Why Wait for Social Security?

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Delaying Social Security can often make good financial sense, but people often have reservations. Joining me to discuss some common reservations is Mark Miller. He's a Morningstar contributor.

Mark, thank you so much for being here.

Mark Miller: My pleasure, Christine.

Benz: Mark, let's talk about why people like you, people like me often exhort people to delay Social Security filing.

Miller: I often point it out as something that can be very good to think about doing. I always also like to point out that there is no one size fits all solution, and I would never be one to say everybody should delay their filing. And in reality, actually, most people don't when you look at the actual... The federal claiming patterns show that the vast majority of people have certainly claimed by their full retirement age, which these days is 56 and a bit. A very small percentage--

Benz: 66.

Miller: 66, yes. A very small percentages wait till 70, which is the latest, that's the extreme delay. There's no reason to delay past 70 in terms of additional credit. So, we're talking about something that some people do. Why is it a good thing to at least consider? Because every year that you delay you get a big bump up in your monthly or annual benefit. So, for households that have a concern about boosting the amount of guaranteed income coming in, this is definitely the best way to do that. I mean, some households, maybe don't need to focus on this as much. Let's say, if you have a defined benefit pension coming in, for example. So, there could be other reasons but Social Security on average replaces about 40% of preretirement income. So, if there are ways to boost that, it's great to do it. And the delay, once you delay past your full retirement age, is worth about 8% annually in terms of increased annual benefit.

Benz: So, that's a big payoff and really hard to match with anything that's guaranteed in the market, right.

Miller: Totally impossible to match.

Benz: Right.

Miller: So, if you can pull it off and you're comfortable with it, it's great.

Benz: Let's quickly outline, too, the benefits for spouses because, if the primary earner delays, there's a potential payoff for the spouse.

Miller: Yes. This pays off well in households where one spouse has significantly higher benefit coming than the other. Usually, it's the man because we have the typical disparity in earnings--career earnings generally are higher for men. So, typical scenario might be the higher earning spouse, let's say, the man, delays a few years in order to boost the benefit. And also, typically, women outlive men. And so, survivors can upgrade to 100% of the deceased spouse's benefits. So, at that point, you can get a benefit bump. And the other significant thing there to consider is that when the household goes from two Social Security checks to one, there's a drop in income. So, this can make up some of that difference.

Benz: One common reservation when we tell people that they should consider delaying is they're concerned that they may not live that much longer beyond the date when they file for Social Security. So, let's talk about that reservation.

Miller: Right. It's an understandable one. I think this is kind of a behavioral factor that drives other decisions, too, that are out there like buying annuities. So, it's a bit of a bet on longevity. But as one economist once said to me--I never forgot it because it such a great line--he said, "You know, you should plan to live not plan to die." And the reality is, especially for married couples, that one of the two spouses is going to outlive the so-called break-even number. Typically, that's about 83. And the benefits for a person who lives to an advanced age in particular are really dramatic of having a higher Social Security benefit. I always like to remind that Social Security is one of the few benefits out there that adjusts for inflation annually. Very few retirement benefits that I can think of --yes, you can buy inflation riders on annuities and the like, but ...

Benz: Some government pensions may, but ...

Miller: ... this literally adjusts to the consumer price index every year. And that's a whole other topic. So, there's a lot of reasons to think about Social Security as this insurance against longevity risk, if you will. That's the way I like to think about it. A lot of people do like to think about this break-even thing. I get that. I understand why people want to round those numbers. I just prefer to think about it as longevity insurance.

Benz: Right. And wealthier folks, presumably, some of our viewers, have longer life expectancies on average as well.

Miller: They do. But depending on what level of wealth you're talking about, these are folks who probably also will run through their retirement savings if they live well into their 90s.

Benz: So, let's talk about another big reservation. This came up recently at a speaking engagement I was doing. There are concerns that something may change to Social Security benefits between the time that someone is eligible for Social Security and when they might eventually delay. So, the question is, Would the benefit that I'm looking at today somehow shrink or get adjusted? Let's address that one.

Miller: Well, the legit reason to be concerned is that Social Security has a long-range solvency issue that it's facing. The current projection is that in 2035, the combined retirement and disability trust funds will be "exhausted." I put that in quote marks because it's a term of art that needs to be understood. It means that the--think about the trust funds as checking account that right now has--or a savings account--that has a huge surplus. It's about $3 trillion. It's starting to be spent down as the boomer age wave accelerates and more people draw benefits. 2035 is the date when the savings surplus will be gone. That's "exhaustion." At that point, the system will still be taking in enough revenue to pay about 80% of benefits just on a pay as you go basis. That implies a 20% benefit cut in 2035.

So, the real question is, What [is] the likelihood of that happening? I'd say very small, for a few reasons. Some of this is just unpredictability in terms of what the mix of control of Congress and the White House will be between now and 2035. If there's the right combination of control, a reform could go through. And there are a number of good plans out there for righting the ship, if you will, to avoid those benefit cuts. Even if that doesn't happen, and who the heck knows at this point--actually, most of the people I talk to who are smart about this stuff in Washington suggest that even at 2035, what would be most likely to happen would be some kind of fix involving an infusion of other revenue outside the payroll tax. So, the government could decide, Congress could decide to open up a source of general revenue into the system, could even borrow.

The other interesting thing is that the closer you get to 2035, the less likely it is that we'll see a solution to this problem that involves benefit cuts. And that's just math. Because if you pass a bill that says we're going to increase the payroll tax, you start collecting that money tomorrow and you start moving towards a fix pretty quickly. But benefit cuts take much longer to be realized as a cost saving. You're not going to--we've never had anything done in terms of Social Security reforms that involved retrospective benefit cuts or cuts to current beneficiaries. It's always done prospectively, with a long period of ramp in.

Benz: To get people used to the idea.

Miller: Give people time. So, for example, the last major reforms, 1983, we're still phasing those in now, which was the--the big one was the higher retirement age. And so, if you assume that that would happen again, and I think we better pray that that's what would happen because we don't need a big dramatic shifting of gears here. Nobody would want that.

Benz: And there are political costs to do that, too.

Miller: Huge. So, I think it's fair to say "that ain't happening." So, that being the case, the closer you get to 2035, it becomes harder and harder to achieve any kind of solution involving benefit cuts, just the math doesn't favorite it. So, what does this all add up to? I think it says Social Security at minimum would continue to pay current benefits. There are proposals out there to even add some modest expansions to benefits, and that might happen. That's my take on it. There is some uncertainty because of the political volatility we're going through. But that's I think how it shakes out. I think the chances of big benefit cuts are very, very small.

Benz: Mark, big important topic. Thank you so much for being here to shed some light on it.

Miller: Thanks for having me.

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