Conventional wisdom about Social Security bites the dust—again.
As you undoubtedly already are well aware, most financial planners recommend that—so long as you can afford to do so—you should wait until age 70 to begin receiving your Social Security benefits. Your monthly payment in such an event will be 32% higher than if you begin receiving benefits at age 66. So long as you live to your early 80s, those higher monthly payments should make up for the foregone income over the four years from age 66 to 70.
Two months ago, you may recall, I presented one argument for why conventional wisdom could be wrong. In this column I present another.
This additional reason traces to Social Security’s uncertain fate at the hands of our elected officials. If you take at face value some of the proposals being given serious consideration in Congress and in President Trump’s administration that reduce future Social Security benefits, then the financial planners could be giving the wrong advice to wait until age 70.
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In fact, the president’s budget director, Mick Mulvaney, supports raising the eligibility age for receiving those benefits to age 70 anyway. If he were to get his way, future retirees might not even have the option of beginning to receive benefits at age 66.
And though it may seem unlikely that our political system will ever be able to tackle as thorny an issue as restoring the Social Security system’s solvency, continued inaction will set up the preconditions for an even bigger shortfall. Consider the language the Social Security Administration (SSA) is putting on every benefits statement sent this year: “By 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.”
The issue comes down to your confidence in the federal government. Richard Band, editor of the Profitable Investing advisory service, put it this way in the January issue of his newsletter: “If you believe that Uncle Sam, saddled with a $20 trillion—and rapidly rising—national debt, will keep his Social Security promises flawlessly, you might as well wait until age 70 to take your benefits (assuming you’re in normal health.)”
If you’re skeptical, however, you might want to “take the money and run.” That is what Band, who is 66, has decided to do.
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Band suggests that it’s possible to quantify what levels of uncertainty are needed to justify beginning at age 66 to receive benefits rather than waiting until age 70, and I modified his analysis for this column. Specifically, I made the following assumptions about a 66-year-old who is choosing between receiving benefits beginning right away or waiting four years until he is 70:
•He is expected to live another 20 years (which is average, according to the SSA)
•The Social Security Cost of Living Adjustment will be 2.0% per year for the next 20 years. (2% was the most the SSA’s most recent COLA.)
•The monthly payout will be 32% higher if he waits until 70 to begin receiving benefits
•After five years (2023), payouts in each successive year are reduced by half of one percent a year over what they otherwise would be. This is one way in which the SSA could avoid having to implement a big benefit cut in 2034, instead gradually reducing benefits over a number of years.
•The discount rate, employed to calculate the net present value of the retiree’s benefits between now and his expected death, is the 10-year Treasury yield (currently 2.55%).
Given these assumptions, the net present value of our hypothetical retiree’s total Social Security benefits would be 0.6% higher if he chose to begin receiving benefits at age 66 rather than waiting until age 70.
To be sure, you may take issue with this or that assumption I made, and other sets of assumptions reach different conclusions. But that’s the point. There’s no way of avoiding making a bet on whether and how the government will keep the Social Security system going.
As always, however, remember that it’s important to consult your financial planner before making any decision as big as deciding when to begin receiving Social Security.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.