How to Approach Social Security During a Pandemic

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Christine Benz: Hi. I'm Christine Benz for Morningstar. Thanks to the economic effects of the pandemic, many older adults may be pondering retirement earlier than they expected. Joining me to discuss Social Security filing during this period is Mark Miller. He's a Morningstar contributor, and he's also an author. Mark, thank you so much for being here.

Mark Miller: Thanks for inviting me, Christine.

Benz: Mark, let's talk about what we should expect to see in terms of Social Security filing during this period. I guess it's probably too early to say if we're seeing more people filing for Social Security, but what does maybe the last financial crisis from 2007 through 2009 kind of suggest we should expect to see during this period?

Miller: Yeah, you're right. It is too early to really know in any kind of hard data sense. But if you go back and look at that last recession of 2008 through 2010, there was an increase in the number of people who filed early for Social Security. And then after the recession, the claiming trends shifted pretty markedly in the other direction. The share of people who are claiming at the earliest possible age, 62, dropped pretty dramatically from 53% in 2009 to 35% in 2018.

Right now, of course, there's just a huge amount of uncertainty about the economy, but it does seem likely to me that many people are going to wind up retiring sooner than they might've expected either because of the very serious decline in the economy and the job market, and for some people it's going to be related to the health risks of the pandemic.

Benz: For some people there may be no other option but to take Social Security as soon as they're able, but let's talk about the benefits of delayed filing if you possibly can.

Miller: You can file as early as 62, but every 12 months that you delay, you get an increase in your annual--or in your benefits--for every 12-month period that you wait. It'd be low for retirement age, which is 66. The increase is generally about 6% per every 12 months, and then it's 8% for the delayed credits that accrue after your full retirement age up to 70, and at 70, the delayed credit stops, so there's no reason to wait further at that point--but very substantial increases in the annual amounts that are paid out. And it's worth mentioning that these are adjusted for inflation, so it's really a valuable increase in your benefit.

Benz: That helps explain why people like you suggest that if people possibly can, they should delay, but let's talk about people who are looking at their portfolios today. Maybe they saw them drop significantly, although things have recovered quite a bit, or maybe they just were feeling like this is a limited pool of resources to begin with, tapping Social Security might seem safer. How do you address that issue of Social Security filing versus portfolio withdrawals?

Miller: It's never been the case that folks like me have said, "Everybody should always wait." It's always been very much of a personal matter, and there can be reasons, even prepandemic, why it can make perfectly good sense to go ahead and file. But the pandemic adds some new dimensions to this. And some of the experts I've been interviewing for various stories who were like me--in the camp that it often makes sense to delay--are saying that there may be other ways to think about this now. Most Americans have rather modest amounts of saving and may just want to hang on to what they have from a liquidity standpoint at this point. So taking Social Security early, rather than starting to live on your savings, assuming you're not working, may be the way to go for some people just due to the incredibly uncertain environment. There may be situations where, for example, you have a legacy concern or you may want to hang on to savings to help out adult children who may be struggling with their own careers.

And lastly, there's the issue of the uncertainty about the market. All the usual formulas of amounts you can draw down from savings to live on, inflation--those get to be a little scary if you're withdrawing into a down market and a declining market. So there could be reasons why you'd want to go ahead and get Social Security because it provides that kind of stabilization.

Benz: Back to the idea of portfolio withdrawals. Let's talk about taxes briefly because, arguably, if people find themselves in sort of an income pinch, maybe they've had job loss or whatever type of income loss, let's talk about how that relates to portfolio withdrawals and might actually embellish the case for portfolio withdrawals versus Social Security filing.

Miller: Sure. For people who might be thinking in terms of delaying past full retirement age and intending to live on portfolio drawdowns in the early years of retirement, there can be a substantial tax benefit to this, especially with the current rates under the Tax Cuts and Jobs Act of 2017, which reduced the rates fairly substantially in some of the brackets. So the point here being that you'd be drawing those monies down from tax-deferred accounts, 401(k) or IRA typically, at a time when you're in a lower bracket. And so it becomes cheaper, if you will, from a tax perspective to make those drawdowns. A lot of the tax experts I speak to about this say it could be reasonable to think about doing these drawdowns to the point where you fill up a bracket. So it can be a sweet spot in terms of a time to get money out of a tax-deferred account, I think is the argument.

Benz: Let's talk about someone who does go ahead and file for Social Security maybe earlier than they had wanted to because they have had job loss during this period, but then they find a job later on. Can you discuss the tax implications for people in that situation or how it affects your eventual benefits?

Miller: Well, the interesting thing here in some recent reporting that I frankly was a little surprised by and I think a lot of people are surprised by this is that it is possible to file for Social Security and then suspend your benefit later and start accruing delayed credits again. The reason this can be confusing is that there was this whole brouhaha a few years ago about the elimination of the so-called "file and suspend" feature of Social Security, and that was eliminated, but this is something different.

Let's say you were out of work at age 62, decided you needed Social Security. You take it, but let's say you get a job again at age 64 or 65. If you wait until your full retirement age, you could suspend your benefit again and start accruing delayed credits again, and those calculations start from the already reduced benefit amount. But nonetheless, you would have the ability to make up some lost ground, if you will. And so it is a bit of a do-over opportunity that's out there for people who might need the money now, but let's say they do manage to get reemployed.

Benz: One other consideration in the mix is that some people might be worried about the finances of Social Security. I hear from a lot of retired or preretiree investors who say that they really want to take the money and run because they're concerned about what might happen to the program down the line. How do you address their concerns?

Miller: Well, Social Security is facing a long-term financial shortfall that was already known before the pandemic, meaning that the most recent projection that was done by the trustees before the pandemic projects that the Social Security trust fund will be exhausted in the year 2035. And then at that point, there'd be sufficient monies coming in from current payroll tax revenue to meet about 80% of the promised benefit. So it implies a 20% or 20%-plus cut in benefits. Very few people expect that to happen. There are a number of ways to fix that problem, and my expectation is Congress is going to fix it before 2035 arrives.

Now, the pandemic may well accelerate that date a bit from 2035, and the big reason for that would be the decline in payroll tax collections because of the down economy. That would be the most important reason. And so the Social Security actuaries have said that the depletion date might move up a year or two, 2034, 2033. That said, you want to asterisk that and say if the downturn is longer and deeper than some might think, it could move up even a little further, but we're not talking about a program that's going to implode tomorrow by any stretch. And so I don't think that there's a good reason for people to think about uncertainty of Social Security as a reason to file early.

Benz: Nonetheless, though, it seems like there are a lot of different factors, very personal factors to get your arms around in this decision--maybe a good place to get the advice of a financial advisor. How about tools that you recommend in the realm of trying to figure out what are the trade-offs involved with various Social Security filing dates?

Miller: Well, one thing that I would recommend, which is not a tool so much, but a really, I think, very good, cogent, and succinct book about Social Security is called Social Security: The Inside Story by Andy Landis, who was a gentleman who used to be a Social Security employee, and it's just a very straightforward, easy to understand guide to the ins and outs of the Social Security rules. That's one tip I would offer.

A second, and again, I'm going to get to tools in a second, but a second thing I would advise people to do is get a hold of your Social Security statement. Social Security used to mail out an annual statement, which is a very handy thing to have. It gives you a projection of what your benefit will be at different ages, shows you what the earnings history is that your benefit's being calculated from so you can check that for accuracy. Used to come in the mail, but you can always get it online. You set up an account at the Social Security website, which is something people ought to do anyway, and then you can at any time you want, you can download a PDF of your statement. And so for any exercise around claiming and decisions, a good starting point is to have that statement in front of you, because a lot of the tools that you use will ask you to plug in a few key numbers from that statement, so go get that.

There are a couple of tools out there that I think are pretty good--they're very good, actually--that charge a small fee. The best tools out there are fee-based. They're not super expensive, but I always like to point out with a decision this important, a little bit of money invested upfront could pay very, very large dividends in terms of an optimized benefit. One outfit I like a lot for this is Social Security Solutions. Another is called Maximize My Social Security, which comes from ESPlanner. That's a broader planning device that was founded by the economist Larry Kotlikoff.

There are a couple of free tools out there that are pretty good. They generally lack some of the sophisticated features for decision-making that you find in the fee-based tools. They typically, for example, don't allow you to do spousal and survivor planning, but nonetheless, they're not bad. The Social Security Administration itself has one called the "Retirement Estimator." AARP also has one called the "Social Security Benefits Estimator" that's pretty good.

Benz: Mark, timely discussion. Thank you so much for being here to share your perspective.

Miller: My pleasure, Christine.

Benz: Thanks for watching. I'm Christine Benz from Morningstar.com.