Social Security at 62 - Yes or No

[joeea]

No denying cuts need to happen.

Sorry, I can and do deny that cuts need to happen.

 

[Winemaker]

What the program was originally intended to be and what it has eventually become are quite different. If the jokers had stuck to the original plan they would not have to rob Peter to pay Paul...

A Ponzi will always be a Ponzi.... only this one is legal.

 

[Red Badger]

A Ponzi will always be a Ponzi.... only this one is legal.

Yup. And, let's add an additional layer of political shenanigans.

Social Security needed the backing of NC congressman "Farmer" Doughton, who was chairman of the House Ways and Means Committee. Doughton was cool to the proposed legislation, but he wanted the Blue Ridge Parkway to go from VA to NC; and to completely bypass the original route (that had a large section of the parkway winding through TN).

So, FDR got SS, and NC got ~250 miles of one of the most beautiful byways on the planet!

Sorry TN. But what the hell, the Great Smokey Mountains National Park is no slum either. We're happy to share that with y'all.

 

[Chuckanut]

Social Security needed the backing of NC congressman "Farmer" Doughton, who was chairman of the House Ways and Means Committee. Doughton was cool to the proposed legislation, but he wanted the Blue Ridge Parkway to go from VA to NC; and to completely bypass the original route (that had a large section of the parkway winding through TN).

My understanding is that the highway is also downhill both ways.

IMHO, I think it is prudent to plan on SS being cut about 30% sometimes in the 2020 decade. If it isn't, great. But, IMHO, given the current political environment any fixes will be delayed so long that a 'cut' (probably in the form of a tax increase on SS benefits) will be necessary as of the things done to shore up SS.

 

[Dtail]

My understanding is that the highway is also downhill both ways.

IMHO, I think it is prudent to plan on SS being cut about 30% sometimes in the 2020 decade. If it isn't, great. But, IMHO, given the current political environment any fixes will be delayed so long that a 'cut' (probably in the form of a tax increase on SS benefits) will be necessary as of the things done to shore up SS.

If they did change the taxes, I wish we would know now....
as this could influence the delay of SS equation

 

[WestUniversity]

https://www.forbes.com/sites/merril...lion-social-security-trust-fund/#44dac5134947

https://www.quora.com/Where-did-all-the-Social-Security-trust-fund-money-go

Here are a couple of articles about what the jokers are doing. Krauthammer and others have written similar articles about this particular issue...

 

[Rianne]

It would be nice if the SS trust fund earned more interest. I understand the trust fund was used for other purposes than SS. How does that get paid back?

If I'm wrong, correct me...if one earned $100,000 for 30 years, that contribution would be $186,000. Take into consideration interest on that. We should at least get paid back for what we contributed plus interest.

 

[Archman]

Exactly. That is something many people fail to take into account when they pontificate on how others should take SS. It seems to be a radical idea to some. Through humorous exaggeration I was showing my agreement.

Ah, I see the eek. Sorry, that I misunderstood you.

 

[Archman]

If the new workers don't pay SS taxes, but the earlier generation of workers are collecting benefits, who will pay the taxes that support those benefits?......

The earlier generation of workers. It's going to take some time.

 

[Archman]

It would be nice if the SS trust fund earned more interest. I understand the trust fund was used for other purposes than SS. How does that get paid back?

Social Security trust fund reserves are by law invested in US Treasury securities. So, this, in a way, it finances federal government spending. But this has nothing do with Social Security’s shortfall. Social Security still owns all that money and earns interest on it. The program’s financing problems arise instead from its benefits exceeding the revenue (including interest) that it generates.

 

[explanade]

It would be nice if the SS trust fund earned more interest. I understand the trust fund was used for other purposes than SS. How does that get paid back?

If I'm wrong, correct me...if one earned $100,000 for 30 years, that contribution would be $186,000. Take into consideration interest on that. We should at least get paid back for what we contributed plus interest.

I think a lot of people get way more out than they put in, including interest, due to longer life expectancy.

That is partly why funding may be outstripped by payouts in 20 years or so.

 

[corn18]

The problem isn't the wage base, the problem is the rate:

But it's easier to raise the wage base. Doesn't cause as much angst to tax the higher income earners.

Raise the rate, keep the increase in base tracking and raise FRA by a year or 2 over the next 20 years.

 

[Independent]

The earlier generation of workers. It's going to take some time.

Maybe you can provide some numbers.

 

[Independent]

Take into consideration interest on that. We should at least get paid back for what we contributed plus interest.

Certain types of workers get a better (expected) deal from SS than other types. Low income workers and married people generally do better than high income workers and single people.

In this report, a "money's worth ratio" above 1.00 means that the members of the group are expected to get an interest rate above the rates shown in Table B. Similarly, a ratio below 1.00 means they will get a rate below that table (not necessarily zero).

https://www.ssa.gov/oact/NOTES/ran7/an2017-7.pdf

 

[pb4uski]

As mentioned in the post above, deferring SS may allow us to spend more money early in retirement. It depends on the specific situation.

Deferring SS does allow one to spend more money in retirement. Take a simple example of a single 62 yo with $1 million and a PIA of $2k/month at age 66.

Option 1... they take $1,500/month or $18k/year of SS at age 62 and 4% WR on $1 million and spend $58k/year for life.

Option 2... they split their $1 million into $253,440* SS "replacement fund" and $746,560 retirement portfolio. The retirement portfolio provides $29,862/year at 4% WR. SS provides $2,640/month or $31,680/year... for a total of $61,452/year for life starting at age 62.

Under Option 2 they draw $2,640/month from the SS replacement fund starting at age 62 until it is exhausted at age 70, then SS benefits of $2,640/month start.

* $253,440 = $2,640/month of SS at age 70 ($1,500 PIA * (1+(8%*(70-66)))) for 96 months ((70-62)*12).... funding a "replacement" of SS at age 70 for the SS deferral years.

The person who defers gets to spend 6% more with the same risk of ruin.

 

[Winemaker]

The problem isn't the wage base, the problem is the rate:

But it's easier to raise the wage base. Doesn't cause as much angst to tax the higher income earners.

Raise the rate, keep the increase in base tracking and raise FRA by a year or 2 over the next 20 years.

But don't forget that chart includes the payroll tax reduction holiday passed December 2010 and lasted 2 years, IIRC.

 

[pb4uski]

..... If I'm wrong, correct me...if one earned $100,000 for 30 years, that contribution would be $186,000. Take into consideration interest on that. We should at least get paid back for what we contributed plus interest.

Assuming that you live to an average life span, you would get paid back what you contributed plus interest.

I once took my SS earnings and calculated the SS taxes that my employer and I paid each year (excluding Medicare taxes). Then take 80% of that amount... the 20% excluded relates to disability and life insurance benefits within SS... the remaining 80% relate to retirement benefits. At that point I know my year by year contributions for retirement benefits.

The value of my benefits can be estimated by my annual PIA divided by a 4% SWR since SS is COLAed.

Then solve for the rate of return... in my case it was 5.85%. Most people will be higher... I was a high income earner so mine would be lower because of the way retirement benefits are skewed to lower income earners (I get less in relation to what I paid in than a lower income earner).

So if I claim at my FRA and live until I'm 82 I'll get back everything that my employers and I paid in plus 5.85% interest.... if I live longer then more and if I die earlier then less.

 

[joeea]

Deferring SS does allow one to spend more money in retirement. Take a simple example of a single 62 yo with $1 million and a PIA of $2k/month at age 66.

Option 1... they take $1,500/month or $18k/year of SS at age 62 and 4% WR on $1 million and spend $58k/year for life.

Option 2... they split their $1 million into $253,440* SS "replacement fund" and $746,560 retirement portfolio. The retirement portfolio provides $29,862/year at 4% WR. SS provides $2,640/month or $31,680/year... for a total of $61,452/year for life starting at age 62.

Under Option 2 they draw $2,640/month from the SS replacement fund starting at age 62 until it is exhausted at age 70, then SS benefits of $2,640/month start.

* $253,440 = $2,640/month of SS at age 70 ($1,500 PIA * (1+(8%*(70-66)))) for 96 months ((70-62)*12).... funding a "replacement" of SS at age 70 for the SS deferral years.

The person who defers gets to spend 6% more with the same risk of ruin.

In your math, it appears that you assume your $1M is in cash and earns nothing?

And I'd argue that the person who defers actually has a lower "risk of ruin" due to a higher percent of income not subject to market risk and buffered from inflation risk.

I'm pretty sure I tend to agree with your high-level conclusion regarding deferring benefits. But I'm not sure your math helps the argument much. Folks tend to make this choice without regard to the math behind it and won't likely be swayed. "Bird in hand" isn't about math.

 

[rayvt]

Deferring SS does allow one to spend more money in retirement.

The person who defers gets to spend 6% more with the same risk of ruin.

Everything looks good if you look only at the plusses and ignore the minuses.

The two risks that you've ignored are:
1) Only the person who lives long enough gets the benefit of deferring.
2) The risk of SS benefits being cut in the future.

 

[pb4uski]

In your math, it appears that you assume your $1M is in cash and earns nothing?

And I'd argue that the person who defers actually has a lower "risk of ruin" due to a higher percent of income not subject to market risk and buffered from inflation risk.

I'm pretty sure I tend to agree with your high-level conclusion regarding deferring benefits. But I'm not sure your math helps the argument much. Folks tend to make this choice without regard to the math behind it and won't likely be swayed. "Bird in hand" isn't about math.

No, under the 4% rule in both cases it is assumed that the portfolio is invested and earns a market return. For the SS fund, I assume that it is invested in a CD ladder and earns interest that approximates inflation.

And you're right on the second part, people tend to make the choice based on emotion rather than math, especially the "I want my money back" crowd.

 

[pb4uski]

Everything looks good if you look only at the plusses and ignore the minuses.

The two risks that you've ignored are:
1) Only the person who lives long enough gets the benefit of deferring.
2) The risk of SS benefits being cut in the future.

Your first argument is nonsense, if you defer you get to spend 6% more as long as you live no matter how long you live.... so explain to me how that is a minus.

On 2, you are correct, I haven't factored the risk of SS benefits being cut in the future into account... but even with a future cut it still favors deferring.

If in 2034 benefits are cut 25%, the person under Option 1 can spend $53,500 annually (in 2018 dollars) and the person under Option 2 can spend $55,440 (in 2018 dollars), a 3.6% advantage.

 

[Independent]

Deferring SS does allow one to spend more money in retirement. Take a simple example of a single 62 yo with $1 million and a PIA of $2k/month at age 66.

...

The person who defers gets to spend 6% more with the same risk of ruin.

I agree with your math. I'll also note that people who defer are in better shape if they exhaust their portfolios because they have significantly higher SS benefits.

My post allowed for people who don't follow a 4% SWR (or a level spending FireCalc run). Some people here promote a fixed percent of portfolio spending pattern. Suppose they start with a 6% withdrawal rate. Unless I made a math mistake, the same approach gives a 2% advantage in the first year to the people who start SS early. ($78,000 vs. $76,500)

 

[RunningBum]

Your first argument is nonsense, if you defer you get to spend 6% more as long as you live no matter how long you live.... so explain to me how that is a minus.

On 2, you are correct, I haven't factored the risk of SS benefits being cut in the future into account... but even with a future cut it still favors deferring.

If in 2034 benefits are cut 25%, the person under Option 1 can spend $53,500 annually (in 2018 dollars) and the person under Option 2 can spend $55,440 (in 2018 dollars), a 3.6% advantage.

The worry about SS cuts is that they wait until 2034 and make an across the board cut at that time. I'll be 72. If I had taken at 62 I'd have received 10 years without cuts, but if I waited until 70 I'll only have received 2 years without cuts. I did a spreadsheet analysis on this last year. Assuming a 5% return on my investments, and 2% COLA increases in SS, my breakeven for taking at 70 is at age 84. If a 25% cut comes in 2034 (age 72 for me), with no provision for making things "fair", my breakeven moves to age 88.

Breakeven point may not be the right thing to look at for longevity insurance, but if someone has poor odds to live longer than the average, AND has a concern about how much money they will leave behind, taking it earlier in that scenario might make sense.

In another post in this thread you said

For the SS fund, I assume that it is invested in a CD ladder and earns interest that approximates inflation.

yet when you do pay-off-the-mortgage-or-not analysis you use your overall investment return rate. Why the difference? It seems to me that you are skewing factors to make numbers back up your side of the argument. Or am I confusing you with someone else?

 

[RunningBum]

If I use 2% for both my investment rate and inflation rate (SS COLA increase), my breakeven points are 80 without cuts, and 82 with cuts coming at 72.

 

[Chuckanut]

If they did change the taxes, I wish we would know now....
as this could influence the delay of SS equation

My best guess based upon nothing but my own observation of the political process and my gut feeling, is that they will 'means test' SS benefits. The more income you have, the bigger the tax on the SS benefit.