Are Emerging Political Threats to Social Security Enough to Change Retirement Strategies?
A friend of mine recently turned 62. (A mere child.) Because I have written so much about the Social Security system over the course of my career, my birthday message to him included this: "You’re now eligible for Social Security retirement benefits. Grab ‘em before they disappear!!" I was kidding, except that I was not at all kidding. Indeed, I am fast approaching my full Social Security retirement age, and although I have not yet started to take my retirement benefits, I have recently begun to wonder seriously whether the chaos of the second Trump Administration might be reason enough to start claiming benefits sooner than would otherwise be warranted.
Short answer: The political threats that emerged in the last year show no signs of abating, and everyone would be wise to think seriously about beginning to take benefits sooner rather than later. Republicans have wavered over time between trying to partially privatize Social Security and accusing Democrats of wanting to destroy the system, but under Trump, anything might happen at any time. With that level of uncertainty, moving fast might end up dominating other considerations.
I want to be very clear that my analysis here is not at all related to what has been one of my most-published arguments about Social Security (see, for example, this two-part Verdict column from a year ago), which is that the nation's public pension system is not "going bankrupt" and that conservatives' efforts to scare the public (especially younger people) into believing that Social Security will not be there for them in the future are pure sophistry. Those arguments are (and have always been) false as an economic and legal matter, and they could only be true if the anti-Social Security scaremongers were to succeed in undermining public support for the program.
In other words, the system continues to be sound economically and legally, but -- like all government programs -- it is potentially politically vulnerable. That is why it has always been important to know whether Social Security's status as "the third rail of American politics -- touch it and die" was holding fast. With the political realities in the United States becoming less sane by the day, Social Security might soon be cut, privatized, or simply vaporized if Republicans are told that that is what Trump wants. In that sense, Social Security is no different from the Corporation for Public Broadcasting, the Voice of America, or USAID.
For now, knowing that Trump's political base skews older has convinced most observers that neither Social Security nor Medicare are in political danger. On the other hand, Trump has been doing a lot of things that harm his base (tariffs being the most obvious example, while eliminating Affordable Care Act subsidies will soon be the most politically salient one), so nothing is off the table. That change in the political winds -- and not at all a change in the underlying finances of the Social Security retirement system -- is what drives the analysis here. The answer to the question "Will Social Security be reduced or eliminated?" has changed from "Not a chance!" to "Seems unlikely, but who knows these days?" Prudent people will therefore want to reassess and quite possibly change their individual strategies.
How should one think about this? The relevant aspects of Social Security for this analysis are mechanically simple, but they are neither obvious in an intuitive sense nor top-of-mind for most people. Moreover, the popular discussion of the relevant rules is somewhat misleading. I will therefore lay out the basics here.
Everyone (like my friend above) who becomes eligible for Social Security benefits by working and paying Social Security taxes for 40 total quarters during their lifetimes is eligible to receive retirement benefits. A person can start receiving "reduced benefits" at age 62. If they wait until their "full retirement age" (FRA) -- 67 for everyone born from 1960 onward, with lower FRA's for earlier birth years as part of a phased-in increase of the FRA from 65 to 67 -- they will receive what is called the full retirement benefit. If they wait until age 70, "delayed retirement credits" allow them to receive maximum benefits.
For someone earning $60,000 per year before retiring, reduced benefits at age 62 would be about $1250 per month, full benefits would be about $1875 per month, and maximum benefits would be about $2400 per month. (The Social Security website includes some excellent online calculators.) As I noted above, public discussions that focus on those three dates are somewhat misleading, because the benefit levels are not subject to "cliff effects." That is, if the person in the example here were to begin to receive benefits one month shy of their 70th birthday, they would not be stuck at the age-67 level but would lose only an amount proportionate to one month of "earlier" retirement. Like so much of the Social Security program, this is good policy and avoids setting up perverse incentives. (There is a "kink" at age 67, but there are no cliffs.) But the public discussion might lead people to think that they need to hang on to reach age 67 or 70 to avoid a big reduction, which surely confuses some people.
In any event, as soon as benefits begin, they are locked in at that level (other than being adjusted for inflation every year). This sets up a simple tradeoff, with a person who takes benefits at their first moment of eligibility getting $1250 monthly for eight years, or $120,000 total (again, however, the payments will be adjusted for inflation during that time), while the person who waits until age 70 receives nothing for all of that time. At that point, however, the reduced benefits receiver's checks are $1150 smaller every month than are the enhanced benefits for the person who waited ($1250 rather than $2400).
Simple arithmetic says that it takes about 8 years and 8 months for the late retiree to make up the forgone $120k, which is why the conventional advice is that -- health and other personal finances permitting -- anyone who thinks that they will last at least into their late 70's should wait to collect benefits. With life expectancy for a 62-year-old US male currently 82-84 (and 82-85 for women), the conventional advice adds up.
I have seen some stories (which I cannot currently track down) that some financial operators are trying to convince people that they should take benefits as soon as possible and then invest the money in the stock market. And if the numbers added up, this might be sensible. After all, during those eight years between age 62 and 70 (and assuming that the person is not spending the money, which is a safe assumption for anyone who is seriously considering waiting until age 70), the money could be put into some kind of savings/investment funds to earn a return. At a 4 percent average rate of return, for example, that first $1250 monthly payment at age 62 would grow to about $1711 with compounding.
That means that the break-even date is a bit later than the 8 years/8 months that I computed above. And if the rates of return are truly extraordinary, then of course having money now to invest in high-yield returns would only be sensible. I have done the analysis, however, and it would take truly extraordinary rates of return -- along the lines of 10 percent after inflation each and every year at a minimum -- even to push the break-even date past average life expectancy. All of which is why I referred to the financial pros who are pitching this idea as "operators," because what they are selling is a "you can't lose" idea that can definitely lose.
But we now return to the big, political question. What if Social Security is cut or even eliminated in the near-ish future? Even a 20 percent across-the-board benefit cut starting ten years from now could add two or three years to the break-even date. More obviously, if the system goes bye-bye before my friend turns 70, he would get exactly nothing in return for having waited.
Do I think that anything so dramatic will happen? Even with all of the shocking changes wrought by Trump's return to office, I still have a very hard time seeing Social Security on the chopping block. Even so, I can say that adding a nebulous "political uncertainty" discount to my own calculations has convinced me not to wait until I turn 70 to initiate my Social Security retirement benefits. Unsurprisingly, I am not alone.