Social Security is sturdier than you might think at first glance. What’s jittery and unstable is our own ability to make the best possible decisions about our own Social Security-claiming strategy during a crisis.
By Marcia Mantell, RMA
You’ve seen the latest headlines about the coming catastrophe with our critical Social Security system. Taken note that this COVID-19 pandemic is going to shove Social Security over the cliff any day now. Heard from even the most reputable news anchors that we are headed into the eye of the hurricane.
Perhaps we could all take a seat and look at the facts that belie the headlines. Let’s take a breath and move beyond the mass hysteria and doom and gloom outlook. This social safety net is simply too important to be misunderstood. And, those headlines do just that: cast unnecessary and uninvited doubt to those particularly close to decision-making time.
It’s imperative that we make logical, smart, and knowledgeable decisions about Social Security even as we’re reeling from a global health pandemic and economic crisis.
What’s Really At Risk With Social Security?
Social Security is sturdier than you might think at first glance. What’s jittery and unstable is our own ability to make the best possible decisions about our own Social Security-claiming strategy during a crisis. Many revert to focusing on the short-term versus the long-term perspective necessary to make their best financial decision. For many, the decision they make about Social Security is going to be a million-dollar decision.
When you choose to claim your benefit is just about the most important financial decision you will make for your retirement. The long-term implications to your personal financial security as you age well beyond your 70s and 80s cannot be underestimated. Unfortunately, what’s at stake during this once-in-a-lifetime global crisis is our individual ability to make a really sound decision today that carries serious financial implications that will stick with us for 30-something years.
So, let’s delve into a few key details and gain some practical understanding of how Social Security works, why the scary headlines paint an unnecessary (and perhaps irresponsible) view of this critical program, and why your decisions about claiming are so important to your long-term financial health.
High Unemployment, Low Payroll Taxes Impact Social Security Funding
Yes, that is true. Social Security is funded almost entirely by payroll taxes. Eighty-eight percent of the funding comes in from current worker’s and employer’s FICA tax payments. That was over $800 billion in 2019. Workers pay into the system based on their wages. So, when 36 million people lose their jobs and their wages in a compressed period of time, there will be some pressure on incoming revenue.
In this particular crisis, job losses are hitting lower income workers, including gig economy and part-time workers. The higher-paid jobs are largely intact, and professional career folks are still working. And, getting paid. And, paying their higher amounts of FICA taxes.
Also note that large numbers of laid-off and furloughed workers are getting the call back to work as all the states begin their phase one reopening plans. Workers in construction, manufacturing, and health care were sidelined for weeks, not prolonged months and years as we experienced in the great recession of 2008. They are getting back to work now, and more small businesses and retail sector jobs will rehire over the next four to eight weeks.
The bottom line: It’s way too early to get overly excited about unemployment’s effects on the long-term health of Social Security’s Trust Fund. And, certainly too early to be projecting Social Security’s imminent demise.
COVID-19 Is Accelerating Social Security’s Reserve Account Shortfall
That Social Security could fall short in paying retirees 100% of their benefits is not a result of this pandemic. The program was already on thin ice. Since 1996, the Trustee’s Reports have forecast that the Social Security Reserve Account will run out of money between 2029 and 2041. Various economic conditions over time have changed the projections and estimates of the Reserve Account. Every few years the projections bounce up for a few years, then down for a few years.
The Reserve Account is the surplus between the incoming cash and outgoing payments that have accumulated over decades. It is intended to make up any shortfall in collection of income from FICA taxes to meet the payment obligations to our retirees.
In the most recent report, released with year-end 2019 information, nothing had changed in the forecast: The Reserve Account remains on track to be depleted in 2034.
Enter COVID-19 in March 2020. As experts look at the resulting sudden and significant unemployment, and therefore, lower FICA tax income, we can expect the depletion date to accelerate by a few years. But this is not cause for alarm. Remember, back in 1996, the forecast was for depletion in 2029. We’ve seen this story before.
The bottom line: Even when the Reserve Account pays out its last dollar, retirees will continue to get Social Security checks. However, their monthly checks could be reduced to the amount collected from current workers. That’s estimated to be a 20% to 25% drop in monthly benefit payments to retirees. This is a scenario each individual should plan for. What would happen to your personal retirement income if there is a reduction in the amount of Social Security you receive in retirement?
Different Day, Same Problems For Social Security
Our Congress has simply not taken up the mantle and agreed to new amendments to shore up Social Security’s funding and payment problems. But, it’s not just the current Congress. It’s been multiple Congresses over decades, all dragging their heels, hoping the problem will remedy itself. There’s been plenty of time to put less painful, small, measured fixes into place. Obviously, that hasn’t happened.
Despite the fact that inaction has led to concern by retired workers who count on Social Security for a significant portion of their income, there’s been no political will to solve Social Security’s shortfall in any meaningful way.
The coronavirus didn’t create this problem. This may be a different day, but we have the exact same problem; COVID-19 simply moved the date forward by several years.
Separate Your Personal Decisions From The Headlines
In general, claiming Social Security before your full retirement age (between 66 and 67) is less than ideal. The penalties for claiming early are severe. Claiming at age 62, the earliest age possible for retirement benefits, results in a significant and permanent reduction in benefits. Early claims result in 25% or 30% less in monthly income. And, between 30% and 35% less if you are claiming a spousal benefit. This is a dramatic shortage in guaranteed income that most will not be able to make up from personal savings.
In this time of crisis, there are two scenarios playing out that can cause individuals to make hasty or uninformed decisions in the short-term. But the consequences will be felt in the long-term. Read Benefits Planner.
“I’m unemployed. I’ll just claim Social Security early.”
Even if you’ve lost your job during this epic economic downturn, claiming Social Security early should be a last resort consideration. Every other avenue should be explored first: Claiming unemployment is an excellent stop-gap measure for many. And, with an extra $600 per week boost from the CARES Act along with extended time to collect unemployment, this may be just the extra amount needed for the interim. Then, there’s your own emergency fund. If you’ve been saving for a rainy day, now’s the time to open that umbrella. Other short-term investments may be an option. Or, if you must “borrow” from your retirement accounts, that might be a consideration.
The long-term implication: If you claim your benefit early, you lock in significantly lower monthly payments for your entire retirement. What are you willing to trade for a 25% or more decrease in monthly income?
“I’ve lost a year of income. Now my Social Security benefit will be less.”
An all-too-common misunderstanding around an individual’s Social Security benefit is that being unemployed for a year or two will change their overall benefit payment. This is generally not the case. Social Security will use your highest 35 years of earnings (adjusted for wage inflation) to calculate your personal primary insurance amount, or PIA. This is the benefit amount you collect at your full retirement age or FRA.
If you have a break in your earnings history, there may be very little impact on your PIA. Only the highest 35 years are included. They do not have to be consecutive years. You can replace a lower year’s wages with a future year of higher wages. You can replace any zero-dollar years with part-time wages. It’s important to realize that any one year only accounts for 1/35 of your calculated benefit.
The long-term implication: If you lose your job during this crisis, and have lower earnings in 2020, maybe that year will be excluded in your highest 35 years of earnings…maybe it won’t. Focus on finding the next job and getting the wages back on your work record. Sign up for your Social Security statement at SSA.gov/mySocialSecurity so you can see what your estimated benefit is today and how a one-year reduction across some 35-to-50 years of work might not change your benefit estimate.
The bottom line: It’s much more damaging to claim your Social Security too early. You’ll lock in a 25% to 30% permanent reduction in your income throughout retirement if you claim at age 62. On the other hand, if you lose one year of employment, your calculated benefit might shift a few dollars as one of your 35 years of earnings is less than ideal. But remember, you can work longer and replace a low year of wage income with a year with higher wages.
Rise Above The Noise
The importance of Social Security as a foundation to almost everyone’s retirement income cannot be overstated. Despite the fact that there are a lot of scare tactics leading the news these days, declaring that Social Security is going bankrupt is a lot of hot air. It’s not a new problem.
Stick to your best decision-making. Rise above the noise and look carefully at your options. One of the best strategies you have in your arsenal is to keep a long-view when considering claiming Social Security. For the most part, once you’ve claimed, you are locked in. And there aren’t many retirees who are pleased that they receive less income every month than they could have.
Social Security, our 85-year old, social insurance program, is sturdier than current headlines suggest. There is nothing substantially new about Social Security’s solvency today than was the case this past January before the coronavirus reached our shores. Or in 2018. Or in 1996.
That the Reserve Account might run dry two to three years sooner than projected in January 2020 might actually kick Congress into gear to deal with the problems we’ve had with Social Security for the last 25 years. Nothing like a little pressure to get focused on a problem and provide real solutions. It will, in fact, take an act of Congress to shore up that Reserve Account.
About the author
Marcia Mantell, RMA®, is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is author of “What’s the Deal with Retirement Planning for Women?” the newly published “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.