Don’t touch my Social Security.
You’ve seen the newspaper headlines, placards and palpable anger when the talk of shaving Social Security benefits arises. And no doubt you will hear the President discuss it in tonight’s State of the Union Address.
I recently sat down with Mark Miller, the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living and an expert on aging and retirement, to discuss his view on the hotly debated topic. Miller also writes the syndicated weekly column “Retire Smart” and publishes RetirementRevised.com. I value his opinion.
In our conversation, Miller talks about his viewpoints on the proposed changes to Social Security and shares advice for retirees.
KH: What’s your biggest concern with the current debate?
MM: The idea of making further reductions in the value of Social Security at a time when it has never been more important is dangerous. We’re about to hit a wall here in terms of retirement security. Many Americans are on paths to simply run out of money in retirement, and that is across lots of different parts of the income spectrum.
Social Security is one of the few building blocks of retirement security that we have that actually works. People have never needed it more. If anything, I think we should be looking at ways to enhance its value and boost benefits.
KH: What’s the biggest misunderstanding about Social Security?
MM: That Social Security really has anything directly to do with the deficit. It has its own trust fund separate of the general federal budget. The reforms passed by Congress in 1983 were made in anticipation of the coming age wave of boomer retirement, and to build up a surplus for that purpose. Enough money was set aside through those reforms to pay for most of the boomer retirement wave.
KH: Can you explain the question on the table?
MM: Unless we make further changes, the trust fund would be exhausted around 2035. At that point, Social Security would have enough revenue coming in the door to meet about 76 percent of its obligations going forward–so the question is how to avoid that and continue to meet all the promised benefits from 2035 onward. How do we tweak the system to keep it solvent for the long run? Social Security is always on a 75-year plan. By law, it needs to project out its finances 75 years in the future. There are any number of possible ways to tweak that. Some of the proposals on the table would increase the retirement age over time. That wouldn’t impact many of the people who are close to retirement.
KH: What’s your biggest concern for today’s retirees?
MM: One proposal that does concern me is the suggestion by the co-chairmen of the President’s fiscal commission to adjust the formula that determines annual cost-of -living adjustments (COLA) for Social Security and some other programs.
The COLA is one of the most valuable features of Social Security, because it helps protect retirees against inflation. The co-chairs’ proposal is to change the yardstick of inflation used to calcuate the COLA, replacing the CPI-W with someting known as the “chained consumer price index”. It would reduce the inflation calculation by about three tenths of 1 percent annually. It sounds small, but it compounds. Here is the really significant thing about it–this proposal calls for making the changes to the COLA formula pretty soon– as early as 2012. This is one that will start impacting people pretty darn quickly. (For more discussion on this, go to my Forbes colleague Janet Novack’s Taxing Matters post: Can You Count On Social Security?)
KH: OK. Let’s talk about some practical, mechanical advice for right now. Here’s a question I get all the time. When should a retiree or soon to be retiree start taking Social Security?
MM: The most important consideration here is longevity risk. Americans are living longer and women, in particular, are living longer. They outlive men.
Social Security needs to be understood as a form of insurance. And it is, in fact, social insurance. What it insures against is the risk of running out of money in old age. That’s why it was created. You are eligible to file for Social Security benefits at 62 (before your full retirement age), but most of us will receive larger lifetime payouts by waiting until we reach age 66, or even 70. But it’s a bit of a gamble because the math all depends on how long you live.
Remember that Social Security is a public insurance program. It’s built around actuarial principles–and a central actuarial idea here is the Normal Retirement Age (NRA). That’s the rule that the Social Security Administration uses to make sure the funds are paid out fairly among all beneficiaries, and to ensure the funding of the program is adequate as longevity rises. The NRA has been rising gradually over the years; currently its age 66 for anyone born from 1943 to 1954, and slightly older for people born after that.
If you file early –before 66–your benefit is reduced accordingly to avoid paying you higher lifetime benefits than someone who waits until their NRA. So, if your NRA is 66 but you file at 62, your annual benefits would be reduced by a total of 25 percent–for the rest of your life. The system also has incentives for you to wait past your NRA. Your payments are bumped up 8 percent for every year you wait until 70. So if you did wait to 70, your annual benefit will be 32 percent higher than if you started at 66, and you’d also get all the COLAS from the intervening years thrown in. In general, you come out ahead if you live past what’s called the break-even age–the age where total benefits paid to those who wait begin to exceed total payouts to those who take early benefits. The break-even is around 80.
For individuals who live to very old age, this can mean the difference of hundreds of thousands of dollars in additional lifetime benefits. And the odds of one member of a couple doing that are fairly high.
Here’s the thing about waiting until your full retirement age, or beyond. Particularly for married couples, it pays big dividends because the odds of one of you living well into your 80s or 90s are pretty high. The surviving spouse receives the higher of the two benefits. That’s typically the woman. For a man to wait for full retirement, the widow will receive the higher level of benefit. For women in old age, Social Security is a very important resource. Many women live on Social Security only. So maximizing that benefit in old age is terribly important. Waiting until full retirement is a great thing to do if you can.
KH: Are people waiting?
MM: About half of Americans file sometime before full retirement age, and there has been an increase in the number doing that. People who lost work in recent years who are in their early 60s, for example, have tapped into it for income. Given a choice to work longer and delay filing for Social Security, I would always go for the latter.
The Social Security Administration web site has a good online tool that lets you test ‘what-if’ assumptions on various retirement ages, called the retirement estimator.
KH: What are the benefits of working longer besides getting a regular paycheck?
MM: Working longer means fewer years of drawing down your retirement savings, and it means more years of contributing to a retirement account. So those are years in which you are building your retirement stash, rather than depleting it. Those are additional years that those funds can grow.
A major big theme of my book is that working longer can create a major inflection point in your retirement security. If you push retirement out even a few years, it makes a very big difference down the road in your annual retirement income–it can boost it on the order of a third. It’s a big deal. I hear a lot from people who say ‘oh I will never be able to retire, I am going to have to keep working forever.’ The message of my book isn’t ‘work forever.’ It’s ‘consider working longer for financial reasons, and more…there are health and wellness benefits, mental well-being and happiness issues that point toward the benefit of staying engaged longer’.
KH: What happens if someone starts taking Social Security and then needs to go back to work?
MM: If you take Social Security at your NRA or beyond, you can work and earn as much as you like and still earn full benefits. For 2011, workers younger than full retirement age lose $1 of Social Security benefits for each $2 they earn above $14,160. (Recipients who will reach the full retirement age of 66 in 2011 can earn $37,680 in the months before they reach 66, without affecting their benefits; for each $3 they earn above that, they will lose $1 in benefits.) Even then, your lifetime benefits aren’t reduced. They are added back to you benefits after you reach you full retirement age.