Social Security as a Stream of Post-Retirement Income
What is Social Security?
The Social Security Act was signed by President Roosevelt in 1935 as part of the New Deal to support a steady income for retired individuals 65 and older. Over the years, it has expanded to include other social safety-net entitlements. It is the most successful anti-poverty program in US history and remains one of the most popular and effective government programs today.
There are several types of Social Security benefits. They are:
- Social Security Disability Insurance (SSDI)
- Supplemental Security Income (SSI),
- Survivors’ Benefits
- Spousal Benefits
But the focus of this article will be the foundation of the Social Security system: Social Security Retirement Benefits.
Who benefits from Social Security?
As of 2019, Social Security helps 1 in 5 Americans, a third of which are disabled, dependents, or survivors of deceased workers. Most retired workers can begin claiming reduced Social Security at age 62.
For a recipient to be eligible for 100% of their monthly retirement entitlement, they must wait until full retirement age (FRA), which is 66 or 67, depending on their birth year. Delaying benefits by months or years will increase the beneficiary’s monthly payout by a fixed percentage. If Americans born between 1943-1954 delay their benefits until age 70, they will be entitled to 132% of their full retirement benefit. The percentage of funds available maxes out at 70 years old, regardless of how much further they delay enrollment.
When should Seniors begin receiving Social Security benefits?
Soon-to-be retirees often face complex and challenging considerations when deciding when to begin taking Social Security. On the surface, the choice looks crystal clear: wait it out and collect the most money possible. But that might not be a realistic option for everyone.
Social Security began as an anti-poverty measure, and to a large part, it still fills that role. Social Security payouts amount to 50% of post-retirement revenue for at least half of older beneficiaries. And for about 25% of seniors, it provides at least 90% of their income. Social Security income acts as a progressive annuity where lower wage earners get back a higher percentage of their pre-retirement income, while higher wage earners receive a lower rate.
As older adults are pushed out of full-time employment due to cost-cutting and downsizing, many find themselves shuttled into low-wage part-time work, participating in the gig economy, or withdrawing entirely from the workforce. If a senior in this situation is not able to make ends meet, they may want to consider taking an early, reduced benefit to avoid financial difficulties.
Health may also be a driving factor for early enrollment. Since the original signing of the Social Security Act, life expectancy has gone up dramatically. A healthy man or woman who is 65 can expect to live until 81 and 85, respectively. And due to advances in medicine and increases in healthy lifestyles, 17% of today’s 65-year-old men and 31% of modern 65-year-old women can expect to live past 90. If a retiree has reason to believe they will live a long life, it may be wise to wait until at least FRA, if not 70, to receive the maximum sum. In this case delaying is a great option should you have enough savings to bridge the gap between leaving the workforce (seniors can continue to work without penalty after reaching FRA) and enrollment.
But not every senior is healthy. If a potential claimant is chronically or seriously ill or has a predisposition to certain hereditary conditions, it may be in their best interest to claim a reduced payout so they can gain from the system to which they contributed over their lifetime.
How does Social Security fit with other standard retirement vehicles?
Traditional defined-benefit pensions have fallen out of favor with many employers as an increasing number shift toward defined-contribution plans (such as 401(K)s). Issues with the latter include dependence on workers’ contributions and ties to the whims of market fluctuations. Cost of living adjustments are also guaranteed with Social Security. This leaves Social Security as the only steady stream of income that is not exposed to risk and is guaranteed to keep up with inflation.