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Carla Fried: Don't be scared into claiming Social Security early

By Carla Fried, on

Published in Home and Consumer News

As if household finances weren't rattled enough by the coronavirus recession, a new round of ominous headlines set off fresh worries about Social Security benefits, and a new round of hand-wringing from near-retirees that it may be best to grab benefits ASAP before payouts are cut.

Slow down. Waiting still makes the most sense. Retirement planning pros who crunch the numbers have modeled the impact of hypothetical cuts - accent on hypothetical - and still find waiting to claim a benefit at a later age makes plenty of sense.

Social Security pays a guaranteed 6% higher benefit for every year you delay starting between age 62 and 67, which is the "full retirement age" (FRA) for anyone born in 1960 or later. (If you were born earlier, your FRA is between 66 and 67). You can't earn a risk-free 6% investing today. And if you delay starting your benefit between 67 and 70, Social Security increases the benefit boost to 8% a year.

Can you earn 24% over three years investing? Maybe. But again, that 24% from Social Security is guaranteed. (Side note for married couples: The most important step is for the highest earner to try to delay as long as possible. It's less important when the lower-earning spouse starts receiving benefits.)

That said, the recent headlines were unsettling. President Trump's pronouncement in August that he would do away with the payroll tax that funds the bulk of Social Security, if re-elected, set off howls. It would effectively undermine funding for the program. The White House soon started walking that back. But still.

And then there was the Social Security Administration itself reminding us it has a cash flow problem - nothing new, really. If not addressed, it could result in a reduction of benefits. The 2020 estimate from the SSA is that absent any Congressional fix, the program will not be able to pay out 100% of full benefits come 2034.


The cash flow problem could come even sooner, as this year's SSA report did not factor in the COVID recession. (With most of the program funded by payroll tax, widespread unemployment means less payroll tax collected.)

Deep breath. It's important to remember that even if Congress does nothing, benefits will not go to zero. The absolute worst-case estimate is that benefits would drop by 25%. Not 100%. But "just" 25%.

But Congress has plenty of motivation to fix this problem. For all the polarization across the country, Social Security has bipartisan support. A fresh survey found that more than half of Democrats and Republicans are against cuts to the program. And last year, research from the nonpartisan Pew Research Center reported 74% of Americans think future benefits should not be cut at all. Among Democrat-leaning Americans, 78% are against any cuts, and among Republicans, 68% said benefits should not be cut.

The reality is that benefits will likely need to be reduced to solidify the program. But the odds of those cuts falling on people in retirement are pretty slim. Back in 1983, Washington had to reform the program (For the record: Republican White House, Republican Senate, Democratic House. And a deal was done.) and the changes did not upend benefits for retirees. People who were 23 or younger that year were told their FRA was going to rise from 65 to 67. That's in fact a benefit "cut." But it was rooted in an important truth: Folks in their 20s had a longer life expectancy.


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