At the Family Wealth Decisions Group we often advise clients to delay claiming Social Security if they can afford to do so. To be sure, other factors must be considered such as their health status and whether they have sufficient current income to carry them through while they wait. Delaying Social Security offers about an 8% increase for each year that someone waits beyond 62 up until age 70. Moreover, the enlarged benefit is guaranteed over an individual’s lifetime and perhaps even over the lifetime of a surviving spouse.1 This kind of return is hard to beat with other guaranteed investments, especially in today’s low interest rate environment.
But is the advice to delay still valid amid the current coronavirus environment and the recent market drop? I have seen a few articles lately that have asked this question.2 The basis for the query is generally twofold. First, with depressed stock prices, shouldn’t you wait for your portfolio to heal rather than sell at a low? And second, isn’t the Social Security program itself at increased risk?
It’s true that for most investors, portfolios are not what they were at the beginning of the year. While equities have gained ground somewhat, those nearing retirement who haven’t yet claimed Social Security may find themselves with depressed equity holdings. For those who are retired or ready to retire, where can they expect to get income for lifestyle expenses if they delay claiming Social Security? In these situations it may be possible to sell bonds or use cash to provide income while waiting to claim Social Security benefits. At Family Wealth Decisions Group we generally maintain a balanced portfolio of stocks, bonds and cash along with other asset classes. One advantage of a balanced portfolio is the ability to sell one type of asset rather than another if cash is needed for any reason.
Yet even if it becomes necessary to sell equities, this may still be preferable to claiming Social Security benefits prematurely. There is no guarantee that equities will perform as anticipated, at least in the short run, and time may pass while equities languish. After all, from December 31, 1999 to December 31, 2009, the annualized price return of the S&P 500 was -2.72% and with dividends it was still -.95%.3 Social Security, on the other hand, offers an approximate 8% annual increase with little risk. To be sure, every situation is unique and must be considered according to individual circumstances.
What about the second issue? Is the Social Security program itself at increased risk? According to the 2020 Trustees’ Report published in April, Social Security can pay full benefits for another 15 years but then faces a significant, though manageable funding shortfall. This is essentially the same outcome as projected in last year’s report.4 However, the 2020 report does not reflect the impact of the coronavirus pandemic and the resulting recession on the programs’ trust funds. The Covid-19 pandemic, its economic repercussions and the legislative responses will likely worsen the outlook for the trust funds. One source estimates the trust funds could be depleted before 2030.5 Perhaps if talk of a payroll tax holiday were to materialize,6 the trust funds may be depleted even sooner.
The recent concern about Social Security's financial health is nothing new. The issue has been around for quite a while, fueled partly by the nonstop talk about the program's long-range financial shortfall. The shortfall is a problem, but a manageable one, and it is not substantially affected by the spending the government is doing now to offset the economic devastation being caused by the pandemic. In 1983 we were only months from a funding shortfall which was eventually addressed by the Greenspan Commission.7
It's worth noting that the shortfall in revenue pertains to only ¼ of the cost of the program. Three quarters (76%) of the costs of the Social Security program are supported by payroll taxes and taxes on benefits.8 Covering the 24% shortfall is easily manageable. There are many proposals on the drawing board. The Social Security actuary has evaluated more than 100 such proposals.9 Some of them include increasing the full retirement age, increasing payroll taxes or raising the base wage (the current wage base is $137,700).
At Family Wealth Decisions Group, we believe that Social Security plays a significant role in our clients’ retirement and should be considered in the context of their overall retirement plans. If you would like to know more about how Social Security may fit into your retirement plan, please feel free to contact us. Remember, we are here to help!
Doug Lemons, CFP®
1A surviving spouse may receive the higher of either (1) his/her own Social Security benefit or (2) the Social Security benefit of the deceased spouse.
2https://www.politico.com/news/2020/05/17/coronavirus-social-security-2030-261207, https://www.financial-planning.com/list/social-security-deficit-rises-in-2020-trustees-report, and https://www.morningstar.com/articles/981386/is-delaying-social-security-still-smart
3https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/#7cd45b9e7cf8
4https://www.ssa.gov/OACT/TR/2020/II_A_highlights.html#
5Politico, Op. Cit.
6https://taxfoundation.org/trump-payroll-tax-history-of-payroll-tax-holidays/
7https://www.ssa.gov/policy/docs/ssb/v46n7/v46n7p3.pdf
8https://www.ssa.gov/OACT/TR/2020/II_A_highlights.html#
9https://www.ssa.gov/OACT/solvency/index.html
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and a widely recognized, unmanaged index of common stock prices. You cannot invest directly in an index. Past performance is no guarantee of future results.
Doug Lemons is not licensed to offer products or services. Registered associates of Family Wealth Decisions Group are registered representative of Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Family Wealth Decisions Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-3145859-063020