MAKING SENSE -- September 26, 2011 at 12:28 PM ET
Is the Conventional Wisdom on Social Security Correct?
From "Why Social Security?" (1937). Social Security Administration pamphlet explaining need for the new system in terms of the transition from rural to urban-industrial society. Illustration by Hendrik Willem Van Loon, photo via flickr user Tobias Higbie.
Paul Solman answers questions from NewsHour viewers and web users on business and economic news on his Making Sen$e page. Here's Monday's query:
Name: C Tate
Question: The conventional advice for people nearing retirement age is to delay collecting Social Security benefits for as long as possible, ideally to age 70. I am now at my Full Retirement Age of 66, in good health, with a reasonable life expectancy of another 20 to 25 years. By delaying benefits to age 70, I could theoretically collect about $100,000 more from Social Security by the time I reach age 91, in 2036. But how reasonable are these calculations, given the recent projections that the Social Security trust fund's reserves will be exhausted by that very year?
Paul Solman: Very reasonable, IMNSHO*, especially as you're in good health which, incidentally, I am very glad to hear.
The way I figure it, the most important eventuality against which to protect yourself is outliving your savings, since I imagine a future with potential medical advances that Medicare will simply be unable to cover.
Delaying Social Security until age 70 is like buying old-age insurance. The cost: the foregone Social Security checks between ages 66 and 70. The benefit: If you live past your early 80s, you are receiving more in total than had you started collecting at 66, and you're better protected against a penurious senescence. Also: Social Security is inflation-protected, remember, since it includes an annual cost-of-living adjustment. That, at any rate, is the reasoning behind my own decision, and that of my wife, to wait until 70 before taking Social Security.
As to worries about its solvency, we're betting that no significant changes are going to be made to the formula for older Americans like you and ourselves. Some may find what I'm about to write cynical: that older Americans like us are both growing in number and voting disproportionately to our numbers, so politicians can't afford to cut us back. But cynical doesn't mean false.
A plausible guess as to what will happen with Social Security? Look at what happens to most underfunded pension plans. In the typical case, current workers are forced to contribute somewhat more; younger workers, and especially new ones, wind up with lower benefits. Raising the pay ceiling on Social Security taxes from the current $106,800 would be an example of "contributing more." Extending the retirement age would lower the benefits for younger workers.
Neither adjustment, C Tate, would apply to you. Is Social Security likely to lower benefits for those of us who wait to take them? I wouldn't think so. Waiting saves the government money in the short run, and that has got to be more attractive to current politicians than paying out sooner. They have every incentive to make waiting for benefits more attractive rather than less.
Is there a chance that the new rules will apply only to those, like yourself and us, who haven't yet started taking their benefits? Maybe, but I'd think the likelihood very low.
Finally, I can imagine Social Security benefits being taxed at 100 percent, rather than the current limit of 85 percent. But if you live to 100, as I'm counting on you to do, you'll still almost surely be far, far better off by delaying benefits.
One addendum: if you're married and both spouses are delaying benefits, one or the other of you is eligible to take a dependent spouse benefit without jeopardizing your full benefit at age 70. So a husband or wife who's eligible can register for Social Security and decline the benefits. The spouse can then apply for the dependent spouse benefit and take it until age 70, at which point the spouse declines further payments and switches to the full personal benefit. Both will be taking full benefits at that point.
*In My Not-So Humble Opinion.