Don't Fall for This Social Security Panic Trap

Trying to protect yourself or clients against the coming crisis only makes it worse

Ric Edelman: It's Wednesday, April 10th. On today's show, millions of people are about to make a huge mistake with their Social Security benefits. Don't do it. And if you're an advisor, don't let your clients do it. I've been warning you for years, more than a decade actually, that the Social Security Trust Fund is going broke. 

When it does, in 2032, all Social Security retirement benefits are going to be cut by 24%. That's not a guess. That's a guarantee. Because that's how the law works. If you don't believe me, just go ask the trustees of the Social Security Administration's Social Security Trust Fund. The only way to prevent this catastrophe is for Congress to change the law. You see, it's really very simple how it all came about to be this way. The law is very simple. When they created the Social Security law back in 1935, they created along with it a Social Security tax. It's the payroll tax, and you know all about that. With every paycheck, some of your pay is withheld and goes into Social Security payroll taxes. 

That money is collected by the Social Security Administration, and the money is used to pay out benefits to the retirees. Well, back in 1935, there were a whole lot of workers and not very many people age 65. In fact, there were 135 workers for every retiree. Which means the government was collecting, back in 1935, a whole lot more money in payroll taxes than it actually needed to pay out in benefits. 

So what did they do with the excess money? They put it into a brand-new Social Security Trust Fund. And the money has been getting collected into that trust fund for decades and decades and decades. So much money that it has amounted to huge buckets of cash. But things have changed over the past 50 years. 

Instead of having 135 people for every retiree, we now have only three. In other words, the social security system never expected that people would be living so long into retirement. You were supposed to retire at 62 and be dead at 65. That's the way it was in 1935. But today you retire at 65 and you're living to 95. FDR never anticipated that. The result is that when you look at the amount of money that the Social Security system is collecting in payroll taxes, it isn't enough to pay out all of the benefits to all of those retirees. In fact, it's only enough to pay out about 76% of the benefits. So where do they get the other 24%? From the trust fund. The Social Security Administration has been dipping into the trust fund to make up the difference. And they're going to continue doing that as long as they can, and that means until 2032. By 2032, the trust fund will be fully depleted. There won't be any more money left. And at that point, the only money that the Social Security Administration will have to pay out to retirees is the money they're collecting in taxes. And that's 76% of the need. In other words, if you're getting a dollar in retirement benefits today from Social Security, starting in 2032, you're only going to get 76 cents. Because the other 24 cents was coming from the trust fund, which will no longer exist. That's the situation.  

So the real question for you is this: Between now and then, will Congress change the law? They're going to have to raise Social Security taxes to raise more revenue, or they're going to have to cut benefits, or delay the benefits for newer, younger workers so that they can transfer money or transfer emphasis to the current retirees. This is what we have to ask ourselves. And a lot of people are skeptical that Congress is going to do anything. And for sure, Congress isn't going to do anything right now. This is an election year. Nobody wins an election promising to cut benefits or raise taxes. You haven't even seen or heard anybody talking about this, have you? Of course not. 

So for that reason, although it certainly would be easier and cheaper in the long run if Congress acted now, I don't think Congress is going to do anything, not only not now, they're not going to do anything until 2032, until they have to, right before those mandatory cuts are about to happen. That way, Congress will be able to do some combination of tax increases and benefit cuts, and when the voters complain, Congress will be able to say, hey, it's not my fault, I had no choice. It was that or you'd suffer huge cuts. Politicians always love to do nothing until they're forced into it. There was a huge debate in America in 1940 about whether or not we ought to enter the war against Germany and Japan. But all that debate stopped with the bombing of Pearl Harbor. That horrible attack gave the President and Congress the political cover they needed to declare war. The President and the Congress, whoever they are, in 2032, They're going to get the same political cover when they say they have no choice but to save the Social Security system.  

So in the meantime, consumers are going to be wringing their hands with worry. All you'll know is that the trust fund is quickly becoming broke, and that Congress is doing nothing to fix it. And this is where millions of retiring Americans are going to make a very expensive mistake. Let's say you're 62 right now. And you're convinced that Social Security benefits are going to get cut in 2032. You look at your Social Security statement. You can do that at ssa.gov, and it's telling you that when you're 70, you're going to qualify for $2,000 a month. I'm making up that number. The average check is about $1,400, but work with me here, people. I'm trying to make a point. Let's say that when you look at your Social Security statement, you're told that at age 70, you'll qualify for $2,000 a month. That's 8 years from now. But by the time you get there, in 8 years, benefits are going to get cut 24%, because of the absence of the trust fund. And that means your monthly check won't be $2,000 a month, like the ssa.gov statement is promising right now. You're going to get less than $1,500 a month by the time you actually turn age 70 in eight years. So you know what this is causing some people to do? People in this situation, people who are turning age 62 this year, they're saying, I better start my benefits right now instead of waiting until I'm 70. That way I get my two grand now per month for the next eight years, and then when they get cut, I'll then get the $1,500. It's all clever logic, but it's dead wrong, and I'll explain why.  

If you're 62 and you need the money right now, go ahead and start your benefits. You need the money, so take it. But if you don't really need the money, and the only reason you're thinking of starting to collect your social security benefits right now is because you're afraid of the future cut that's coming in 2032, you're making a big, huge mistake. Here's why, in my example, having you wait to age 70 to get $2,000 bucks a month - that's the maximum benefit for waiting the longest to start. You see, if you start collecting benefits prior to age 70, you don't get what you would have gotten if you waited to age 70. You get a whole lot less. Like, if you start at 62, instead of waiting to 70, you get 56% less than if you had waited. 

In other words, if you're supposed to get $2,000 a month at age 70, but you start at 62, you don't get $2,000 a month. You only get $1,100. And then, when the Social Security Administration cuts everybody's benefits 24% in 8 years, because you locked in at $1,100 by starting now, you're gonna get cut by another 24%, all the way down to $858. 

So instead of getting $2,000 a month, you're going to be getting $858. All told, by starting now at 62, instead of waiting to age 70, you're going to cut your monthly income by 57%. Have you ever experienced a stock market loss of 57%? This is pretty huge. If you think getting $2,000 a month isn't a whole lot, try $858. 

Yes, we have a Social Security crisis. No, Congress isn't doing anything about it right now. Yes, the trust fund is being depleted. No, starting your benefits now is not the right answer. Do not start your Social Security benefits. And if you're a financial advisor who has clients turning 62 this year, or they're older and not yet started their benefits? Don't let them start until they're age 70. No matter what happens with Social Security, starting now will only make your situation worse.  

On tomorrow's show, UBI is growing all over the country. Let's see how you feel about this new trend of universal basic income. 

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Links from today's show: 

Social Security Administration: https://www.ssa.gov/  

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