Social Security: Should You Take It ASAP?

Sometimes we need to rethink things.

Now is one of those times.

I’ve been an advocate of deferring Social Security benefits for decades. The basic case was direct and dirt simple. Each year that you deferred taking benefits worked to increase the amount of your benefit by 8 percent. Better still, the increase would be inflation adjusted every year. Since the benefit is inflation-adjusted, it only takes 12.5 years to get your money back – with its original purchasing power.

An Unbeatable Deal

You can’t find a deal like that anywhere in the private market. Here’s an example. If you go to a website like immediateannuities.com, the life annuity monthly payment for a 67-year-old male paying a $100,000 premium is $522 a month, or $6,264 a year. So you’d get a 6.26 percent constant, non-inflation-adjusted payout.

This means your money would be returned to you in monthly payments of decreasing purchasing power over 16 years. If you live longer than 16 years, you’d start to earn some interest on your original payment.

That 16-year figure, you will soon see, is important.

The alternative is to spend some of your savings today so you can defer taking Social Security benefits. Do that and you get a deal no insurance company can beat. If you are looking for a way to increase your retirement income, this is the best way to do it.

That said, deferral works better – much better – for some than for others.

The Sure-Shot Couple

The ideal candidate for the deferral of benefits is the increasingly rare “Leave It to Beaver” household. That would be a well-paid husband with a somewhat younger wife who doesn’t work or earns substantially less.

When he defers taking Social Security, he isn’t just making a bet on his life. He’s making a bet on their joint and survivor life expectancy as a couple. If, say, he’s 65 and she’s 62 that’s a whopping 28.9 years.

So while the payback period is 12.5 years, one of them is likely to be collecting benefits for more than twice as long. When the husband dies, his wife gets his benefit as a survivor.

Personally, I still think that’s a good bet even if our government remains as screwed up as it currently is, and future benefits get cut 24 percent.

What About Everyone Else?

But we don’t live in a “Leave It to Beaver” society anymore. You may have noticed.

Divorce is common. Millions of men and women enter retirement as singles. This changes the odds that deferral will be a good deal. Why? Because you’re now betting a single life expectancy against that 12.5-year payback.

Let’s suppose a 67-year-old man decides to defer until he is 70 so he can enjoy benefits that are 24 percent higher. Will he get his money back?

The answer depends on how long he lives. As a group, men that age have a life expectancy of 15.27 years. But since he would be spending money for three years before enjoying the start of larger benefits he would need to live, err, 15.5 years to hit break-even.

So unless he knows he’s got good genes, his bet is looking like what blackjack players call a push.

Women Have An Advantage

It’s a better bet for a woman because women, typically, live longer than men. In this case, 67-year-old women have a life expectancy of 17.95 years. That means she’s likely to collect the higher benefit for an additional 2.45 years after the three-year deferral and 12.5-year payback.

For both single men and women there’s an added “tilt”: If you’ve enjoyed an above average income and are college educated, you are likely to enjoy a longer life than people with lower incomes and less education. The question is whether you, as an individual will be fortunate.

Another case is that of married women. A wife who earns more than her husband would leave a higher benefit to her husband, if he survives her. But the odds are that she will be earning less, and he will die before she does. So she’s almost in the same boat as a single woman – it’s mostly about how long she will live, and the odds are somewhat in her favor.

Forces Making Deferral Not Such a Sure Thing

Except…

All of this happily assumes that Social Security benefits will remain unchanged as we run the highest budget deficit in history and a single month deficit of a stunning $856 billion.       Now add a president with a passion for eliminating the employment tax and who, as this is written, is threatening to veto any recovery bill that doesn’t include an employment tax cut. That cut, were it to happen, would drain the Social Security trust fund faster.

Result? A 24 percent reduction in benefits when the trust fund is empty.

Sadly, this isn’t the only threat to Social Security benefits. It’s just the most dramatic.

The last major Republican bill to “save” Social Security, put forth in 2016 by the late Sam Johnson (R, Texas) consisted of a multitude of ways to cut benefits over time.

Oh, yeah. And then there’s this Covid-19 thing.

Since it racks up the most fatalities among older people, it’s just possible that us old folks aren’t going to be around as long as we thought – or bet.

Related columns:

Scott Burns, “Social Security: The Last Source of Income,” 5/16/2020 https://scottburns.com/social-security-the-last-source-of-income/

Scott Burns, “Social Security: Things You Need to Know,” 4/25/2020 https://scottburns.com/social-security-things-you-need-to-know/

Scott Burns, “Social Security and Medicare: It’s All About the Cash,” 5/28/2019 https://scottburns.com/social-security-and-medicare-its-all-about-the-cash/

Scott Burns, “Social Security: A Tale of Two Menus,”02/01/2017 https://scottburns.com/social-security-a-tale-of-two-menus/

Scott Burns, “The Be-Careful-What-You-Wish-For-Economy,” 01/13/2017  https://scottburns.com/the-be-careful-what-you-wish-for-economy/

Scott Burns, “Lower Wage Workers Also Likely to Lose in Social Security Reform,” 01/06/2017    https://scottburns.com/lower-wage-workers-also-likely-to-lose-in-social-security-reform-2/

Scott Burns, “Social Security Reform: If You’re Under 50, Watch Out,” 12/30/2016     https://scottburns.com/lower-wage-workers-also-likely-to-lose-in-social-security-reform-2/

Sources and References:

Immediateannuities.com    https://www.immediateannuities.com

Michael Kitces/Joint life expectancy and mortality calculator:    https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: Scott Burns, Flames in the Lost Oak fire

(c) Scott Burns, 2020