Tuesday, August 28, 2012

Should you claim Social Security early?

Over at the Huffington Post, Tom Sightings gives four reasons why, contrary to common advice, you might want to claim benefits before the full retirement age of 66 (followed by my comments):

You need the money: Yes, if you need the money more at age 62 than you will at ages 72, 82 or 92, then by all means claim early. But there are fewer of those people than you’d think.

You’re in poor health: If you’re single and you KNOW you won’t be living that long, then claim early. But even for groups with known short average life expectancies – say, African-American males – there’s a ton of variation in life spans, and a higher Social Security benefit protects against outliving your assets. Moreover, if you have a spouse retiring later will provide her with a higher survivors benefit once you’re gone. You might want to delay retirement even if you know you won’t live past the average life expectancy.

You’re a financial genius: Delaying Social Security benefits gives you a guaranteed return on your money. By claiming early, you can invest that cash and maybe do better. Maybe.

If benefits change: This one is basically just wrong. First, Social Security reform is unlikely to substantially effect current retirees. And second, to the degree it does – say, by reducing COLAs – claiming early won’t exempt you. In fact, if you think COLAs might be cut that’s a reason to put off retirement, not claim earlier.

1 comment:

WilliamLarsen said...

"if you think COLAs might be cut"

This shows how ignorant the writer is about social security and COLA. Legislation in 1984 made a few dramatic changes to COLA, Trust fund and automatic benefit cuts.

SS-OASI has run negative cash flows in the past; 1957-1965, 1971-1983 when it exhausted the trust fund and borrowed $11 Billion from SS-DI and Medicare trust funds. Before you get your panties in a twist, SS-OASI paid back the funds borrowed with interest using the increased SS-OASI revenues from the 1983 tax and base increase, subjecting SS-OASI benefits to taxation and later on increasing the age of full age of retirement for those born after 1945.

However, in 1983 the complete and utterly drained SS-OASI trust fund woke people up to reality. What happens when the trust fund is drained again? FICA taxes are credited to the Trust fund periodically and if the trust fund had no funds in it, then there could be a period where full scheduled benefits could not be paid. So "United States Code Title 42, Chapter7, Subchapter VII, Sec. 9210 (a) and 911 (a) was passed.

It is not whether COLA will be reduced but when. With negative cash flows starting five years earlier than predicted a few years ago, Record low Treasury rates means dramatic reduction in interest paid to SS-OASI, higher unemployment (fewer workers paying SS-OASI taxes) and the fact that many over age 55 are not working (paying SS-OASI taxes) and the fact the SS-OASI benefit is skewed to pay higher replacement rates to lower wages (means the more you make, the lower replacement rate on wages earned/taxes paid, which means those over age 55 would not change their initial SS-OASI Benefit much based on age 60), it is near a mathematical certainty that COLA will be begin being phased out around 2025 and be gone by 2030. But it gets worse. In order to maintain the trust fund at 20% ratio to expenses, across the board cuts to ALL BENEFICIARIES will be done unless taxes are increased. Do you think workers will accept higher payroll taxes when SS-OASI begins to implode?

Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund.[4]

By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security's ability to pay future promised benefits is dependent solely on the ability to raise social security taxes.[5]

[4] United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a),

[5] United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a),