Social security: Better to withdraw early?

[BTDretire]

I don't think you'd find a more motivated demographic than seniors who just saw their benefits cut, and they have fewer distractions to keep them from the polls. 

Personally, I think the retirement age ought to be raised again.  When Social Security was established, about 54% of men who survived to age 21 were expected to live to age 65.  Fifty years later, that number was 72%.  For those who hit 65, years-of-life-left has gone from 12ish to 18ish.  So you've got 33% more people drawing benefits, and doing so for 50% more years.  That's just the men.  More women are working and retiring, and tend to live longer, so there's that, too.

I agree, and it's time to start getting some changes made to make SS sustainable.


  Because my wife and I were very good savers over our life, I always thought we could have done much better investing the money (i.e. we would have) than
most people. But because most people wouldn't save it, forced SS tax is better overall for our society. Plus the added disability policy included. This from a smaller government guy. Now that I'm a few years from receiving SS, it is a comfort to know a steady guaranteed income is there to add to my own savings.
I have several ideas to lead to that, some more controversial than others.
Please feel free to add to my list. Or make comments either way.
 I think multiple changes are more palatable per individual, but creates many more separate groups to fight each one.

Raise the retirement age
Raise the cap
Raise the 6.2% tax
Only use 90% of the cost of living increases (time limited)
Keep a sharp eye for fraudulent disability claims (may have been done)
If your income is over $150k, tax SS at 50%. (uhh!)
 Bump early SS from 62 to 63 yrs old. (ya, I know)

[AdrianC]

Is the "lower earning spouse draws at 62, higher earning spouse draws at 70" strategy still viable under current rules?

If by viable you mean allowable, then yes.

Open Social Security: Free, Open-Source Social Security Calculator is a good resource for estimating the optimal strategy.

As always, optimal results depend on lifetimes and return rates.

Thanks for that.

Your spouse files for his/her retirement benefit at age 62 and 1 months.
You file for your retirement benefit at age 70 and 0 months.
The present value of this proposed solution would be $941,900.

Wow! Probably won't be that much by the time we get it, but still...surprising.

[BTDretire]

I just ran the program, but it leaves out your tax rate. I want to do Roth conversions,
 in the 12% bracket, Adding early SS payments to that may push me into the 22% bracket.
 So many inputs to the the solution.

 Can anyone tell me why the answer is often high wage earner at 70, low wage earner at 62 and 1 month.
 I understand 70 gets max SS if someone dies, but why is it always best to get the smaller payment at 62?

[sherr]

I just ran the program, but it leaves out your tax rate. I want to do Roth conversions,
 in the 12% bracket, Adding early SS payments to that may push me into the 22% bracket.
 So many inputs to the the solution.

 Can anyone tell me why the answer is often high wage earner at 70, low wage earner at 62 and 1 month.
 I understand 70 gets max SS if someone dies, but why is it always best to get the smaller payment at 62?

I don't know if it's "always best", but I think the idea is to ensure that you get *something* out of lower-earner's SS benefits. If lower-earner dies before drawing SS then poof, there goes that accrued benefit. If higher-earner dies before lower-earner starts drawing SS, and survivor benefits of higher-earner's SS is larger than lower-earner's SS benefit, then poof, same thing.

[MDM]

I just ran the program, but it leaves out your tax rate. I want to do Roth conversions,
 in the 12% bracket, Adding early SS payments to that may push me into the 22% bracket.
 So many inputs to the the solution.

Yes.  Not aware of any available program that considers all effects over multiple years.  It appears, however, that it's a relatively "flat optimum" - in other words, if one does reasonable things then the difference between the actual and optimal results are small in practical terms.

Can anyone tell me why the answer is often high wage earner at 70, low wage earner at 62 and 1 month.
 I understand 70 gets max SS if someone dies, but why is it always best to get the smaller payment at 62?

If the lower earner will switch to using 1/2 of the higher earner's benefit when the higher earner files, and the higher earner is somewhat older than the lower earner, this can be the answer.

[sherr]

I agree, and it's time to start getting some changes made to make SS sustainable.


  Because my wife and I were very good savers over our life, I always thought we could have done much better investing the money (i.e. we would have) than
most people. But because most people wouldn't save it, forced SS tax is better overall for our society. Plus the added disability policy included. This from a smaller government guy. Now that I'm a few years from receiving SS, it is a comfort to know a steady guaranteed income is there to add to my own savings.
I have several ideas to lead to that, some more controversial than others.
Please feel free to add to my list. Or make comments either way.
 I think multiple changes are more palatable per individual, but creates many more separate groups to fight each one.

Raise the retirement age
Raise the cap
Raise the 6.2% tax
Only use 90% of the cost of living increases (time limited)
Keep a sharp eye for fraudulent disability claims (may have been done)
If your income is over $150k, tax SS at 50%. (uhh!)
 Bump early SS from 62 to 63 yrs old. (ya, I know)

FWIW I agree with #1 and #2. There shouldn't be an income cap on the tax, and the retirement age should be raised by a few years (done in a way that doesn't screw over people who are really close to the current ages). And just like that, there goes the "underfunding problem".

I think the fear over the demise of Social Security is completely overblown, if not intentional fearmongering. Not to mention that putting little old grandmas out on the street is completely politically untenable for either party. I'm only 34 but I fully expect SS to be alive and well when I finally get around to drawing benefits.

Edit:
Oh, and yes we should definitely keep a sharper eye on disability fraud. When one of the most common categories of TV commercials is lawyers claiming to be able to get your previously-denied claim approved you know something's up.

[zolotiyeruki]

Raise the retirement age
Raise the cap
Raise the 6.2% tax
Only use 90% of the cost of living increases (time limited)
Keep a sharp eye for fraudulent disability claims (may have been done)
If your income is over $150k, tax SS at 50%. (uhh!)
 Bump early SS from 62 to 63 yrs old. (ya, I know)

FWIW I agree with #1 and #2. There shouldn't be an income cap on the tax, and the retirement age should be raised by a few years (done in a way that doesn't screw over people who are really close to the current ages). And just like that, there goes the "underfunding problem".

I think the fear over the demise of Social Security is completely overblown, if not intentional fearmongering. Not to mention that putting little old grandmas out on the street is completely politically untenable for either party. I'm only 34 but I fully expect SS to be alive and well when I finally get around to drawing benefits.

A good one-time fix for #1 (retirement age) would be to simply tie it to measured demographics.  For example, for anyone born in 1965 or later (currently 55 or younger), your retirement age could be set to the year when 54% of your cohort is still alive(to match the original demographics when SS was implemented).  Maybe add a ramp-up for that, to smooth the transition.

Agreed on #7 as well (bump the early retirement age), although I'd say it should simply shift so that it's #1 minus five years.

[jeroly]

Raise the retirement age
Raise the cap
Raise the 6.2% tax
Only use 90% of the cost of living increases (time limited)
Keep a sharp eye for fraudulent disability claims (may have been done)
If your income is over $150k, tax SS at 50%. (uhh!)
 Bump early SS from 62 to 63 yrs old. (ya, I know)

FWIW I agree with #1 and #2. There shouldn't be an income cap on the tax, and the retirement age should be raised by a few years (done in a way that doesn't screw over people who are really close to the current ages). And just like that, there goes the "underfunding problem".

I think the fear over the demise of Social Security is completely overblown, if not intentional fearmongering. Not to mention that putting little old grandmas out on the street is completely politically untenable for either party. I'm only 34 but I fully expect SS to be alive and well when I finally get around to drawing benefits.

A good one-time fix for #1 (retirement age) would be to simply tie it to measured demographics.  For example, for anyone born in 1965 or later (currently 55 or younger), your retirement age could be set to the year when 54% of your cohort is still alive(to match the original demographics when SS was implemented).  Maybe add a ramp-up for that, to smooth the transition.

Agreed on #7 as well (bump the early retirement age), although I'd say it should simply shift so that it's #1 minus five years.

We're a much richer nation than we were in 1935, but somehow we can't support the same retirement age as we did then? 

"Well, yes, a richer society should be able to afford a longer retirement, but...we can't because of long life expectancy!"

Oh, but...  the life expectancy of lower income Americans is now about the same as in the Sudan or Pakistan... https://news.harvard.edu/gazette/story/2016/04/for-life-expectancy-money-matters/

So how about we eliminate the cap, drop social security benefits for those with assets exceeding $10 million, tighten up on disability fraud, and raise the employer tax by 2%.  That should also allow us to raise the minimum payment for the people that need the money the most.

[American GenX]

Raise the retirement age

For FRA.  For people under 55, yes, but phase it in.  So, us older GenXers would have to wait until age 69 for FRA SS.
50-54 increase to 69
45-49 increase to 71
40-44 increase to 73
35-39 increase to 75

Raise the cap

Most people seem to agree with that one, but rather, "remove" the cap.

Raise the 6.2% tax

SS FICA tax is actually 12.4%, but half is paid by the employer (or yourself if self-employed).  Increasing that rate by 25% would make it 15.5%, split between employer and employee.  That seems reasonable.

Only use 90% of the cost of living increases (time limited)

I actually think we should go in the opposite direction.  SS COL increases are based on a CPI metric that doesn't correlate with the inflation experienced by senior citizens.  I think SS increases should be indexed to CPI-e.  As it is, it's like a yearly cut, in addition to the post-tax cut due to the higher amounts of SS income that are taxed each year.

If your income is over $150k, tax SS at 50%. (uhh!)

It's not a good idea to suddenly tax at such a high rate when you hit a cliff.  Instead, just phase in a deduction of SS benefits with higher income.  So, someone would start seeing a cut in their SS benefit when household income exceeds $50K/yr, and would phase out SS income completely at $150K/yr.

Early retirement increases would simply need to correlate with the FRA increase mentioned earlier, increasing it by the same number of years.

Someone else suggested adjusting benefits based on wealth.  It's much easier build on to our existing system that tracks income.  Also, we don't want to discourage people from saving when most people don't save enough as it is.  Someone with an $80,000/yr pension may not have much wealth but should still see a cut in their SS benefit.

Other good ideas:

Eliminate spousal benefits.  I'm NOT talking about spousal "death" benefits, but about the additional bonus SS benefits that a spouse can receive when they haven't worked to earn those benefits, simply because they are married to a living SS recipient.  Redirect those funds to people that actually paid into the system for 40+ quarters!  I do support death benefits.

Index the SS tax thresholds to inflation from when they were set in 1983 and 1993.  Social Security after-tax "net" benefits are already being "cut" and have been for years, but most people aren't aware of how this is being done.  The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983.  For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits.  If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits.  $25K in 1983 is worth a lot more than $25K in 2018.  Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.)  It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further.  The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed!  It's absurd, and those thresholds should be increased to reflect inflation since 1983.

https://www.marketwatch.com/story/people-who-saved-for-retirement-are-being-punished-by-social-security-taxes-2019-01-07
https://www.fool.com/retirement/general/2016/05/08/this-33-year-old-social-security-rule-is-wreaking.aspx
http://www.foxnews.com/story/2007/03/25/double-whammy-taxation-social-security-benefits.html
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html

This bill would address the higher yearly taxation problem some by increasing the 85% taxable threshold.

H.R.860 - Social Security 2100 Act

https://www.congress.gov/bill/116th-congress/house-bill/860

The 50% threshold isn't mentioned there, but this document states the 50% taxable threshold would be eliminated.

https://larson.house.gov/sites/larson.house.gov/files/Larson%20Blumenthal%20Van%20Hollen_2019%200918.pdf

It's not perfect because the new threshold would still not be indexed to inflation going forward.

[pecunia]

Maybe you could cut out some of the stuff that isn't pure retirement:

Social Security is more than retirement Many people think of Social Security as just a retirement program. Most of the people receiving benefits are retired, but others receive benefits because they’re:•   Disabled.• A spouse or child of someone getting benefits.•   A divorced spouse of someone getting or eligible for Social Security.•   A spouse or child of a worker who died.•   A divorced spouse of a worker who died.•   A dependent parent of a worker who died.Depending on your circumstances, you may be eligible for Social Security at any age. In fact, Social Security pays more benefits to children than any other government program.

Other programs could be set up for these needs.

[maizefolk]

I'd definitely cut the "retirement" portion of social security before I cut the parts of social security that provide a social safety net. In the latter group I'd include both the disability and survivors programs, but also the treatment of social security income up to the first bend point.

Social security pays out 90% of people's average monthly income up to about $960/month (a little below the federal poverty line). A person who earned $960/month for 35 years (enough to qualify for full benefits) has paid about $25,000 into the social security trust fund and their employer(s) have paid another $25,000. One they retire they'll receive a bit more than $10,000 in social security payout each year. The equivalent of buying an annuity paying out roughly 20% per year.

I think the investment we're makes as a society in not having the elderly starving or freezing on the streets is well worth it, but don't make the mistake of thinking social security works by paying people back what they put into the system.

[American GenX]

Oh, but...  the life expectancy of lower income Americans is now about the same as in the Sudan or Pakistan... https://news.harvard.edu/gazette/story/2016/04/for-life-expectancy-money-matters/

That doesn't surprise me.  I guess that helps to justify that those on the lower income end of the spectrum get a higher benefit ratio than higher income earners that live 10 to 15 years longer on average, and therefore more years to draw on SS.

[BTDretire]

Raise the retirement age
Raise the cap
Raise the 6.2% tax
Only use 90% of the cost of living increases (time limited)
Keep a sharp eye for fraudulent disability claims (may have been done)
If your income is over $150k, tax SS at 50%. (uhh!)
 Bump early SS from 62 to 63 yrs old. (ya, I know)

FWIW I agree with #1 and #2. There shouldn't be an income cap on the tax, and the retirement age should be raised by a few years (done in a way that doesn't screw over people who are really close to the current ages). And just like that, there goes the "underfunding problem".

I think the fear over the demise of Social Security is completely overblown, if not intentional fearmongering. Not to mention that putting little old grandmas out on the street is completely politically untenable for either party. I'm only 34 but I fully expect SS to be alive and well when I finally get around to drawing benefits.

A good one-time fix for #1 (retirement age) would be to simply tie it to measured demographics.  For example, for anyone born in 1965 or later (currently 55 or younger), your retirement age could be set to the year when 54% of your cohort is still alive(to match the original demographics when SS was implemented).  Maybe add a ramp-up for that, to smooth the transition.

Agreed on #7 as well (bump the early retirement age), although I'd say it should simply shift so that it's #1 minus five years.

On # 7, SS at 62, I know I'm in much better health and I'm younger at 64 than my parents were, and I think that is a general characteristic of US society. However, I'm certain there are people that are just worn out at 62 and we should have a way for them. Fine if you want to make sure they don't come out ahead of those that wait to 67.