Q. Recent newspaper articles have reported that the Social Security trust funds will run out in 2037. This date has moved closer each time it is reported. Yet many financial advisors tell potential retirees to postpone drawing down their Social Security benefits as long as possible because they will receive more that way.
I am 50 and my plans are based on anticipating not receiving any Social Security benefits as I really don't think Washington (or our self-absorbed public) has the stomach to fix this or many other budget problems. We are leaving a disaster for our children and grandchildren. Shame on us -- our Depression-era parents and grandparents sacrificed for us to have a better future. This made them "The Greatest Generation" in more ways than one, but it seems our generation is too full of entitlement issues. —J.W., Dallas, TX
A. We should all be grateful to the Greatest Generation for the sacrifices they made during World War II. But all of our problems cannot be heaped on the baby boomers that followed. Remember, Social Security was passed in 1935. The first boomer hadn’t even been born yet. Medicare was passed in 1966, about when the oldest boomer was going to vote for the first time. Boomers didn’t write the legislation that got us into this mess, the Greatest Generation did.
Most people— the majority— don’t have much choice about the decision to take Social Security benefits. They take them at age 62 because they don’t have other income sources or their other income sources aren’t enough to pay all the bills. If you have a choice about when you take benefits it is likely that you are still employed. It certainly means that you have savings, a pension, or both. If you were age 62 today, the best decision would be to defer taking benefits. You would do this simply because the savings you spend to defer benefits could not be better invested for maximum lifetime income, as I have written many times.
So the question comes down to whether you should “take the money and run” by taking lower benefits now, or bet that higher benefits will arrive as promised in the future. Sadly, you should not take comfort in the idea that the Social Security Trust fund won’t be exhausted until 2037. The trust fund is not a vault filled with coins used as a swimming pool by Scrooge McDuck. It is a bunch of IOUs from the U.S. Treasury. The Treasury, in turn, gets its cash from the taxes we pay or from the money it borrows.
Social Security is now paying out more in benefits than it receives in employment taxes (and taxes on benefits being paid out). The 2010 report from the Trustees of Social Security shows program costs of $714.6 billion for 2010. Actual revenue for the year was only $673.2 billion. (Note: we are talking about actual cash here, so the illusory non-cash interest income of the trust fund doesn’t count.)
As a consequence, Social Security now has to go, hat in hand, to the Treasury for some of its needed cash. Social Security is at the head of the begging line, of course, but it will still be hat in hand. We can only hope that China, a nation with a per capita income that is a fraction of ours, will continue to be kind and lend us the money. We have become the Blanche DuBois Nation, dependent “on the kindness of strangers.”
Given that reality, it is doubtful that someone 50 today will have the choices currently available to those now on the cusp of retirement. Prudence suggests that most people should try to defer taking benefits until full retirement age or a year later, age 67 or 68.
Some people jump to the conclusion that Social Security will not exist at all. They forget that it has significant revenue. It will exist because it must— but we can expect major pressure on promised future benefits. The really huge pressure, however, will be on Medicare.