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We got lots of disturbing news from Washington last week. But the latest updates on Social Security and Medicare really got my blood boiling.
It is now estimated that both programs’ trust funds will run out sooner than previously expected. In the case of Medicare, the date is 2017 rather than 2019. For Social Security, it’s 2037 rather than the previous estimate of 2041.
Both programs are suffering because of the recession. The simple explanation is that fewer jobs mean less money getting paid into the systems. That creates a bigger drain on the programs’ current resources.
But it merely highlights the larger issue, one that has been there since the very beginning of Social Security.
The Problems with Pay-As-You-Go …
It’s interesting — and very instructive — to look at the history of the U.S. Social Security system.
The program’s first payment reportedly went to Ernest Ackerman. He retired a day after the program began, and contributed a whopping nickel. His lump sum payout? Seventeen cents. Not a bad return for good ol’, Ernie!
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| Ernest Ackerman put in one nickel to Social Security, retired a day later, and got back a $0.17 lump sum payment. Need I say more? |
Meanwhile, the first person to receive a monthly payment from Social Security was Ida May Fuller. During the late 1930s, she contributed $24.75 into the system. Her initial monthly check was $22.54, so by her second check, she had more than recouped her entire investment!
And get this: She lived to be 100 years old, collecting $22,888.92 out of the system over her lifetime!
Sure, it’s an extreme example. But it demonstrates the real problem with Social Security … the problem that has existed since day one … and the problem that is only worsening as more and more people live to Ida-May-Fuller-like ages …
Social Security’s pay-as-you-go structure means a never-ending game of catch up.
When Social Security was first instituted in 1935, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage. What’s more, the average life expectancy was about 60.
Today, Social Security covers virtually everyone. The average American is living to age 76.
And to accommodate this widening gap of money coming in and money going out, the initial 1937 payroll tax rate of 2 percent (split between employer and employee) has already risen to a combined 15.3 percent (including Medicare taxes).
Yet, I’m sure it will absolutely have to go much higher if the system is to survive!
Reason: Based on the newest projection, Social Security will begin collecting less money than it pays out in 2016.
Odds are also extremely good that the current cap on the amount of a salary that is subject to Social Security taxes ($106,800 in 2009) will have to be raised or completely eliminated.
And all of this begs additional questions …
Will Social Security Benefits Be Reduced? Or At Least Taxed?
Should You Start Taking Payments As Soon As Possible?
I believe Washington’s preferred solution will be getting more money into the system. But I would not completely rule out some tinkering on the payout side, either.
Taxing benefits at the Federal level has been one idea bandied about. That would be a slightly less obvious way of reducing future recipients’ payments.
Continuing to bump up the age at which benefits begin is another, and by the time I retire, I’m sure the age will have increased substantially.
But I would say that if you are near — or already in — retirement, you shouldn’t worry too much about your payments.
In fact, despite Social Security’s problems, I still suggest you consider delaying your benefits as long as possible.
Sounds counter intuitive, I know.
After all, the conventional wisdom is to just start collecting as soon as you can. This is both because of the aforementioned problems — i.e. “catch as catch can” — and because it is commonly believed that the system is designed to work out the same no matter when you begin collecting.
But let me explain my logic here …
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| I think near-term Social Security recipients have little to worry about. Everyone else? I shudder to think … |
First, it would be political suicide for anyone in Washington to mess with near-term benefits. Instead, the preference will remain — as it always has — kicking the buck further on down the line. Can it continue this way forever? No. But for longer than it probably should.
Second, there are also logistical problems with changing soon-to-be-retirees’ benefits. After all, the government uses formulas to calculate benefits at age 60 and 62 for each recipient. They are unlikely to retool the entire process overnight.
Third, it’s true that the system is designed to pay out the same in total benefits no matter when you start collecting. But the calculations are obviously based on averages and you are anything but average!
It’s important to look at your individual situation before you just accept the conventional wisdom.
Sure, if you need the money to live on then just take it.
But if you can delay taking your benefits, it might be worth your while, especially if you have “longevity genes” in your family.
After all, the Social Security Administration will raise your future payments for every month that you delay. Annually, that will amount to an 8 percent increase (plus any cost-of-living adjustments).
So the longer you delay taking benefits, the bigger your monthly benefit.
The math differs for every person, but consider someone who’s age 66 and has the choice of collecting $2,000 a month for the next 12 months or an additional $160 every month starting a year from now (i.e. the 8 percent annual increase for delaying benefits).
The $24,000 upfront seems like the better option. Especially since it takes 12 ½ YEARS of payments to make up for that missed $24,000.
Yet according to government statistics, the average American at age 66 will live another 17 ½ years.
In other words, you stand a very good chance of collecting at least another five years worth of those extra $160-a-month payments. That comes out to another $9,600 in your pocket!
So yes, Social Security is riddled with problems. And yes, it may not be around — or paying out nearly what it will hand near-term retirees — by the time I’m collecting my checks.
We will also all face higher taxes in the near future if the system is to be “saved.”
But there are still plenty of things that you can do to get more of your money back out of the system. Don’t feel guilty about it. Don’t worry about it. Just educate yourself on all the options and possibilities and take advantage of every little advantage you can.
Best wishes,
Nilus
P.S. Delaying benefits is just one of the many ways to maximize your Social Security benefits. I listed four others in my special retirement report, “The Weiss Guide to Worry-Free Retirement Profits,” and there are surely even more than that depending on your particular situation. So get out there and start researching … you’ll be amazed at what you learn!
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