The October SMI cover article on Social Security's funding challenges (outgo will exceed income by 2034) prompted this suggestion from a reader named Rich:
As the "inevitable" changes to SS begin to be seriously considered or enacted, I would appreciate future articles from SMI that give substance to the question of when to begin to collect. I have generally been thinking that I would begin to collect at age 70 (11 years from now), but that may not be as wise of a course of action if future benefits are reduced.
Many people share Rich's concern. Before addressing it, let me suggest that if you haven't yet claimed retirement benefits and you are, say, 55 or older, you should read our July 2020 article, Projecting Your Social Security Retirement Benefits. That piece has details about free and paid online calculators that can help you figure out your optimal claiming approach (under current law).
As for how future changes in SS benefit and taxes may affect your claiming decision, answers are elusive. We don't know the details of what changes Congress will make or when.
But that didn't stop CNBC from publishing a story with the headline, "Fears About Social Security's Future Funding Shouldn't Prompt You to Claim Benefits Early." (As an aside, I wish the press wouldn't use the word "Fears" when a more apt description would be "Reasonable Concerns.")
The CNBC piece notes that both "optimistic and pessimistic experts see reason for hope with regard to the continued availability of [Social Security] benefits." One reason for hope, we're told, is that "lawmakers have traditionally stepped in to balance spending and revenues." In other words, lawmakers have raised taxes and altered benefits in the past and will do so again — eventually.
Dangerous to touch
Economics professor Larry Kotlikoff of Boston University, one of the nation's foremost authorities on Social Security, offered CNBC a more sober take. "This is a point in time when we need to have radical, fundamental fiscal reform, take the entire fiscal system and redesign it so that we get enough revenue so we don't impoverish our kids."
Maybe he's right, but there is zero political will for a "fundamental fiscal reform" of Social Security. That's because politicians know that messing with Social Security is an excellent way to lose an election!
There's a long-standing metaphor about this. As you may know, electric-powered train tracks have warning signs posted about the deadly "third rail" that carries high voltage. For years, Social Security has been called "the third rail of American politics — touch it and you die."
So don't expect Congress to do anything about Social Security until they have no choice.
As our October cover article points out, "predicting what might end up in future Social Security legislation is impossible." That, in turn, makes it impossible to choose the "best" approach for claiming benefits. While some of the likely legislative changes would make it advantageous to claim SS benefits earlier, others could make it more beneficial to delay. A few wouldn't change the calculation at all.
Financial writer Mike Piper, who has written extensively on Social Security, says one thing that would tilt the field toward claiming earlier would be a change in the index used to calculate the annual cost of living adjustment (COLA). Right now, those calculations are based on the Consumer Price Index (also known as CPI-W).
One proposal getting a lot of discussion...is to switch the calculation for Social Security cost of living adjustments to chained-CPI rather than CPI-W. This would result in benefits growing at a slower pace over time.
Such a change would make claiming early more advantageous than it currently is, because it would mean that, in inflation-adjusted terms, benefits received later are smaller than benefits received earlier. So the sooner you receive the bulk of your benefits, the better.
Piper also notes that "means testing" could make early claiming more attractive — but it depends on how such testing is implemented:
If the law implementing means testing includes a grandfather clause exempting people already old enough to receive benefits, the change likely wouldn’t impact the decision in any dramatic way. Similarly, if your income (or wealth, if that’s how the means testing is done) ends up being below the point where means testing takes effect, your decision process would be no different than it is now.
On the other hand, if means testing is implemented somewhere in the middle of your retirement and people old enough to receive benefits are not exempted via a grandfather clause, then exactly how it plays out for you will depend on the facts and circumstances.
- Having claimed earlier would mean that you had more years of non-means-adjusted benefits, which is good, but
- If means testing is done via adjusted gross income or "combined income" then having a larger portion of your income...in the form of Social Security benefits could actually decrease the effect of means testing on you. (In other words, waiting could have turned out to be helpful with regard to the means testing.)
No easy answers
On its face, Social Security seems like a relatively simple program — you pay in most of your life and claim benefits when you retire. But as you study the ins and outs of various claiming strategies, the situation gets murky, especially if you're married and must take two claiming strategies into account. That already murky situation is made murkier by the unknowables about future changes.
There's one more crucial unknowable too: How long will you live? If you claim at 62 and die at 66, you will have gotten a raw deal, even though you claimed early. If you wait to claim at 70 and then go on to live to 95, having enjoyed 25 years of the highest-possible inflation-adjusted benefits (however those adjustments may be figured), that's not bad at all!
So this is a case (as with your investment decisions) in which you must make a choice based on the information available at the time. Do your research, pray for wisdom, chose what seems to be the best path, and trust the Lord. In a world of unknowables, we can rest assured that He will never leave us or forsake us (Hebrews 13:5) and that His abundant resources will never suffer a shortfall.