back to work if your health will even allow it. If you do become gainfully employed again, you will most likely command lower wages due to the previously mentioned reasons.
Stay ahead of the curve and plan strategically for a work optional and retirement lifestyle now, and do not discount the probability of the above scenario occurring. It is real.
If you plan on delaying your income benefits, still plan on signing up for Medicare three months before reaching age 65. If not, you may have to pay a late enrollment penalty for as long as you have coverage through your Medicare medical insurance or prescription drug coverage programs.
No matter what the future holds for Social Security, focus on saving as much for retirement as possible while smelling the roses along the way. Think lifetime or longer. My experience is those that do are usually around to experience it. In the end, it’s advantageous to view the Social Security program and its benefits through different lenses. Every recipient is unique and there is no one size fits all approach. Make the decision of when to take Social Security income benefits part of a well thought out financial and retirement income plan. To find out more information, visit ssa.gov and create an account to view your own personal benefits.
Tim Evans, CFP® CLTC
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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