Popular as it is to complain about government programs, Social Security might be one of those programs that is worthwhile. As outlined in the previous post, as a whole Americans have done a poor job of saving and Social Security is the only thing keeping them out of poverty. Poverty among the elderly has greatly declined since the institution of the Social Security system. For instance, the 17% decline in elderly poverty between 1967 and 2000 is credited to improvements in the Social Security system.
As widely reported, Social Security is in trouble. But in a worst-case scenario where nothing is done to address the issue, the program still has enough money coming in to fund 75% of distributions. In fact, the Social Security office uses this scenario, as one of three, in analyzing the “return” one can expect from Social Security contributions (FICA).
The Administration’s analysis came up with the following:
First, in none of the 891 calculations did the hypothetical worker receive an estimated real rate of return that was negative. In other words, all hypothetical workers in all scenarios were estimated to receive a rate of return that at least equaled the projected rates of inflation. The estimated real rates of return ranged from an annual rate of 0.04 percent to 9.19 percent per year. It’s instructive to look at the circumstances of the highest and lowest estimated rates of return. (emphasis mine)
I realize that the Administration is a poor source to analyze its own program, but even taking the analysis with the proverbial “grain of salt”, and also realizing the poor state of most American’s savings, I think Social Security, flawed as it is, is a worthwhile and necessary program.
Since the average Social Security payment is $1,341, is received for a lifetime, and indexed for inflation, consideration should be given for this important financial decision (FYI-the maximum payment amount is approximately $3,538, though rarely obtained). Initiating payments before full retirement age (which is different for different ages) results in a reduced benefit whereas waiting up to age 70 results in a larger benefit. Though rarely enacted, waiting until age 70 to begin benefits is usually best. The following chart is a representation of distribution of claiming ages.
Age Distribution of Individuals
Claiming Retired-Worker Benefits, 2013
Source: Calculations from US Social Security Administration (2015a), Alicia H. Munnell and Anqi Chen “TRENDS IN SOCIAL SECURITY CLAIMING”, Center for Retirement Research of Boston College
Existing retirees, or those who plan to retire within the next 10 years, should not experience any change in the system. For those of us 10 years or further from retirement, change is expected. Retirement ages can be extended or taxes can be increased on payments and/or “contributions” (FICA tax-which stands for the federal insurance contributions act and is currently 6.2% of wages for employees). Regardless, the majority of the projected payments are expected to be made.
A good decision with respect to the timing of claiming Social Security is best done holistically-looking at one’s entire financial picture. Investments, estate planning, insurance, taxes, etc., are all part of a comprehensive, holistic financial planning decision. Let us help you with this important financial decision.