Each year, we hear dire projections on the solvency (or lack thereof) of the Social Security Trust Fund. This is of interest citizens of all wealth levels since we all have paid into this program and expect some return on that investment. But greater longevity for these citizens means that the Social Security system will pay out more than was originally projected. Something has to give. We will need to cut benefits or increase money flowing into the program if it is to be perpetuated into the future.
Today, Morningstar.com posted a short article on the subject that provides a good overview of the issue, while doing away with panicky language, and offering some potential solutions. The takeaway: This is a fixable problem, even if partisan politics mean that we will have to wait for a compromise solution well into the future.
In this article, Morningstar states that while the Social Security Trust Fund will be "insolvent" in 2035, "that doesn’t mean the program will have no money left to pay benefits. Rather, this forecast references the year when the enormous Social Security trust fund reserves (currently $2.78 trillion) would be depleted." After that, the money flowing into the fund would be sufficient to pay only 83% of current benefits.
Clearly a better solution is needed. So, what are the options?
Extending the age for receiving full benefits (full retirement age) is one such solution. A similar extension of the full retirement age was enacted in 1983. With citizens generally living longer, there is some logic to this thinking.
The other option is to raise the cap on income that is subject to social security taxes. Since inflation raises wages over time, it also makes some sense to index the taxable maximum income subject to social security tax.
With solid logic underpinning aspects of each approach, a compromise is the most likely outcome. Just don't expect action to be taken by Congress anytime soon.
Given the apparent state of flux for future benefits, consumer advocate Clark Howard was asked if this changes his recommendation of waiting to claim benefits until age 70. His answer make sense: “The odds overwhelmingly show that a lot of us are going to live a lot longer than we thought. So the best time to take Social Security is to wait as long as you possibly can."
Supporting this conclusion is data from the Social Security Administration. "The average 65-year-old man will live 84.1 years; the average 65-year-old woman will live 86.7 years." So, Social Security payments may last some 25 years, or more, for today's retirees, and those payments are indexed to inflation.
Since one can start claiming benefits at age 62, waiting until age 70 clearly has an opportunity cost of not receiving eight years of benefits! There is, therefore, breakeven age when the sum of higher benefits after age 70 is higher than the missed benefits before age 70. That age is 79.
Social Security is an important portfolio component for many individuals with unique (inflation indexing) characteristics. And while each recipient has their own unique set of circumstances, optimizing this aspect of their finances might be among the most important.