Financial Planning

It Still Pays to Wait to Claim Social Security

Despite dire headlines about the Social Security trust fund, you will be better off waiting to collect benefits.

Laurence Kotlikoff is a professor of economics at Boston University and author of Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life. He also developed MaxiFi Planner and Maximize My Social Security—software programs designed to help users raise their living standards by getting the most out of their Social Security benefits.

In its most recent annual report, the Social Security Board of Trustees said that if nothing is done, the trust fund will be depleted by 2033, which would mean Social Security would be able to pay out only 76% of promised benefits. What do you say to people who plan to file at age 62—which results in about a 25% cut in benefits—because they’re afraid the program will run out of money? I have run through our software a benefit cut starting in 2031, and you still see a very major gain from waiting to collect. But I don’t see the politicians cutting benefits directly. I think they’re going to raise taxes on the rich. Congress could also use general revenue to finance Social Security, or they could partially index benefits for the rich. Historically, they phase in changes, so anybody who is close to retirement is quite safe—and by close I mean 55 and older.

Yet many people fear that if they postpone claiming Social Security until age 70, they’ll die before they’ll be able to take advantage of the higher benefits. What’s your response to that? They’re ignoring longevity risk. If you’re 98 and collecting a Social Security check that’s 76% higher and adjusted for inflation, that’s where you want to be. A lot of people will live that long. If you buy home insurance and your house doesn’t burn down, are you shortchanged because you paid the premium? You’re protecting yourself against catastrophic events. Financially, the catastrophic event is living to 100.

Thanks to big increases in home values, seniors have seen their housing wealth grow to a record $9.6 trillion. Are reverse mortgages, which allow seniors to tap that equity while remaining in their homes, a good source of retirement income? When the Federal Housing Administration insured most reverse mortgages, I thought, they can’t be that bad. But when I spent several weeks looking at them carefully with software, I decided that they’re way too expensive. They’ve got huge fees. You could sell your home and move into a continuing care retirement community—that’s like buying an annuity and long-term-care insurance at the same time. Or you could sell the house to the kids and write a contract in which they let you stay in it until you die. You take care of me and as soon as I die, you get the house. I die early, you win. I die late, I win. But it’s a win-win because we’re insuring each other.

What did the pandemic teach us, if anything, about the state of personal finances in the U.S.? We don’t save enough. The Chinese save 30% of their disposable income. We save very little. This is a wake-up call. The pandemic got me to think about what I was spending on housing, living in Boston. We downsized and moved to Providence, where house prices were a third as expensive. The pandemic has been a saving and spending wake-up call for us, just as the Great De­pression was for those who lived through it. We’ve realized life is much riskier than we thought. The pandemic is making us all reevaluate our finances and what really matters, which doesn’t include driving a BMW.

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