Author Topic: What do you think about this SS question?  (Read 2203 times)

psu256

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What do you think about this SS question?
« on: July 02, 2013, 01:03:12 PM »
I'm far from SS-age, but I wondered what some people here might think about the first question responded to here:
http://www.pbs.org/newshour/businessdesk/2013/07/is-it-worth-taking-social-secu.html

What would you do? Do you think that you could do better than the government's 3%?

footenote

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Re: What do you think about this SS question?
« Reply #1 on: July 02, 2013, 01:09:52 PM »
My reaction to your question is "Mu!" which (loosely translated) means "Wrong question!"

Whether you can "beat" 3% in the short term isn't the point. What's your anticipated lifespan (to the best you can estimate given your family history and current health)? Can you guarantee you will beat 3% for the 30 years you will live if you take SS at 62 and live to 92?

pom

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Re: What do you think about this SS question?
« Reply #2 on: July 03, 2013, 02:32:09 AM »
It makes me go crazy when people assume that the world will be static in the next 30-40 years. Look back 30 years ago, it was the cold war and the disco era.

Nobody can guarantee anything, even social security is not guaranteed.

Here in France they are discussing not increasing social security with inflation for the next 2 years. I am pretty sure that the US will have to do this kind of stuff sooner or later. Don't get me wrong, I am not one of those loonies that think that social security will pay nothing but, since contribution will only cover 75% of the cost, I think that it is fair to assume that:

- the contributions will rise, or
- the benefit will go down, or
- both

Most likely it will be both as it the path of least resistance. I would not be surprised if the way to cut back will be through partial indexation; instead of full indexation (lets say index the first $1000 but not amounts above that).

My conclusion: take the money asap and run because investment return within the social security system is likely to be really low, maybe even zero. That is not very hard to beat in the market.

fiveoclockshadow

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Re: What do you think about this SS question?
« Reply #3 on: July 03, 2013, 04:32:11 AM »
My conclusion: take the money asap and run because investment return within the social security system is likely to be really low, maybe even zero. That is not very hard to beat in the market.

The issue with this logic is that changes to SS have been and will likely always be slow.  Because for such a large fraction of the population it is the only retirement they have it is politically untenable to change it for those in retirement or close to it (beyond fussing with the COLA, which would impact early and late retirees identically). 

You must also consider that despite all its flaws when it comes to legislation like this congress is very careful about not creating "gotchas" or "moral hazard".  That anything they came up with (which would be some of the biggest legislation to come out of congress in ages) would screw over those who waited to draw compared to those who started to draw early is really unimaginable.

So while I think the logic that contributions will rise and benefits will go down over time is a foregone conclusion I don't think that at all implies drawing retirement early is the correct option out of fear the system will change under your feet.  By the time you are close enough to make such a decision your benefits will be fixed and no one is going to be significantly changing the benefits on you - those much younger than you of course still being fair game.  As an example, note the eligibility age change and how much lead time there was on that.

Besides, the concept of getting better return than the penalty just doesn't work out when you do the math.  The penalty for withdrawing at 62 vs. 67 is 30% or a 5.4% annualized return with inflation adjustment on top of that with extremely low risk.  Are you going to find an investment with that rate of return after inflation with anything close to a risk as low as SS?  Absolutely not.  And at that age you should have a much lower risk portfolio anyway.  SS is effectively offering you a 5 year Treasury at 5.4% above inflation - that's an insanely good investment for a retiree.  Drawing early to try to earn more than the penalty is bad financial move plain and simple unless you expect to not live for very long or you want to possibly leave slightly more to your heirs in certain cases.

The danger with "nobody can guarantee anything" is that such thinking is equivalent to ignoring risk entirely - a huge pitfall in any investment strategy.  The question is degree of risk, and SS - even with potential legislative changes - is an incredibly secure investment, on the order of treasuries - while alternatives that return anything close to the early withdraw penalty are vastly more risky.
« Last Edit: July 03, 2013, 04:34:04 AM by fiveoclockshadow »