Tuesday, October 21, 2014

Social Security

Ever since Social Security began in 1935, there have been more workers paying into the system than retirees withdrawing. The excess payments are saved in the Social Security Trust Fund. Social Security benefits to today’s retirees are paid with earnings from current workers and with money from the trust fund. A demographic shift known as the “baby boom” is underway, with more retirees receiving benefits than workers paying into the system. As you can imagine, the balance of the trust fund is declining. According to a report published by the Social Security and Medicare Boards of Trustees earlier this year, the trust fund is expected to be depleted by 2033. So what happens then?

One of two things will happen in 2033 if reforms are not implemented before then. Social Security taxes will rise for current workers or benefits will fall for current retirees, or some combination of the two. According to estimates, if all of the shortfall were to be shouldered by the retirees, benefits would need to decrease by 25%. It’s unlikely that politicians will have the courage to take on social security reform before 2033. So why am I telling you all this?

Well if you’re of a certain age you need to decide when to start drawing your social security benefits. The longer you wait the bigger your check will be…for the rest of your life. Benefits starting at age 62 are less than if you wait until 65. And much less than if you wait until 70. How long you should put off collecting social security depends on how much of your own money you saved and how long you think you’ll live. If you wait to collect, it takes years to make up the social security benefits you would have received starting at age 62. But if you live to a ripe old age you may wish you had waited. Tough to know what to do. Here’s something else to think about, another factor to plug into your equation.

If your social security benefits were to be slashed because of the depletion of the social security trust fund in 2033, it might make sense to start receiving benefits as early as possible before any cuts are implemented.