Top Social Security Questions, Answered
Mark Miller tackles delayed filing, break-even points, and means testing.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Morningstar.com contributor Mark Miller focuses on Social Security for us, and he gets lots of questions about the program. He is here with me today to tackle some of the most common ones that he receives.
Mark, thank you so much for being here.
Mark Miller: My pleasure, Christine.
Benz: Mark, you always do receive an avalanche of comments and questions whenever you talk about Social Security. We wanted to talk about some of the ones that you receive the most frequently. Let's start with the question about whether people should follow the wisdom to delay Social Security, filing at least until their full retirement age or maybe even after. A question that I receive a lot, and I know you do, too, is, why not just file early or maybe full retirement age, and then invest the money? Isn't that a better strategy? Let's talk about that.
Miller: That's the good problem to have is if you can actually afford to bank your Social Security and invest that. The reality is, the lion's share of retirees can't do that. Most people live on Social Security. The idea of that as generalized advice just doesn't hold up. I suppose, if you wanted to take it early and invest it and you don't need the money for anything else, you might come out ahead on that. The way I would look at it is, every year of delay is roughly an 8% increase in the amount of benefit you will receive monthly for the rest of your life, 8% a year up until age 70. That's the number to beat.
Benz: And it's guaranteed by the way, that return is guaranteed.
Miller: That's where I was going. You've got to beat that number with a risk-free investment in my view. Show it to me.
Benz: Right. Yields are going up, but not that high yet.
Miller: If somebody has got that, I would like to know about it, personally.
Benz: Me too. Let's go on to the next question, which is, what is the break-even rate? For example, if you tell me that I should delay filing to age 70, how long do I have to live beyond that to make that the better decision versus claiming early or maybe claiming at my full retirement age?
Miller: I'll answer that question only if you let me first say I hate the question.
Miller: Social Security is social insurance. It's insuring against the risk. The risk is lost income. Especially that risk increases with age. If you think about longevity risk, kind of a hot topic out there right now, even relatively affluent households can exhaust their savings when they live to very advanced ages, especially women. You picture somebody in their 90s, savings are all gone, a maximized Social Security benefit, with inflation protection, by the way, because that's built in, is highly valuable.
Benz: That lifetime benefit.
Miller: Right. So, rather than thinking about it from this break-even standpoint, I prefer to think about it as longevity insurance. That's I think a better approach in many cases. You always have to caveat it and say, if you are in poor health, you really desperately need the money--sure, go ahead and file for your benefits.
Benz: Setting aside that you think it's not such a great question to think about break-even rates, people still want to know what are the break-even rates if they file at, say, full retirement age and then file maybe until age 70.
Miller: Delaying from 62, the earliest age, to 66, your break-even age is roughly 78. Delaying from 66 to 70, the last year that would make any sense to delay, the break-even age is going to be 84 or 85, depending on a lot of factors that we don't have time to get into.
Benz: You want to think a little bit about your own longevity, especially if you are planning to delay until age 70.
Miller: Yes. For couples, we have talked about this many times here, too, you should have a couples' approach to planning. It is a whole set of strategies that can be employed there with, once people do reach full retirement age with a delayed claim for the higher-earning spouse in order to bring up the lifetime earnings of the couple, and particularly, the woman who is likely to outlive the man.
Benz: So, ideally, a couple should harmonize their …
Miller: Yes. I think about that rather than break-even points.
Benz: One question you say get a lot, Mark, relates to how to fix Social Security and some strategies that might be in play down the line to address shortfalls in terms of Social Security's kitty. Let's talk about means testing. You say you get that question a lot.
Miller: Yes. I call it the Warren Buffett question. The question is, Warren Buffett and Bill Gates don't need Social Security. Shouldn't we means test Social Security so that they don't get anything, is the implicit question. There's a few things about this. One is, there aren't that many Warren Buffetts in the world. Even theoretically if you cut Warren Buffett's, I assume he gets a maximum benefit …
Benz: I would think, yes.
Miller: About $2,400 a month. Even if you take back his $2,400 a month, there is not enough there to make a difference in the solvency of Social Security. It's a gigantic system. There's just not enough mega billionaires to make that difference. It's a way of arguing something with an extreme that the math doesn't play out.
More to the point, sure, he doesn't need it. But many people who do have significant assets will need it for the reasons we were discussing--longevity, exhaustion of assets. And then third, a thing that people don't understand is Social Security really already has some means testing built into it. It's done two ways. One is through the taxation formula, which takes back some benefit for higher-income seniors. The other thing is that Social Security, the way it pays benefits out is it uses a bracketed approach. It's almost like an upside-down income tax bracket. The technical term for it is bend points. What it amounts to is, people who are sort of low income or sort of into middle-class levels of benefits, get about a 90% return on their earned credits. Then there is another bracket on the pyramid that reduces for the next tier of your benefit, you get 32% of that back. And then outside of that it's 15%. It's pyramided in this way.
The greatest level of income level replacement that goes on in Social Security goes to lower- and middle-class households. The program is designed primarily targeting middle-class and lower middle-class households, working households. That's really what it's designed to protect primarily. There already is means testing in the program.
There are two other things about means testing that concern me. One is, I think, as soon as you start talking about doing more means testing, you are on a slippery slope away from our conception of Social Security as a universal earned benefit program …
Benz: Something that we all get if we work and pay into.
Miller: We all get and we all pay into, and it starts sounding more like welfare. Well, who needs it, as opposed to who earned it? I think it's a really slippery slope. I also don't know practically how you would really do further means testing with Social Security. If you think about programs that are means tested now--food stamps, for example or Supplemental Social Security Income, SSI--there is a means test, and you have to go through a rigorous process of proving need.
How exactly are you going to do that with the Social Security? Are we going to look at seniors' income? Income goes way down in retirement. Are we looking at assets? If you are going to look at assets, what are we going to all do, start submitting our tax returns for somebody at Social Security to review? A program that already is struggling under a decade of budget cuts, staff shortages--it would just be a logistical nightmare.
Benz: Not to mention an incursion into people's privacy.
Miller: If you want to means test Social Security, think about submitting your tax returns when you file for your benefit. Right now, you can go on ssa.gov and file for your benefits. It takes maybe half an hour, and that's all there is to it. I think it's a lot of noise about something that doesn't make a whole lot of policy sense. It's not something that's going to rescue the program. And I think there are all kinds of reasons not to do it.
Benz: And there are a host of other solutions that could be considered to help address the shortfall.
Benz: Mark, always great to hear your insights. Thank you so much for being here.
Miller: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.