For many of my clients, the advice regarding Social Security is quite simple: If you are in good health and have a history of longevity in your family, then holding off on receiving Social Security payments until age 70 is the wise choice. If you end up living past age 81, then waiting until 70 is the best move. That’s the sort of “break-even” point in terms of total lifetime tax benefits.
Think about it. Each year that you wait past age 62 (the first year you can apply) or age 67 (“full retirement age”), the value of the benefit goes up by 8%. And with an inflation bump, it is closer to 10%.
Some of my clients opt to receive the money earlier, typically for three reasons:
- First, they may simply need the money to live on. Fair enough.
- Second, some don’t trust that the Social Security Administration (SSA) will remain solvent. The SSA trust fund is currently projected to run out of money around 2035, if no changes are made before then. At that point, the SSA would need to slash benefit payments by 23%. Voters would never let that happen, although slower-than-expected annual inflation adjustments might mean your future benefits will be less when adjusted for inflation.
- Lastly, some people think “I paid into the system, may as well get what’s mine.” That’s an impatient and unwise approach.
I can’t speak to why some would take that last stance, but I do want to better address the second point: That Social Security is heading for trouble. As things currently stand, many people that rely on Social Security (and have no other means of support such as a retirement plan) have enough trouble now making ends meet.
Any cuts in SSA benefits would be catastrophic for so many people that are living on the margins. In response, there are two likely steps that will be taken to shore up Social Security. First, the amount of each paycheck will be exposed to higher FICA (Federal Insurance Contributions Act) limits.
Right now, the first $137,700 in income is exposed to the 6.2% FICA tax. Soon enough, that figure may rise to $175,000 or even $200,000.
Second, your SSA benefit may eventually be subject to “means testing.” If you have a sizable of assets in place and are living comfortably, then the SSA may come to find that you need your benefit less than a person that is financially struggling. And your projected benefit may get reduced.
We already have something like this in place, known as the Tax Torpedo, which I wrote about a couple of years ago.
The key takeaway: Social Security is not going bankrupt. Nor will it be slashing payouts sharply, especially for anyone that clearly depends on Social Security just to live. But for wealthier Americans, they may end up paying more in FICA taxes in coming years. And for financially comfortable Social Security recipients, means testing may reduce their expected benefit.