Why Social Security Is In Trouble

[FEDUKE404]

Viewpoints

I recently heard on the radio something to the effect that 60% of retirees apply for benefits early. Can anyone corroborate that? Many are convinced to draw early due to the rumors of impending insolvency and the fact that nothing is vested. If you start at 62, and drop dead at 63, your estate gets nothing. Better to take it and bank it.

While I have no meaningful facts to support any position, I do know that the vast majority of my clients have generally chosen to start their SS benefits as soon as possible, usually at age 62. I never put myself into a position to "advise" them what they should do, but if asked I will tell them the pros/cons of waiting.

A few clients are continuing to work and have high W2 income, so waiting until nearer full retirement age is almost a no-brainer for them. A couple of clients have serious health problems, so they see the opposite side of the waiting option.

As far as "recovering" what you paid in, no one has quite mentioned the time value of money issues. I remember making $44/week for a full-time job in the mid 60s.

The other problem with the system is a (single) person without dependents who decides to wait until age 66 to start benefits, but dies in a car wreck at age 65, never sees even 1¢ of his/her payments into the system.

FE

[JohnH]

As far as "recovering" what you paid in, no one has quite mentioned the time value of money issues. I remember making $44/week for a full-time job in the mid 60s.

FE

I think you can approximate the time value of money by adding 1-1/2 years to the straight actuarial payback period for each 1 percent of earnings you assume. So if you assume a 4% earnings rate on the funds received and invested, a payback period of 77 years would stretch to 83 years. (you might want to check my math, but I'm pretty sure that works)

I did some more reading on the interplay between waiting vs benefits (back to Sandy's question) and it appears that for anyone born after 1943, you can assume an 8% increase in benefits for each year they wait after age 62. Interestingly enough, full retirement age isn't the end of the story. The 8% per year continues in a straight line all the way to age 70. So the same rationale which would encourage someone to wait until age 66 would also compel them to consider waiting 4 more years, assuming good health, adequate financial resources, etc.

[Black Bart]

One thing that ticked me off was finding out that if a parent with minor children is collecting SS...for example someone who has kids late in life or a 'second family', the kids automatically get SS benefits too. WTF? Why is this? What's the point? If you haven't learned how to keep from having kids by the time you get that old, you deserve to have to support them on whatever you make. And, of course, this is usually guys with much younger wives...who are still of working age, and should be, what with geezer able to sit at home and take care of the kids.

This also applies to grandparents who are raising grandkids.

And parents on SS disability.

But don't get me started......................

No question that money's being thrown away -- I just wish some of it could go to better uses and places. Several of my clients are deserving grandparents forced to raise grandkids because their own sons and daughters are too sorry to take care of them.

Unfortunately, those sons and daughters get to booze/dope/party it up on their checks and the kids' checks while nana & pop get the responsibility and the expenses. Of course there's the satisfaction of providing a decent home for the babies, but it's frequently a crushing financial responsibility in their old age, especially for those of modest means.

[Black Bart]

Hear! Hear!

Here's a link to an especially good discussion on Social Security. I respect James Kwak in spite of the fact that I sometimes disagree with him politically. Given all the drivel out there from Conservatives and Liberals, each pushing their own agenda for the sole purpose of gaining and holding political power, it's refreshing to read someone who actually takes the time to present well-reasoned opinions rather than the talking point of the day...

Social security aside for a moment, this is an especially good point about all reporting nowadays. It's to the point you wonder, "Is this the true story? I'd like to decide for myself what to think about this. Does an unbiased statement of facts exist anywhere?"

At one time the newspaper weren't so bad, but here's a recent Associated Press excerpt about the Minnesota government shutdown: "The blind are losing reading services. A help line for the elderly has gone silent. Poor families are scrambling...the shutdown has ripped into the lives of people like XXXXX, a 39-year-old mother of eight facing the loss of about $3,600 per month in state child care subsidies...."

While AP's obtuse staff reporter might surely have found a more sympathetic figure (would that my life were "ripped into" by temporarily suspending $43K per year babysitting fees) and whether you're Dem/Rep, the "slant" seem fairly obvious.

[JohnH]

Social security aside for a moment, this is an especially good point about all reporting nowadays. It's to the point you wonder, "Is this the true story? I'd like to decide for myself what to think about this. Does an unbiased statement of facts exist anywhere?"

At one time the newspaper weren't so bad, but here's a recent Associated Press excerpt about the Minnesota government shutdown: "The blind are losing reading services. A help line for the elderly has gone silent. Poor families are scrambling...the shutdown has ripped into the lives of people like XXXXX, a 39-year-old mother of eight facing the loss of about $3,600 per month in state child care subsidies...."

While AP's obtuse staff reporter might surely have found a more sympathetic figure (would that my life were "ripped into" by temporarily suspending $43K per year babysitting fees) and whether you're Dem/Rep, the "slant" seem fairly obvious.

That's right Bart. While it is true that facts seldom speak for themselves (in a sense all facts are interpreted facts), I'd be content with reporters who simply acknowledge their biases as they present us with their version of the facts. Instead, we hear all this garbage about "unbiased reporting" when there simply is no such thing.

I tend to learn more from people who don't agree with me than from those who do, but it sure is time consuming trying to ferret out their slant at times. All the while they are either trying to deceive us by claiming to be unbiased, or they don't have enough sound judgement to recognize the fallacy of that claim.

[JohnH]

After thinking about this overnight, a question came to mind. If anyone cares to comment on this or to shoot it down, I'd like to hear the counter-argument(s).

I think this math would work across any range of benefits, but I'm choosing a relatively modest benefit for a 62-year-old of $830 per month, which is close to $10,000 per year. if that person delays filing for one year, they will see an increase in their benefits of $800 per year for life. Effectively, they have invested $10,000 for a single life annuity paying $800 per year. The math appears to be fairly linear, - for example, waiting another year would be equal to a 63-year-old making an investment of $20,000 for an annuity paying $864 per year, etc.

So ignoring taxes and other time value of money calculations, how does that stack up against a plain vanilla annuity sold by an insurance company? I looked up a random annuity calculator and found that if a male age 62 pays $10,000 for a basic annuity, he will receive $508 annually. A female age 62 will receive $445 annually. Based on this simple math, waiting to begin receiving benefits is clearly preferable if there is any way possible to do it.

[Burke]

I think this math would work across any range of benefits, but I'm choosing a relatively modest benefit for a 62-year-old of $830 per month, which is close to $10,000 per year. if that person delays filing for one year, they will see an increase in their benefits of $800 per year for life. Effectively, they have invested $10,000 for a single life annuity paying $800 per year. The math appears to be fairly linear, - for example, waiting another year would be equal to a 63-year-old making an investment of $20,000 for an annuity paying $864 per year, etc.

So ignoring taxes and other time value of money calculations, how does that stack up against a plain vanilla annuity sold by an insurance company?

From what I have seen lately, right now the best guaranteed return you can get on a new fixed-rate annuity is 2%. With surrender charges from 7 - 15 yrs depending on the contract & company. Older ones may have started out paying more in the past but the minimum rate guaranteed contractually is 3%, and that is what the annuitant is getting currently.

[JohnH]

From what I have seen lately, right now the best guaranteed return you can get on a new fixed-rate annuity is 2. With surrender charges from 7 - 15 yrs depending on the contract & company. Older ones may have started out paying more in the past but the minimum rate guaranteed contractually is 3%, and that is what the annuitant is getting currently.

Burke:

Annuities aren't something I investigate very much because I'm not a fan of any of them. (I've always said thatn I'll become a fan of annuities and whole life insurance when Consumer Reports becomes a fan) So I don't know how all of what you said would play out.

In simple terms, does that mean that $10,000 would only guarantee you $300 per year? (I'm ignoring the surrender charges because the "social security annuity" doesn't even offer the possibility of reclaiming any part of the principal.) Also, does the 3% change if the gender of the annuitant is taken into account?

[Burke]

Yes, at 3% guaranteed fixed-rate, the return on $10,000 would be $300. Most agents won't talk to you unless you have over $100K. They are always on the lookout for 401k rollovers for that reason. Or other annuities to replace. Even 2% can be attractive to certain persons who have a lot of cash sitting in checking (you would not believe the ones who really do -- and I mean a lot!) earning nothing, or perhaps a whopping .010% in savings.

[S T]

Chart

Thanks John for the link.
Amazing that if you wait an extra year the increase, or if you wait until Age 70.
Better increase than having your $$ in the bank at less than 1% - 2% right now.

Sandy

[erchess]

Unfair comparison

Comparisons between Social Security and investment vehicles are unfair to Social Security because whether anyone likes it or not Social Security is a form of forced insurance. Like all insurance there are people who draw much less than they paid in, people who draw much more than they paid in, and people who draw roughly what they paid in. For every dollar received by someone in excess of what they paid in there is a dollar of what was paid in that someone else did not receive. For those who don't like insurance or simply think it is wrong to force people to buy insurance that's a political argument that isn't supposed to happen on this board.

Another point is that until very recently Social Security took in more than it was having to pay out so the surplus was used as income by the government. The first reform of Social Security should be to calculate the total of this money and how much there would be if the funds had been invested in long term treasuries. Until ordinary tax revenues equal to that sum have been added to the Social Security Trust Fund it's ridiculous to suggest that the Fund is in trouble or that benefits be curtailed in any way.

[veritas]

Our national debt

is 14.6 trillion dollars. Around 5 trillion is intra-government debt. Of that 2.6 trillion is owed by the treasury to social security. The debt is in government notes and bonds which pays interest.

Therefore Social security is Peter and we are Paul.

Or maybe we are Peter and Social security is Paul.

I get confused.

[Mo Sheets]

Social Security....now or later

I believe two things should happen with Social Security....

1) ALL earned income should be taxable.....no ceiling. Just think, if the Hollywood actors and actresses had to pay Social Security on their $20 million per film, geez, an instant boost in revenue for the government.

2) The disability benefit should not be greater than what someone can draw when they retire. I can't believe the number of people in the rural county where I live who are collecting Social Security Disability......but they seem to be able to get side jobs that pay CASH. Very sad.

I am curious though as to the future life expectancy of people. With more and more morbidly obese people, I wonder if our future generations will even make it to retirement age. Very sad when a healthy person works their entire life, only to die at 60 years old and never get to collect on Social Security.

[JohnH]

Comparisons between Social Security and investment vehicles are unfair to Social Security because whether anyone likes it or not Social Security is a form of forced insurance. Like all insurance there are people who draw much less than they paid in, people who draw much more than they paid in, and people who draw roughly what they paid in. For every dollar received by someone in excess of what they paid in there is a dollar of what was paid in that someone else did not receive. For those who don't like insurance or simply think it is wrong to force people to buy insurance that's a political argument that isn't supposed to happen on this board.

Another point is that until very recently Social Security took in more than it was having to pay out so the surplus was used as income by the government. The first reform of Social Security should be to calculate the total of this money and how much there would be if the funds had been invested in long term treasuries. Until ordinary tax revenues equal to that sum have been added to the Social Security Trust Fund it's ridiculous to suggest that the Fund is in trouble or that benefits be curtailed in any way.

Edwin: Surprisingly, this discussion has done a good job of avoiding the temptation to descend into a political argument (so far). I think this is because the conversation has turned toward the very practical matter of what exactly one should do with the accumulated retirement benefit. Should they begin to withdraw it at the possible moment, or should they wait?

These are investment decisions which also have real tax consequences, so this is a perfectly legitimate area for discussion on this forum. Also, many of us have clients asking these questions and we should be prepared to give them reliable guidance - not investment advice, but giving them a well-reasoned way to make their decisions. From my personal experience and from the posts on this topic already, it's pretty clear that many people (maybe most) are making bad decisions in this area.

While I agree that Social Security is a different animal that standard retirement plan, the decision on when to begin drawing benefits can be evaluated in much the same manner as an annuity purchase when one reaches the decision point. There really isn't any other way to make the decision that I'm aware of, and is certainly much less biased than the info one is likely to get from an investment advisor who has a commission riding on the outcome.

[JohnH]

Mo: Interesting point there at the end. The single question that has resulted in the most sales revenue in history is "would you like fries with that?" So now you're suggesting that it may also offer the solution to our perceived Social Security funding dilemma.