Can You Count on Social Security?

No matter how you slice it, the recent news on the future of Social Security is sobering. The immediate threat to the program—though likely transient—comes from the debt ceiling. Unless a solution is reached, benefit payments could be delayed for millions of retirees. The long-term risk may be more dire. According to the 2023 OASDI Trustees Report, reserves in the Social Security trust fund will be depleted after 2033.ⁱ

What happens then? Don’t worry, benefits won’t disappear. Instead, Social Security would disburse only what it collects in payroll taxes each year. The trustees project that Old-Age and Survivors Insurance (OASI) income could meet roughly three quarters of scheduled benefits. But with Congress coalescing around a deal, benefit payments will likely avert delays for millions of retirees.

Potential Changes to Social Security

We believe Congress will strengthen the future of Social Security before 2033. For instance, the Social Security Administration recently published a Summary of Provisions That Would Change the Social Security Programⁱⁱ which included the following options:

• Reducing the inflation Cost of Living Adjustment (COLA) applied to benefits by a fixed amount or switching to the slightly lower chained CPI
• Modifying the formula for calculating the basic benefit amount, whether for all recipients or through “means testing” based on annual income of the beneficiary
• Increasing the full retirement age and/or minimum eligibility age to collect
• Adjusting benefits received by family members (i.e., widows, spouses, and children)
• Hiking the payroll tax rate
• Raising or eliminating the current $160,200 wage cap for Social Security taxes, or taxing a portion of earnings above that amount
• Expanding the types of income that are subject to Social Security tax, such as investment income or business income
• Investing a portion of the Social Security Trust fund in marketable securities
• Increasing the portion of Social Security benefits that are subject to income tax, or raising the tax rate paid on those benefits

While it’s difficult to handicap which (if any) options will ultimately become law, the prospect of cutting Social Security benefits has historically proven unpopular. It’s quite possible that the solution will involve a combination of provisions with some phased in over time or affecting only future beneficiaries.

An Ongoing Evolution

Keep in mind, there have been dozens of changes to Social Security benefits over the years. When Social Security debuted, benefits commenced at age 65 or older, cost-of-living adjustments (COLAs) didn’t exist, and the program provided no real coverage for spouses and family. Clearly a lot has changed, so it’s not unreasonable to imagine further amendments to ensure the future of Social Security (Display).

Delaying Social Security

While there is past precedent for amending Social Security, there’s no guarantee that Congress will find a workable solution this time around. Should a looming reduction in benefits impact the timing of your claim? In short, we don’t think so. To explain, we’ll use the same approach we’ve previously employed to explore other Social Security scenarios involving inflation or survivor benefits. In each case, our goal is to find the tipping point, or the age when a retiree accumulates more wealth by delaying Social Security benefits to age 70 than by claiming them at age 67.

Consider a 67-year-old contemplating receiving annual benefits of $40,000 today or waiting for higher benefits of $49,600 at age 70. Our analysis shows it takes about 12.5 years—or by age 81.5—to accumulate more total wealth by delaying the claim. Put another way, if the retiree lives past age 81.5, they’d be better off waiting.

But what happens if the future of Social Security includes a 25% reduction in benefits to shore up the trust fund? Shouldn’t you bet on a sure thing?

Let’s take the worst-case scenario. Assume a retiree waits until age 70 and in the year that they claim, benefits are reduced by 25%. In other words, this unfortunate retiree misses out on three full years of intact benefits (by claiming at 67) only to collect a payment that is smaller than the $40,000 they would have originally received. What happens to the tipping point now? In this scenario, it’s pushed back by 4.2 years to age 85.7 (Display).

That figure is unlikely to change—even if the 25% reduction occurs 5 to 10 years down the road, instead of three. That’s because postponing to age 70 allows retirees to collect a few years of intact benefits before the cuts kick in. As a general rule, the longer you live, the more you’ll likely gain by delaying Social Security—even accounting for a reduction in benefits.

A Moving Target

What could change the calculus for the future of Social Security? If Congress passes a combination of provisions that reduces Social Security payments by a greater extent for certain beneficiaries. Here, the tipping point shifts depending on the degree to which lawmakers trim benefits and when those cuts take effect. In a more challenging scenario—which assumes payments are halved in 2026—the tipping point would be pushed back until age 94. But if such drastic measures are averted until 2033, the tipping point would occur at age 87 (Display).

Wait for the Bird in the Bush

Our advice on delaying Social Security has always been counterintuitive. Many retirees are eager to collect as soon as they’re eligible, but our research shows clear benefits from waiting until age 70. A higher Social Security payment at age 70 (even if reduced in the future) matters most to those at risk of drawing down their portfolios if they live well into their 90s.

Notably, the tipping point does shift if benefits are reduced. However, delaying a claim remains optimal for many families as it provides (i) better inflation protection, (ii) a better longevity hedge, and (iii) a cushion for spouses with significant age gaps where a higher survivor benefit could add value. On the other hand, for families facing life expectancy concerns, spending constraints, or liquidity challenges outside their retirement accounts, collecting at full retirement age (67) makes the most sense.

When it comes to the future of Social Security, your Bernstein Advisor can help you determine the best strategy based on your individual circumstances.