Social Security: How secure and when to take it

Posted: January 29, 2013 in Money

cat food eating

Cat food.  It’s what’s for dinner.

Back in the early 1980s I remember railing against Social Security to my mother who was on it. She’d grown up with the specter of little old ladies living on cat food.  That was a real possibility when she was a girl and the elderly were the poorest group in America.  I explained to her that if I and my two sisters were let off the SS hook we could not only give mom more than her monthly check, we’d have extra left to feather our own nests.  She wasn’t buying it.

And I wasn’t buying it, either. I never figured Social Security would be there for me.  All my financial planning has been based on the idea that if it wasn’t, no problem.  If it was, that would be a pleasant surprise.  Well, Surprise! Now I’m just a few short years from collecting and a surprisingly hefty amount at that.   Considering what we’ve paid in and assuming we live long enough, it turns out to be a pretty sweet deal. I hadn’t counted on the power of the AARP:  The most formidable lobby in history.

 retired couple

No cat food for these folks.

Us geezers are now the wealthiest group in America.

—A little bit of history.

Social Security was born in 1935 during the depths of the Great Depression.  Those hard times devastated everybody, but none more perhaps than the elderly who were no longer able to work even in the unlikely event work might be found.  Many were literally living on cat food, if that could be had.

Back in those days, life expectancies were considerably less. Now figuring this can be tricky as the biggest reducer of average life expectancy is deaths in childhood.  But if we look at the life expectancies of people who have survived to the age of 20, we get a more useful number. In 1935, for men the average was around 65, for women about 68. Since then, life expectancy in the USA has continued to expand. Here’s a cool tool for looking at this: http://mappinghistory.uoregon.edu/english/US/US39-01.html

From those numbers it’s easy to see that setting the age to collect Social Security at 65 was a pretty good bet for the system.  All workers would pay in, relatively few would live long enough to collect and then only for a few years. This worked so well, in fact, (with some fairly minor adjustments along the way) that it was only around 2011 that the money flowing in stopped being more than the money being paid out. So well the total surplus is currently around 2.7 trillion dollars.

—The times they are a changin’.

bob_dylan1

“We were all so much younger then…”

But now the wheel has turned. The huge baby boom generation that has been paying in these surpluses has begun to retire. In addition, they are living a whole lot longer. Going forward, if nothing changes, the system will be paying out a whole lot more than it takes in. It looks like this:

1935-2011:  Annual surpluses build and end up totaling about 2.7 trillion.

2012-2021: Annual payroll taxes fall short of the annual payouts.  But the ~4.4% interest on the 2.7T will cover the gap.

2021-2033:  The interest payments will no longer be enough to make up the payout difference and we’ll start drawing down on the 2.7T.

2033:  The 2.7T is gone.

After 2033:  The payroll taxes then collected will only be enough to cover 75% of the benefits then scheduled to be paid out.

—Where exactly is this 2.7T?  

The 2.7 trillion dollar surplus is commonly referred to as the Trust Fund and it is held in US Treasury Bonds.  This, by the way, is about 16% of the roughly 16 trillion-dollar US debt.  In a real sense we owe it to ourselves.  In fact, about 29% (4.63T) of our 16T debt is owed to ourselves in this fashion:  Social Security, Medicare and the balance in Military and Civil Service Retirement programs.  Only 1.1T/8.2% is owed to China, the creditor we hear most about.  We owe Japan about the same.  If you’re curious, here’s a breakout:  http://www.mygovcost.org/2012/09/16/who-owns-the-u-s-national-debt-summer-2012-edition/

—Does this 2.7T really even exist?

You’ve probably heard scary talk that this Trust Fund doesn’t really exist.  That the government has already spent the money.  Well, yes and no.

There is no “lock box” somewhere stuffed with these:

$1000 bill

$1000 bill

Or these:

$5000

$5000 bill

Or these:

$10,000_bill

$10,000 bill

Or even these:

$100000

$100,000 bill

It is in a whole bunch of these:

TreasuryBond

US Treasury Bond

*For bonus points, can you name the guys on those bills?  Without consulting your Uncle Internet?

To answer the question, “Is the money really there?” you need to understand a bit about what bonds are and how they work.

Anytime any entity sells a bond it is to raise money it intends to spend.  The bond and its interest are then paid back with future revenues.  This is how bonds work.  As it happens US Treasury Bonds, what the Trust Fund holds, are considered the safest investments in the world.  Backed, as the saying goes, by “the full faith and credit of the United States Government.”  Of course, that’s us, the US tax payers and the same folks owed most of the 2.7T.

So the US Treasury Bonds held by the Trust Fund are real things with real value.  Just like the US Treasury Bonds held by the Chinese, the Japanese, numerous bond and money market funds and countless numbers of individual investors.

—Yeah, well I’d still feel better if they hadn’t spent the money I contributed and if it really was cold hard cash in a lock box I could draw on.

Well, OK, but cash is a really lousy way to hold money long-term. Little by little it gets destroyed by inflation.

It is important to understand that any time you invest money, that money gets spent.  If you hold a savings account at your local bank, your money isn’t just sitting in a vault.  The bank has lent it out and is earning interest on it.  A portion of that is the interest they pay you.  Federal law does require that banks hold a portion of deposits as cash “in reserve” to be able to pay depositors upon demand.  If that demand exceeds what is commonly called “a run on the bank” occurs. Because most of it has been lent out and is not instantly available.

If that is an unacceptable risk, your alternative is to stuff your cash in your mattress or (much better) a safe deposit box.  Had the government done that, the Trust Fund would now be over-flowing with currency.  That is, pieces of paper money backed by, you guessed it, “the full faith and credit of the United States Government.”

At least the Treasury Bonds pay interest.

—When should I begin taking the money?

Once you reach age 62, you can begin receiving Social Security.  The catch is, the sooner you start, the smaller your checks.  The longer you delay (up until age 70), the bigger the check.  Of course, the longer you delay the fewer the years you’ll be collecting.

bomber

Catch 22.

Countless articles have been written about strategies attempting to answer the question as to when to begin receiving benefits.  All kinds of fancy, sometimes complex strategies, are described.  I’ve read a bunch and my view is in the end it’s really pretty simple:  Since the government actuarial tables are as good as they get, the payments are pretty much spot on with the odds.  Here’s what, in order, you have to ask yourself:

1.  When do I need the money?  If you genuinely need the money right now, nothing else matters. But if you can delay you might find some advantages.

2.  Do you think Social Security will collapse and stop paying? If you believe this, clearly you’ll want to collect while the collecting is good.  For what it’s worth, I happen to think you’re wrong and I’ll explain why further on.

3.  How long are you going to live?  The longer you live, the more advantageous delaying is.  The break even point between age 62 and 66 is around age 85.  If you think you’ll die before then, you might want to take the money sooner.

4.  Unless you are married and you were the higher earning spouse.  Then you also want to consider how long your spouse will live.  If your spouse is likely to outlive you, upon your passing he/she will be able to trade in their lower SS payments for your bigger checks.

For example, my wife and I are both in good health.  But looking at family histories, and because women outlive men, my best guess is that she’ll survive me. Maybe by as much as two decades. I figure I’m good to maybe 80-85.  Were I alone, I’d start drawing ASAP.  But she could easily see 95 or 100. When I die she’ll have the option of switching from her benefit to mine. Since mine will be larger, that’s what she’ll do. To maximize that check for her, I’ll delay taking my benefit until I’m 70.  She’ll start hers at 66.

Another thing worth considering: As we reach advanced age our mental acuity diminishes. Managing our investments becomes harder. We become more reliant on others. At that point, a monthly government check has more value than just the dollars.

Of course there’s no way to know what the future really holds.  The best we can do is play the odds.

—The odds look to me like Social Security is doomed.  I’m taking mine ASAP.

Armageddon_by_teddybearcholla

There are those who choose to take their benefits the moment they turn 62, even though the amount is reduced. Some simply need the money right now and have no choice. But others are acting out of fear. They believe Social Security will collapse in their lifetime and they want to get what they can while they can. I’m not worried. If you are 55 or older you’ll collect every dime. Here’s why:

1. Social Security is backed by the most powerful lobby in history: AARP.
2. Geezers are an increasing proportion of the population.
3. Geezers vote.
4. Politicians rarely try to take anything away from a large population that votes.
5. This is why all the possible solutions being suggested will affect only those age 55 and under.

—Well that’s all well and good, but I’m under age 55!  What about me?

For anyone 55 and over, Social Security has turned out to be a pretty great deal. But mine and the generations older than I are likely the last that will enjoy such lofty benefits. The system is in trouble and clearly changes will have to be made. For those under 55 today the deal is likely to be a lot less sweet. You can expect:

1. To get 100% of any promised benefits, but the promises will be smaller.

2. It will cost you more.  Income caps (the amount of your income subject to SS tax) will continue to be raised.  In 2003 the cap was $87,000.  For 2013 it is $113,700. That’s a trend that will continue.

3.  The “full retirement age” will continue to rise.  It used to be 65. For me it’s 66. For anybody born in 1960 or later it is 67.  Those ages will continue to rise.

4.  Benefits may become “means tested.”  That is, based on your need rather than what you paid in.

5.  Congress will continue to tinker and in the end Social Security will still be there.

—So, is Social Security a good deal?

Well, it kinda depends. For the fiscally responsible types who read this blog, probably not. If you took that 6.2% of your income you are compelled to contribute, along with the 6.2% your employer is compelled to kick in, and invested it over the decades using the strategies presented here, you’d likely be far, far ahead.  Plus your money would be in your hands and not subject to the whims of the government. But that’s just the few of us.

goofs

I’m realistic enough to know most people are goofs with their money. Without Social Security many would be back to living on cat food. Not only would the rest of us have to read about their sad plight, something much more draconian than Social Security might well be implemented to remedy the situation. So, yes, for most people it will turn out to be a good deal. And probably for society as a whole. But not for you. Or me.

—Recommendation

Plan your financial future assuming Social Security will NOT be there for you. Live below your means, invest the surplus, avoid debt and accumulate F-You Money. Be independent, financially and otherwise. If/when Social Security comes thru, enjoy.

—Want to know where you personally stand with Social Security right now?

Go here:  http://ssa.gov/myaccount/

*As for those guys on the currency:

$1000: Grover Cleveland

$5000: James Madison

$10,000: Salmon P. Chase**

$100,000: Woodrow Wilson

Oh, and that’s Teddy Roosevelt on the $1,000,000 Treasury Bond.

**Chase is one of three guys on US paper currency who was not President.  He was a Senator, OH State Governor, US Treasury Secretary for Abraham Lincoln (probably tough years to have that job) and Chief Justice of the US.  But never President.  The slacker.

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Comments
  1. chronicrants says:

    I’m having trouble understanding the purpose of a $100,000 bill, or even a $5000 bill. Why would those exist? People don’t carry them around, do they? It’s just so unfathomable to me.

    Thanks for the SS post Jim! I’ve been excited to read it ever since it appeared in my Reader :) Your advice aligns with my own thinking – to plan as if SS won’t be there (I’m late Gen X) but I’m still nervous about it. I spend below my means, sure, but what if I can’t save enough? I think the main problem is that the timeline is so huge. I won’t reach standard SS age (whatever that may be by then) for another 35 years or so, and then I expect to live at least another 25-30 years beyond that (lots of longevity in my family) so it’s a bit daunting. But I know I’m ahead of things. My thinking is “wow, how will I manage to save enough by then?” whereas a lot of people my age are saying “that’s so far away, I don’t need to worry about it yet.” I worry for them, because SS really may not be enough and I don’t want to see anyone eating cat food. I may have to pass this post around and hope that it gets through to at least one or two people. Thanks for writing it :)

    • jlcollinsnh says:

      Hi CC….

      While no one can predict the future, my guess is you’ll be just fine. You are all ready thinking about these things, and planning. It really is simple:

      Live on less than you earn.
      Invest the difference.
      Avoid debt.

      Learn to be flexible. Live your life and learn new things. You’ll be able to handle what comes.

      I tell my daughter: Plan your life, work and dream it. But spend not a moment worrying about it. Worry does only harm and whatever we worry about is seldom the problem we actually face.

      • chronicrants says:

        Thanks! My big concern is saving “enough,” since working into my 60s (or probably even into my 50s) won’t be an option due to health problems. But you’re right, I need to just do what I can and not worry. I come from a long line of worriers, though, so it’ll take some practice to learn not to. :) But I appreciate your last lines – very wise!

  2. Shilpan says:

    our beloved Fed can print money, so no worries on the credit worthiness of our borrower. :) The only way to avoid Trust fund depletion after 2033 is to add more young workers to pay for the retirees. Unless we start bringing high skilled young immigrants, the picture depicts a rather sad story going forward for the future SS recipients who are in their 30’s and 40’s now.

    • jlcollinsnh says:

      Hi Shilpan!

      As Ruth points out in her comment below: “But the Millennials, the generation after X (b. 1981-2000 I think), is bigger even than the Boomers.”

      That, along with an influx of young and talented immigrants, as you point out, are what make me optimistic. Of course, we might have to work a lot harder to attract those immigrants. With the world economies improving, staying in their home countries is ever more appealing for them. And those countries are working harder to keep them.

  3. Chris says:

    Since 1950, there’s actually been at least 5 non-presidents on US Currency:

    Salmon P Chase ($10,000 bill), Ben Franklin (half dollar coin and $100 bill), Susan B Anthony $1 coin, Sacajawea $1 coin, and Alexandar Hamilton ($10 bill)

  4. Sean says:

    Oh, and by the way, you might actually be better off with the mattress idea than the safe deposit box idea, at least in California: http://abcnews.go.com/GMA/story?id=4832471&page=1

  5. Sean says:

    Side note: It’s sadly appropriate that good old Woody Wilson is on the $100,000 bill:

    “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
    –Woodrow Wilson, after signing the Federal Reserve into existence

  6. chenzhaowei says:

    I think Social Security would have been a great idea if AARP wasn’t such a powerful lobby group. The actuaries could see that lives were being extended, the Baby Boomers were going to eventually retire, and that population growth rates can’t keep exponentially growing to keep a ratio of maybe 3-4 workers for every 1 retiree.

    At the very least, I am grateful for Social Security’s less-discussed but potentially fraud-ridden disability program. I don’t know if I would expect with high probability that a regular insurance company to be able to give payments for maybe 60+ years to a person who was disabled. Or in any case, it is a good back up because the price of long-term disability insurance would be pretty high if it would not be supplemented with Social Security.

    • chronicrants says:

      Actually, private disability insurance policies do not pay out indefinitely. My current one only covers up to 7 years – and that’s if you can get them to pay you. They try to use every loophole to avoid it. SSDI will pay out for longer, but first you must qualify by having paid enough into the system, then your benefit is based on how much you paid in. It also does not account for cost of living. So for example, I am in my 30s and have paid into the system, but my benefit would not be enough to cover rent (even in a cheap place), food, utilities, and medical expenses. Forget about extras like a cell phone, trips to visit family, or a meal out with friends. It’s a great safety net for sure, but unfortunately it’s not the panacea that many would believe it to be.

  7. “Live below your means, invest the surplus, avoid debt and accumulate F-You Money.” I love that advice…though I have a hard time avoiding buying some decent bottles of wine! Nevertheless, living in a relatively dry Asian country has helped curb that itch. Appreciate the insight – simplifies the issue.

    I believe my grandfather had a 10,000 dollar bill. He was a wealthy man when young, though not so in his older years. Your advice should help me keep on a steady path.

    • jlcollinsnh says:

      Glad to hear it, VE…

      …although reading your blog it seems you figured out the good life without my help!

      Whatever happened to the $10,000 bill? I’ve only seen them in pictures. It is hard to imagine folks carrying around that kind of scratch. And when those were in circulation 10 grand was real money! :)

  8. DFW says:

    Great site. I’ve learned a lot from it and am rethinking my whole investment strategy. One question: could you give us your thoughts on life insurance as an investment vehicle to safe for retirement?

    • Prob8 says:

      Sounds like another post idea for JLC! In the meantime, I’ll share with you my thoughts on life insurance. Although financial planners may give a different opinion (and have to me over the years), I think you should use life insurance as a specific tool for a specific job. For example, young parents might own term life insurance during the childhood years to provide money for payment of debts and expenses in the unlikely event of an early death of one or both parents. I don’t think life insurance should be used as a tool for retirement savings. As this blog illustrates, there are other far more effective tools for meeting your retirement objectives.

      • jlcollinsnh says:

        Hi DFW….

        Thanks and glad you’ve found value here.

        Prob8 nailed it exactly and, if anything, I’d put it in stronger terms:

        Life Insurance is a terrible investment. So terrible the only people who seriously call it an investment with a straight face are the people who sell it.

        Life insurance has the characteristics of the worst possible investment: Lousy performance laden with exorbitant commissions and fees. Great for the sales person and the insurance company. Dreadful for you.

        The fact that they peddle such crap solely to line their own pockets is one of the many reasons I distain investment advisors, especially insurance sales people pretending to be investment advisors.

        https://jlcollinsnh.wordpress.com/2012/06/06/why-i-dont-like-investment-advisors/

        As Prob8 says, the only life insurance worthy of any consideration is Term Insurance. That is insurance designed and bought solely for the insurance itself. Insurance not trying to be an investment.

        Even here, I’d suggest you’d be better served leaning out your life and creating a savings rate of 50, 60, 70% of your income. If you are living on 30% of your income, and with the ever growing savings/investments the other 70% is building, in the unlikely event of catastrophe you’ll be even better positioned than with insurance.

        Life insurance, even the “good” term kind, is aimed at people spending every dime they make. That’s just not what we believe in around here.

        Buy term if you must. Dump it as soon as you are able. And never let anybody sucker you into lining their pockets by selling you insurance as an “investment.”

        • DFW says:

          Thanks for the prompt reply. Unfortunately I’ve already been suckered into buying 2 whole life insurance policies (one for me and one for my wife) and now I’m wondering if I should just cut my losses and get my cash back or sit it out for the long term. It’s too bad that I didn’t find your site earlier.

          • David W says:

            Cut your losses, a bad investment doesn’t become a better investment the longer you hold it. I’m actually working on a blog post right now comparing cash value insurance with investing and in almost every situation you are better off with term + investing in mutual funds. Check my blog in a week or so and you should find it (sorry Jim, hope you don’t mind the shameless promotion).

            • jlcollinsnh says:

              Don’t feel too bad, DFW. These things are enormously profitable for the insurance companies and they spend a ton of money suckering people into (marketing) them. I’ve met insurance sales people who honestly seem not to understand how bad these things are. Maybe they’re the first suckers. Or maybe I just want to believe that rather than believe so many people would willing sell such crap.

              Anyway as to what to do now, follow David W’s advice.

            • jlcollinsnh says:

              Thanks for weighing in David, that’s good advice.

              No problem, at least around here, mentioning your upcoming post. In fact, when it goes up please comment again with the link.

            • David W says:

              I speak from experience. I signed up for a whole life policy a few years ago but something seemed fishy so I started doing the math and comparing what I was told to what I was getting. I cancelled the policy after a few months and considered it an expensive lesson. Since then I refuse to touch any financial products that I don’t fully understand.

              • DFW says:

                Thanks for all the advice. I checked out your site David and it’s also great stuff. The hard part will be cancelling all the insurances. Those guys are very hard to argue with. That’s how they can convince you in the first place that you need their crap.

                • jlcollinsnh says:

                  Very true. They will make it as hard as possible. They don’t want to lose the income stream.

                  Here’s the key: Don’t argue. Demand. It’s your money. If they don’t cooperate threaten to go to your state insurance commission and file a complaint. If that doesn’t help, do it.

                  Good luck! and let us know how it goes.

                • David W says:

                  I didn’t even bother talking to the agent, I just called up the billing dept and told them to stop the automatic payments. I got a few calls from the agent which I ignored. I learned not to talk to them in person or via phone, instead I only email. That way there’s a record and they behave themselves. I also found it futile to try explaining my reasons, I just told them what I was going to do and when they ask why I say it’s my decision and I’m not going into the reasons.

                  • DFW says:

                    I did it! I got my money out of all the life insurances. Of course the agents tried to convince me that it was a huge mistake. They showed me many calculations based on current or projected returns, which made life insurance seem like the best thing ever. However, my response was always that I would only base my decision on guaranteed returns, which are much less favorable. Anyways… now I’ll invest in Vanguard index funds and recoup my losses as quickly as possible.

                  • David W says:

                    Good work, I remember feeling like a weight had been lifted off my shoulders. Probably a sign that something was wrong :)

  9. Ruth says:

    Thanks JL. I love your blog and find it very helpful. One question: in this discussion I always read about the Boomers being such a big group compared to Gen X. But the Millennials, the generation after X (b. 1981-2000 I think), is bigger even than the Boomers. If that’s true, won’t their earnings stabilize things, at least for a while?

    • jlcollinsnh says:

      Hi Ruth….

      You are absolutely correct and that fact is something the doomsday prophets fail to see or choose to overlook.

      Not only will their earnings help, but their investing for their own futures will likely drive the market much higher over the next couple of decades.

  10. I’m 22 and I doubt I will see social security by the time I retire. I wish I could have the 12% given to me. There are two kinds of people that I now in retirement: the first, social security is a bonus, the second, social security is the only cash flowing in. There are no in between people. I don’t understand why I have to spend the next 40-50 years paying for someone else’s retirement.

    • jlcollinsnh says:

      Ha! You sound like me in my 20s.

      I’m sure you’d do better investing the 12.4% on your own. But in the end you’d be surrounded by people who didn’t coveting what you have.

      If it’s any consolation one of the retirements you’ll be paying for, hopefully for the next 40-50 years is mine. Does that help?

      Didn’t think so. :)

  11. Prob8 says:

    Being one of the biggest programs we have, I can’t imagine SS going away. I agree that the benefits will be eroded over the years and the ages will go up. I’ve heard of the means testing ideas and, for me, that’s the biggest cause for alarm. I would hate to be denied a benefit because I was smart enough to invest like Uncle JLC. It’s also because I’m self-employed and pay both the employee and employer share of the SS tax – annoying.

    Anyway, another great post! I haven’t heard the word “draconian” since law school. Nice work.

    • jlcollinsnh says:

      Thanks Prob8…

      …always trying to dust off good old words around here.

      You make a great point about means testing and I thought about addressing it in the post.

      The prospect troubles me as it will fundamentally change the character of SS. As originally conceived, and so far, it is a retirement system that pays benefits based on your level of contributions. This is why my checks will be larger than my wife’s: I’ve paid more into the system.

      Once it becomes means tested it becomes fundamentally a wealth transfer welfare program.

  12. Executioner says:

    Benjamin Franklin wasn’t president. He’s on the $100.

    Alexander Hamilton wasn’t president. He’s on the $10.

  13. Monica Lewis says:

    P.S. Also involved in my situation is retirement before age 60 so some income other than a salary is required. I will have only SS or investments to choose from, and she recommended SS.

  14. Monica Lewis says:

    I always thought I would wait until my full retirement age –67– to begin drawing SS… Until I had a financial plan done by Vanguard. They recommended my taking SS at age 62. When I asked the planner why would I take it early and accept a reduced benefit, she explained that this allows more of my investment dollars to continue to grow from my age 62 to 67. I rarely, if ever, read about this strategy. Of course, it’s based on your investments growing during those years, which I believe they will.

    • jlcollinsnh says:

      Hi Monica….

      Once you step beyond looking just at SS other possibilities open up. The strategy suggested to you is a sound one and if recommended by a Vanguard advisor with intimate knowledge of your circumstances, I believe you can feel comfortable with it.

      The risk, of course, is that in any 5 year period your investments can go down as well as up. But overall and over five years you should be fine.

      The alternative, spending some of your investments until 67 and then drawing the bigger check, is the flip side of that same coin.

      • jlcollinsnh says:

        Perhaps the most important deciding factor, Monica, is largely still how long you’ll live.
        The further past your mid-eighties you see yourself, the more valuable the delayed and larger checks become.

        Another thing worth considering: As we reach advanced age our mental acuity diminishes. Managing our investments becomes harder. We become more reliant on others. At that point, a monthly government check has more value than just the dollars.

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