The latest update on Social Security's shaky finances was a tad more bearish than last year.
And that raises the question: Do potential benefit cuts starting in 2034 mean Americans should rethink when they start taking Social Security?
First the bad news: More money is coming out of the Social Security fund than is coming in. As a result, the latest projection from the Social Security Board of Trustees is that it won't be able to pay 100% of benefits for the Old-Age and Survivors Insurance trust fund starting in 2034. That's a year earlier than projected last year.
If Congress doesn't act to shore up the entitlement program, which currently pays benefits to 70 million beneficiaries, there will only be enough revenue to pay 77% of benefits starting in 2034. That equates to a 23% pay cut for Social Security beneficiaries.
Should You Speed Up Your Social Security Claim?
The latest update will no doubt cause many Americans to fear the worst. Many may opt to take their benefit checks as early as age 62. But despite the latest numbers, savers shouldn't make decisions based on speculative headlines or financial outcomes that might not happen.
More than 50% of people over age 65 depend on Social Security for more than half of their income, according to the Social Security Administration, or SSA. Congress will likely move to fix the funding problem, says Lindsay Theodore, a certified financial planner at T. Rowe Price.
"A lot of retired people would be very upset," said Theodore. "We don't think it's likely that everyone's benefits are going to be dropped by 23%. And we don't think that people should change their (Social Security and retirement) planning in anticipation of that."
Still, there's much uncertainty surrounding Social Security. That includes its long-term financing gap and recent government cuts to staffing and field offices. Many individuals claimed benefits earlier than planned as a result, says Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts. NARSSA is an organization that helps people optimize their Social Security claiming decisions.
Some 10% of pre-retirees say they claimed Social Security earlier than planned due to skepticism about Social Security benefits, according to a T. Rowe Price retirement and savings study published in March.
The Cost Of Claiming Social Security Early
But taking Social Security early is costly. Taking benefits at age 62 means your benefit would be about 30% lower than taking benefits at the full retirement age. The full retirement age for people born after 1960 is 67, says the SSA. Each extra year you wait to take benefits, the higher your lifetime benefit.
And if you wait until 70 to take benefits, the government will add 8% to your benefit for each full year you delay taking benefits after your full retirement date.
Craig Ferrantino, president of Craig James Financial Services, says the uncertainty surrounding Social Security's solvency hasn't changed the advice he offers clients about when and why to take benefits.
"Nothing's changed in what we normally tell people," said Ferrantino. If you can wait to take benefits and get a larger benefit, that's a good thing, he says. Taking Social Security early results in people with low-dollar benefit amounts that make it harder to sustain their lifestyle in retirement.
Age and longevity — not Social Security solvency concerns — still matter most when making Social Security claiming decisions. "I want to know if a client's parents are still alive. What age did they pass? If they have siblings, how's their health? If you feel your health isn't good, that to me is the best justification to take Social Security as soon as you can."
Outpace The 20% Cut?
Does the possibility of getting a Social Security check that's roughly 20% smaller starting in 2034 mean you should take benefits early? Is there a different claiming analysis to do? Is it time to redo the math?
"There is a bit more cause for alarm than last year, but it's not a significant change," said Shedden. "However, people should not make their claiming decisions based on (the Social Security fund's potential depletion), something that has been talked about for the last 15 years."
What's more, the way benefits are funded or paid is unchanged, Shedden says. Most of the confusion surrounding Social Security has to do with lower staffing levels. That sparks the issue of the inconvenience of applying for benefits and getting questions answered, Shedden adds.
Will Congress Bail Out Social Security?
Congress has a few options to shore up Social Security. Some potential revenue generating fixes, according to the "Social Security at 90" report, include eliminating the payroll tax cap (currently at $176,100) for those making more than $400,000 and gradually raising the payroll tax from 6.2% to 7.2%. Of course, there is also the option of raising the full retirement age or increasing taxes to cover the cost of Social Security.
There's no guarantee that Congress won't make the necessary fixes to shore up Social Security and keep full benefit payments coming, says Shedden. "It's highly unlikely that nothing is done," said Shedden.
Claiming early will cost you money. Taking benefits early at 62 locks in roughly 30% less Social Security pay. So, panicking and succumbing to fear that Social Security will pay smaller benefits in the future could penalize you financially.
Shedden offers a back-of-the-envelope analysis to highlight why taking benefits early could backfire.
"Going forward as a new retiree, would you not rather have a higher benefit that would be cut by 20% than a lower benefit?" said Shedden.
Do The Math With Social Security
Here's a hypothetical example. Let's say the SSA estimates taking Social Security at 62 will net $2,561 a month. Starting benefits at 67 results in a check of $3,494. And waiting until 70 swells the monthly benefit to $4,332 per month. Now, let's shave off 20%. Your take-home check each month if you take Social Security at 62 shrinks to $2,049. But after a 20% cut, you'll still receive a benefit of $2,795 at full retirement age and $3,465 if you wait until age 70 to take benefits.
"Why would you claim early? That's doing a disservice to yourself," said Shedden.
Some Social Security experts say this key retirement funding source is too big too fail. Social Security is the foundation of economic security for most Americans. In fact, monthly benefit checks for low earners who take Social Security at full retirement age replace an estimated 78% of preretirement income, according to the SSA. Social Security benefits replace 42% of income for medium earners and 28% of high earners' income.
Delaying Social Security can also help make retirees' retirement account balances last longer, according to a T. Rowe Price study.
"When clients postpone taking Social Security, they may initially rely more heavily on their investment portfolios to meet income needs," according to T. Rowe Price. "However, once Social Security benefits kick in at age 70, the increased value of those benefits significantly reduces the size of withdrawals needed from their retirement portfolio. By reducing annual drawdown amounts, the retirement portfolio can last longer."
Weigh Your Situation When Claim Social Security
The goal is to optimize your Social Security benefits by making prudent claiming decisions that are the right fit for your personal circumstances.
For folks who are single and who never married, the claiming decision is more straightforward as there's no need, for example, to factor in spousal benefits or survivor benefits as married couples must do. "There are so many rules that apply to benefits that you need to do a very precise analysis," said Shedden.
For those nervous savers who think Social Security benefits will eventually be cut, there are moves you can make now to make up for the income gap that benefit cuts may cause, says Theodore of T. Rowe Price.
"If you still have the time, save more," said Theodore. Investing in a Roth 401(k) or Roth IRA, which offer tax-free withdrawals, is a good strategy. Why? You'll need to withdraw less dollars to fund your retirement than you would taking withdrawals from a traditional 401(k), which are taxed as ordinary income.
Another way to offset a lower income stream from Social Security is to begin to trim your expenses ahead of retirement, Theodore advises. "So, if you're in a position where you could pay down the mortgage a little earlier, put more money towards that," said Theodore.
You could also take a sum of retirement savings and buy an annuity that generates the amount of monthly income that you could lose if benefits are reduced, adds Ferrantino. "Take charge of your own pension," said Ferrantino.
