Social Security: What’s New?

Congress slipped a bit of Social Security reform into the recent budget deal. Plans to curtail a pair of Social Security claiming strategies didn’t make headlines, perhaps because neither is widely understood nor used. If you are contemplating your own approach, are married, and will reach 62 by the end of this year, then you should learn more about what is being phased out (see Goodbye to Extra Benefits for Married Couples).

More sweeping changes will be required to adequately fund Social Security down the road, yet we believe Social Security will continue to play an important role in retirement planning for most Americans. The recent developments remind us of the need to understand how it works and how timing can impact benefits.

When to Start
Reduced benefits can be claimed at age 62, full benefits at 66 (depending on your birth year) and maximum benefits at 70. Why wait? The payout increases each month you delay, translating to annual benefit growth of as much as 8% between 62 and 70. For a married couple, it can be especially beneficial for the higher earner to defer, as a surviving spouse would be eligible to receive the higher of the two payments.

At what point does waiting pay off? “Break-even” is generally reached in the early to mid-80’s, varying with individual factors such as income taxes and interest rates. If you are inclined to wait, it is not a “set it and forget it” decision – benefit payments can be activated at any point.

In reality, not many maximize by waiting.  In 2013, 62 was the most popular age to claim social security benefits (48% of women and 42% of men). Another third or so held off until full retirement age and just a few delayed until age 70. We identify four reasons for the disconnect:

  • Insufficient income or assets to bridge the gap between retirement and start-up.
  • Uncertainty about living to the break-even age.
  • Concern that Social Security will not be able to honor promised benefits.
  • Unawareness of the benefits of waiting.

Fixing Social Security
Current estimates suggest that in 2033, Social Security benefits will have to be cut to about 80% of promised levels if Congress doesn’t act, with further reductions to follow. Take out the politics, and the fix is pretty simple: increase the inflows and/or decrease the outflows. The longer Congress waits, the harder it gets. Among the available remedies:

  • Hike the Social Security tax rate.
  • Expand the earnings base on which the tax is levied.
  • Increase the full retirement age.
  • Reduce annual cost-of-living adjustments.

When you consider that the average life expectancy for a 65 year-old has increased by almost five years since the program began in 1935, continued escalation in the full retirement age is probably the path of least resistance, albeit one that likely will not fully plug the hole. A Washington Post survey indicated that fewer than 3% of respondents wanted to pass the problem on to the next generation.

How Might this Affect Me?
We don’t have a crystal ball. We expect changes to be more evolutionary than revolutionary. And, it is our best guess that for those already collecting benefits, and for those frequently referred to by politicians as “at or near retirement,” changes will be minor and will serve to ensure the receipt of something close to the expected payment.

The Social Security decision can be complicated and emotional – taking the time to understand your options can help you maximize your lifetime benefits.

Goodbye to Extra Benefits for Married Couples
The November 2 budget act set deadlines for adopting two strategies that alone or in combination have made it possible for married couples to increase their benefits since they appeared fifteen years ago. They can be viewed as loopholes that were waiting to be closed.

As of next May, only those who have already filed or who will have reached 66 will be allowed to use the “file and suspend” strategy. The “claim now, claim more later” strategy, which facilitates delaying the earned benefit while still receiving a spousal benefit has been preserved for those born before 1954.