Chris Stein, CFP®
If Social Security Projects a Reduced Payout in 2035, Should I Claim Early?
If Social Security projects a reduced payout in 2035 (possibly reducing it to 75%), should claimers apply for their benefits early? An Arizonian asks this question with more details:
“The Social Security website is projecting that in 2035 they will institute the first reduced monthly payout, paying only 75%. I am 50 years old, but in 2035 I will be 66. My question is, should I begin taking my SS at age 62, even though I will not need the money, to have four years at the higher un-reduced payout. Does it make sense to start taking SSI before the reduced 3/4 payout in 2035?”
A lot will happen in the next 12 years before you get to the age of 62 or the age of first eligibility. (That’s when you can first claim a retirement benefit from Social Security: in the month after the month in which you are 62 for an entire month.)
I believe you’re worrying prematurely. Not that there won’t be changes to Social Security, but the idea that the benefit will be chopped to 75% is pretty unlikely. (Actually, I think the statement said it was 78%.)
A Dwindling Trust Fund
Social Security is having to tell the truth about its current situation, which is that by about 2033 or 2034, the Social Security Trust Fund will have run out. What is this trust fund? It consists of excess contributions to Social Security that have been built up and held over time. For years, Social Security has taken in more money from people and employers paying Social Security taxes than it has paid out.
In the past couple of years, Social Security has turned the corner where it now pays out more money every month than it has come in, and the trust fund is being used to cover the deficit. Social Security can make up for the cash flow shortage by dipping into the trust fund. But at some point, that reserve is going to run out.
While Social Security had been building this surplus in anticipation of this turning point, according to recent calculations, the trust fund isn’t going to last as long as it had hoped. Under current projections, it’s supposed to be exhausted by about 2033 or 2034. The Social Security system is not allowed to go into debt. So, once the trust fund runs out, if no changes are made to the system, something will have to change in how much it pays out.
If in 2035 everything is as it is today, the assumption is that an across-the-board reduction would be necessary. An alternative would be to say, “Well, we’re going to cut these people by half, and keep these people whole.“ The final remedy is not settled yet. But the assumption mentioned now is that they will chop everything by 22% and continue sending out checks to everybody as it has done all along.
Changes are Likely
I think the chance is minuscule that we get to that point with no changes. As the date gets closer and closer, the chorus of people yelling and calling for fixes and changes to Social Security – more in the longer term – is going to get very loud. Even an inept Congress that can’t seem to get anything done is going to be forced to address this issue. They’re not going to want to be the ones in power in 2035 when suddenly a bunch of their constituents’ Social Security checks get cut by over 20%.
Even though it’s not being acted upon right now, proposals have been swirling around for quite some time. How it gets resolved will depend a lot on who gets elected in both the Congress and the Presidency in the next 2-3 election cycles. That will determine the direction these fixes or changes will take. But, I think the likelihood is very low that things 12 years from now will be as they are today. Much less even farther off in 2035.
It will be vital for you to keep an eye on this, so you’re aware of the changes that do get implemented. You’ll want to know if you are affected or not. Some people of a certain age will be unaffected and will continue playing under the old rules. They’ll be grandfathered into the current situation. But some people will be affected by new rules.
Someone like you who is 50 right now might very well be on the edge of those who will experience some sort of change. Will it change so much that you’ll want to run out and pull the trigger at 62 to try to gather as much as you can before any changes go into effect? Probably not. And you have until your 62nd birthday to decide, with the benefit of much more information.
I can’t see the future, so this is just my opinion. Is it possible that nothing will be done? And that 2035 rolls around and suddenly all the benefits will be cut? It’s possible. I think it’s very, very unlikely, though.
You are 12 years away from having to decide. I know it would be handy information to use in your financial planning, but I don’t think we know enough for you to make that decision today.