The Specter of Social Security Cuts

contributed by Nathan Gehring

PhantomFrequently, as a financial planner, I’m asked when an individual should begin taking Social Security retirement benefits. Often the person asking the question follows it up with a statement similar to “I should probably do it right away and get what I can before Social Security goes bankrupt or Congress changes the rules.” And for a long time, this was the exact advice I heard from many financial planners.

But the professional thinking has been changing quite dramatically over the past half-decade or so. Tools have been developed to determine the optimal social security retirement strategy based on a client (or client couple’s) situation, longevity and need for money. Financial planners now commonly offer analysis which suggests waiting well beyond age 62 to begin drawing benefits.

Bankrupt Benefits

But what about that bankruptcy and rule change argument? Couldn’t the system go bankrupt? Can’t Congress simply write legislation that completely alters the system? Well, yes and no. Frankly, I think this argument is a case of fighting a phantom.

When people and the media discuss the insolvency of the Social Security system, they are referring to the Social Security trust fund. The trust fund, actuarially, is expected to run out of money to pay 100% of promised benefits. But even in this event, the expectation is that 77% of benefits could still be paid by current FICA tax receipts. And the reality is that, as a sovereign currency issuer, the United States government has the ability to pay 100% of social security benefits regardless of whether a penny is collected in taxes or not. The US government does not need tax “income” in order to pay obligations.

When people ask me if they should make a decision to draw benefits immediately before the system goes bankrupt, I remind them that it is advisable to make decisions based on facts and knowns, not on fears and emotions.

Yeah, But Congress Could Change The Rules!

Unlike the bankruptcy argument, Congress is a real risk. They do have the ability to change the social security system. They could increase full retirement age or make the system means tested. Congress could enact all sorts of laws materially changing the way Social Security benefits are determined.

But this is true of every law we must abide by and navigate in the United States. Every tax law a client takes advantage of is subject to the whims of Congress. Every strategy is at risk of being wiped out with the stroke of a pen. Yet, you make decisions (and we help clients make decisions) based on the law of the land today, not based on the risk and fear of change to those laws tomorrow. Certainly we want to consider that risk and take a course of action that allows flexibility. But decisions are guided by today’s laws. Social security decisions should be made no differently.

What Benefits You Most

Instead of fighting phantoms and fears, what social security strategy is likely to benefit you most? Perhaps you simply need the money from social security today to make ends meet and can’t afford to delay drawing benefits, even if that means giving up an increased benefit tomorrow. Then there’s not a lot of analysis necessary. But if you have the financial ability to delay drawing benefits, there are many alternative strategies that could potentially provide you with more long-term security.

Helping our clients make these types of decisions is something we strive to do every day.

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photo courtesy of mattwi1s0n

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