As a financial adviser, one of the most common questions I am asked is: Will Social Security still be there, in its current form, in the next 15-20 years?
After all, consider the following statistics.
• The U.S. is undergoing the largest “graying” of its workforce. More than 10,000 baby boomers will be retiring each day for the next 15 years. These are people born between the years 1946 and 1964. More than 50 million of them are nearing retirement.
• They will join the approximately 54 million people who are currently receiving benefits, 74 percent of whom are retired workers and their dependents.
• Beginning in 2017, the maximum amount of earnings subject to the Social Security tax will increase to $127,500.
Fortunately, the U.S. government has many options at its disposal to keep Social Security fully functional. It can increase the full retirement age or raise the income amount subject to the tax, among other things. It depends on what the government sees as the role of Social Security.
Social Security then and now
The origins of Social Security can be traced back to the Great Depression. Established in 1935, the program’s main purpose was to provide a minimum floor of income support for all eligible workers. At that time, the average life expectancy of the working male was approximately 62 years, so the government set retirement at 65.
Times have changed. Now, the life expectancy of a working male is 84. At current rates, Social Security has enough money to pay out in full to every recipient until 2033.
That may be too soon for many readers. Reports and numbers indicate that without any overhaul or income added into the system, from 2034 to 2077 the payout will be close to 80 percent of what is paid in.
This is because the system is funded by employee payroll deductions. One portion of the relevant tax consists of an equal amount of employee income paid by the employee and employer. Self-employed people (freelancers, contractors and Uber drivers, among others) pay both the employee and employer portions. These benefits are calculated according to the 35 highest-earning years in the workforce and adjusted for inflation.
Types of benefits
The tax is popular because Social Security provides four types of benefits.
• Retirement benefits are for those who have worked in covered employment for many years. They are eligible to receive retirement benefits beginning at age 62.
• Medicare health benefits are for the spouse and minor children of any retired or disabled worker who qualifies for benefits.
• Survivors of a deceased worker covered by Social Security are entitled to income benefits. The surviving spouse is eligible to receive benefits until the youngest child turns 18.
• Disability benefits are for workers who make regular contributions but are disabled mentally or physically before reaching retirement age.
When to collect
Just because you turn 62, however, does not mean you can – or should – start waiting for the checks to roll in. For every year that you wait after age 62 to collect Social Security, you get approximately a 6 percent bump up annually until age 70. Where else can you find such an annual risk-free raise on your income, and from the government, no less? It pays to wait, if you can.
Be warned, however. Social Security benefits may be diminished if you return to work after age 62, and until Full Retirement Age after starting benefits.
Selecting Social Security benefits is not a simple matter. There are literally hundreds of ways to accept benefits, and the choices will have significant impact over the course of the retirement years. Millions of people rely on the system, and it is more complicated to change than simply pulling a plug.
It does not look like Social Security is going away anytime soon.
Arvind Ven is a Los Altos resident and financial adviser with Liberty Group LLC. Email him at [email protected].
