Showing posts with label Social Security. Show all posts
Showing posts with label Social Security. Show all posts

Friday, October 2, 2015

No Social Security COLA Adjustments for 2016

Unless something really wacky happened to cost-of-living in September that I don’t know about, Social Security recipients will not receive cost-of-living benefit increases for 2016.

Here’s the math:

The benefit increases only occur if the average CPI-W for July, August and September exceeds that for the highest previous average for the same months (which occurred in 2014). In 2014 the three CPI-Ws were

234.525 for July 
234.030 for August 
234.170 for September

702.725 total for the three months (average 234.242)

In 2015 we already have:

233.806 for July 
233.366 for August

Meaning that to equal the 2014 total of 702.725, we’d need September to come in at 235.553. However, the cost of living adjustments occur only in 0.1% increments, which means a small increase in the average won’t trigger a COLA adjustment. It has to minimally round up to 0.1% and that requires the total to be at least 703.077. September’s CPI-W must come in no less than 235.905 to trigger a COLA adjustment, and to do that cost-of-living must have jumped over 1% in September!

The CPI-W is not seasonally adjusted, so it is more volatile than some other measures of cost-of-living, but a 1% jump did not happen in a month when gasoline prices continued to decline.

We’ll know for sure on October 15 at 8:30 A.M. Eastern Time, but the bottom line is: No Social Security COLA adjustments for 2016.

~ Jim

Tuesday, December 17, 2013

Delaying Social Security Benefits Revisited

Roughly a year and a half ago, I wrote about my decision to delay the start of my Social Security benefits. http://blog.jamesmjackson.com/2012/07/delaying-start-of-social-security.html In that article I argued that for those of us fortunate enough not to have to live off Social Security payments, we should  concentrate more on our risk of outliving our money rather than on the risk of dying too early and not spending all we could have. In the intervening months between the first article and this one a lot has happened politically and in the financial markets that make some question whether my decision to delay payments is still valid.

I think it is.

Politically, we are another eighteen months closer to running out of money in the Social Security Trust Fund with no hope of Congress acting in a manner to avert the problem. Many Republicans are back to ballyhooing their flawed idea of individual retirement accounts replacing traditional Social Security benefits (after all, the stock markets are hitting new highs) and Democrats are on this issue the “party of no”—as in they want no change, regardless of expert testimony that the current approach is unsustainable.

As each day passes, more Baby Boomers hit retirement age, making it harder to change their benefits. As a large demographic that votes, they can throw their weight around with targeted lobbying by organizations such as AARP. Given the demographics, it will take significant political will to make changes in Social Security. The 113th Congress has shown no political will or wisdom, and there is no reason to think the 114th will be better.

Congressional inaction continues to increase the risk of the Social Security Trust Fund running out of money. So with all that, why shouldn’t you do the Boomer thing of take the money and run.

Without Congressional action, the Social Security actuaries project the retirement Trust Fund will be empty around 2033. That does not mean Social Security benefits must stop. However, it does mean the benefits will become strictly pay-as-you-go: total payments (the benefit checks) can’t be more than the total income (the retirement portion of FICA taxes).

As I illustrated in the earlier blog, by deferring the start of Social Security payments until normal retirement age (66 for me, 67 for those born after 1959 and something in between for those born in 1955-1959) you maximize the portion of your assets indexed to inflation. Let’s say your Social Security normal retirement benefit starting at age 66 is $1,000 a month. If you begin payments at age 62, you will receive only $750 a month. Assume inflation runs at 3% every year (that won’t happen, but it could average out to about that). Here’s what you would get at various ages:

Age
With Age 62 Retirement
With Age 66 Retirement

Age
With Age 62 Retirement
With Age 66 Retirement
62
750
0

80
1,277
1,702
65
820
0

85
1,480
1,941
66
844
1,126

90
1,716
2,288
70
950
1,267

95
1,989
2,652
75
1,101
1,469

100
2,306
3,074




During the first four years you are unambiguously better off if you start your Social Security benefits at age 62. Over those four years you will receive around $37,500 in benefits. Assuming a risk-free return equal to the inflation rate, those payments would have an accumulated value of approximately $39,000. You’ll need that money to reimburse yourself for the greater normal retirement benefits you could have been receiving had you delayed your Social Security retirement. Your accumulated pot of money (continuing to grow with interest but shrinking with the make-up payouts) runs out around age 77. From then on you are less well-off compared to deferring Social Security retirement.

Because the Trust Fund will not run out of money until 2033, anyone born before 1956 who delays payments will have already reached their break-even point and thus be ahead of the game before the Trust Fund hits zero. Once the Trust Fund runs dry, and if there is no other change in Social Security, benefits must be cut by roughly 25% to balance benefit payments with FICA taxes. Note that if you delayed the start of benefits, you will continue to receive considerably more from Social Security each month compared to what you would get if you started benefits as early as possible because the cuts are proportional. Using Age 85 from the table above, if you took your benefits early a 25% cut reduces your monthly benefit from $1,480 to $1,110. The benefit those who deferred receive declines from $1,941 to $1,456.

Does that mean you can best hedge all political risk by deferring the start of Social Security retirement? Not necessarily. The scenario above assumes an across-the-board 25% haircut. While that’s what people are currently discussing, it is possible that the cuts could come from the top down by imposing a cap on the monthly benefit. Even in this take-from-the-rich-and-give-to-the-poor scenario, those my age are still better off delaying the start of retirement because the cut occurs after we have reached our break-even point. Younger folks will need to evaluate when it’s time for them to make the take early/defer decision. Also, Congress could enact this type of benefit cut earlier. It’s not likely, but it is possible, and if they did, it could delay the breakeven date, making it less attractive.

From my perspective at the end of 2013, the politics of the last year and a half have not changed my decision to continue to delay the start of my Social Security retirement benefits.

Recently someone smirked that if I had only taken early Social Security and invested those payments (after-tax) in the stock market, I would be monetarily far ahead. Investment gains would defer the break-even point—maybe even to eternity.

There are two problems with this argument. First, it uses an ex post facto analysis. When I made the decision to defer I did not know what the stock market would do. This looking at what actually happened and saying what I should have done is similar to saying that in December 2002, I should have sold my house, borrowed to the hilt, and invested it all in Apple at $14 bucks a share. Then, in perfect market timing, I should have sold the stock on December 17, 2012 at $700. [And even sold it short that day if I were so prescient.]

Social Security provides an almost risk-free investment. (It used to be risk-free until some Tea Party advocates decided having the US government default on its debt was acceptable.) Since my reason for delaying Social Security benefits is to insure against running out of money if I live too long, I should not then foul the comparison of a risk-free return and one investing early payments in a risky proposition such as equities. Doing so defeats the strategy of taking out longevity insurance. This faulty thinking is the same that caused many defined pension benefit plans to invest heavily in equities to “hedge” against morality risk. While stock markets rose, it looked brilliant, but in the recent past it proved disastrous for companies and governments alike. Some plan sponsors have frozen future benefits, and eliminated non-guaranteed benefits—not an option for an individual.

So unless I learn that I am suffering from a disease that significantly decreases my life expectancy, I plan to stick with my decision and defer the start of my Social Security benefits until I turn 70.


~ Jim

Friday, July 27, 2012

Delaying the Start of Social Security Benefits


I was one of the youngest in my 1968 high school graduating class, which means I’m one of the last of those who have already retired to face the decision of starting Social Security payments at our earliest eligibility, age 62. This decision involves many considerations; I advise talking with an experienced financial advisor to help make sure you understand all the ramifications of early retirement.

I was an actuary and understand the mathematics involved in determining the exact retirement age to maximize the present value of Social Security payments. However, that calculation does not include a crucial perspective: reflecting your risk profile relating to outliving your money.

Unfortunately, because you are a single individual the actuarial mathematics of optimizing when to start Social Security doesn’t apply. It relies on the law of large numbers to provide rational results. You and I are single numbers. We only get to die once (reincarnation is not reflected in Social Security earnings records) and you will either die before or after the actuarially expected time—throwing off the results.

A factor people who have significant retirement assets other than Social Security should give significant weight to is the financial effect if you die “too early” compared to the results if you live much longer than anticipated.

Unless you are already living month-to-month (in which case you probably didn’t have significant retirement assets), if you die “too early” you probably didn’t spend all the money you had available. Your beneficiaries will get more than you hoped they would (you hoped you would spend it not your children or church or whatever). You could have lived a bit higher off the hog. That’s your loss.

If you live “too long,” at some point your standard of living takes a rapid decline. In determining how much you can spend each year, you include Social Security, retirement plan payments and dipping into savings based on a reasonable expectation of how long your savings must last. Unless you are lucky enough to have retired from government, your defined benefit plan payments (if any) are not linked to inflation so over time their purchasing power decreases in value. With good planning, you took that into consideration when you determined how much you could pull out of savings each year.

All of which works fine until you live longer than your plan allowed. Savings can no longer hold up its end of the bargain; the pension plan payments buy less and less each year. Only Social Security keeps up with living costs.

By deferring the Social Security payment start until normal retirement age (66-67 depending on your year of birth) you maximize the portion of your assets indexed to inflation. Let’s say your Social Security normal retirement benefit starting at age 66 is $1,000 a month. If you begin payments at age 62, you will receive only $750 a month. Assume inflation runs at 3% every year (that won’t happen, but it could average out to about that). Here’s what you would get at various ages:


Age
With Age 62 Retirement
With Age 66 Retirement

Age
With Age 62 Retirement
With Age 66 Retirement
62
750
0

80
1,277
1,702
65
820
0

85
1,480
1,941
66
844
1,126

90
1,716
2,288
70
950
1,267

95
1,989
2,652
75
1,101
1,469

100
2,306
3,074


During the first four years you are unambiguously better off if you start your Social Security benefits at age 62. Over those four years you will receive around $37,500 in benefits. Assuming a risk-free return equal to the inflation rate, those payments would have an accumulated value of approximately $39,000. You’ll need that money to reimburse yourself for the greater normal retirement benefits you could have been receiving had you delayed your Social Security retirement. Your accumulated pot of money (continuing to grow with interest but shrinking with the make-up payouts) runs out around age 77. From then on you are less well off compared to deferring Social Security retirement.

From a risk standpoint, these later years are just the time you’ll need the extra money because your chances of outliving your life expectancy are now much greater.

For me the choice is easy. I can afford to die “too early” and I won’t be living to regret my decision. However, if I live longer than expected, I’ll have to suffer (or not) the consequences of that decision. Having a larger guaranteed income will be a welcome cushion.

I’m not sure most baby boomers will agree with my logic. The majority of my generation has preferred purchasing perishable consumer goods over saving for retirement. I suspect these people will start collecting Social Security as soon as they can. Many will rue their decision after they’ve run out of money and all they have left are their toys that no longer work.

~ Jim

Thursday, May 19, 2011

Solving the Budget Deficit—Step Four: Repairing Social Security and Medicare

Social Security and Medicare are funded by what people think of as their FICA taxes. The Social Security portion was intended to be self-sufficient, with benefits “funded” from the taxes without additional income required from general revenues.

More and more of the Medicare benefits have been implemented with the assumption that a substantial portion (75% for much of it) will be funded by general revenues. Because of the different assumptions which birthed these two programs, we’ll address them separately.

Social Security

The biggest problem—perhaps we shouldn’t call it a problem, but an issue—with Social Security is that we are living longer than actuaries originally planned for us. That is not the only issue. We are retiring earlier in larger numbers, which generates fewer years of contributions. As with any program around for three-quarters of a century, some inefficiencies and idiosyncrasies have cropped up. These can be easily resolved if we can get the big fix in place.

Here is an immutable formula that defines financing of retirement plans:

Benefit Payments + Expenses = Contributions + Investment Income

Expenses are not a problem. Social Security is a well-run, efficient operation. Investment income could be enhanced a bit with moderate risk—but that’s a fairly small thing, since the right hand of the general fund of the Federal government has been borrowing from the left hand of the “Social Security Trust Fund.”

To fix Social Security’s problem requires either a cut in benefit payments or an increase in contributions. We can cut benefit payments in three manners: (1) continue to increase the retirement age; (2) reduce benefits the same percentage for everyone across the board to achieve balance; or (3) tweak the benefit formula to minimally affect those beneficiaries who earned the least and significantly cut benefits for maximum wage earners.

It is always easiest for politicians to cut benefits for those far away from retirement. The thinking goes that they have more time to adjust to the changed circumstances. I’m a bit skeptical of the argument. I’d bet most people don’t really know what they’ll get from Social Security—despite Social Security sending annual statements to all workers twenty-five or older since 1999. [Recently the Social Security Administration suspended the statements due to “the current budget situation.”]

One of Social Security’s strengths is that while benefits tilt toward the working poor and away from those better off, they are not so skewed that people consider them unfair. Social Security is widely regarded by all income levels as a good program (which is not to say that people don’t want to make it better, based on their idea of what “better” means.) Changing the current balance by tweaking the formula strikes me as possibly being the straw that breaks the camel’s back.

We should continue to raise the retirement age from its current maximum of 67. The original age 65 normal retirement was adopted at a time when people couldn’t work after 65 because they were physically worn out. Some professions still wear people down to the point they can no longer work. The disability provision must address their situation. For the rest of us, our lifestyle at age 70 today is much more robust than the lifestyle of the 1930s 65-year old. We need to rapidly raise the retirement age and start that process for anyone who has not yet reached their normal retirement age (that includes me).

At the same time the normal retirement age is increased, we should increase the early retirement age. Maintain the current four-year differential for those currently eligible for early benefits. Thus, if someone’s normal retirement age is 70, they could start Social Security as early as 66.
To the extent raising the retirement age does not adequately address the funding shortfall, I suggest cutting benefits in two ways.

First, extend the number of years of averaging from thirty-five to forty in order to receive a full benefit. Start the increase with 2012 retirements and pop it up by one year every other year. For people who work forty years, it will have a very minor effect on their benefits. For those who choose to retire early, it will have a larger effect, eventually reducing benefits by up to 12.5%. Those who are permanently disabled would be unaffected by the change.

Second, provide those who work past the normal retirement age with greater benefits than those who retire earlier, but defer benefit commencement. A simple approach would be to eliminate their future FICA taxes—they have fully paid for their benefit.

If all of those changes are not sufficient to get Social Security back in balance, then cut benefits across the board for everyone: current beneficiaries, those currently working and those not yet born.

Unlike my solution to fix the general fund deficit, I do not think additional taxes are appropriate. One suggestion often touted is to remove the cap on which the OASDI (Old age security and disability income) portion of FICA taxes are paid as was done for the Medicare portion in 1994.

In all my years working with corporate executives I never heard one complain about their personal Social Security taxes. Many looked forward to and celebrated the day when they got their “raise” after they had reached the income threshold and no longer had the FICA tax withheld from their paycheck, but no seemed to think the tax was terribly unfair. If we eliminate the wage limit for FICA taxes, it will drive a wedge between rich and poor in a system that is to the poor’s advantage to maintain.

Congress designed Social Security to be fiscally neutral, and I think that is a good policy to keep. While I believe we should raise taxes on those with higher incomes, income taxes, which benefit the general operating fund, not FICA taxes are the place to raise them.

Next blog for Medicare.

~ Jim

Monday, September 6, 2010

Social Security May Plug the Payback Loophole

I’m sure this provision in Social Security started life as someone’s altruistic idea to help out folks who made a poor decision. Essentially, the payback works like this: you can restart your Social Security benefits to eliminate any early retirement reductions and take advantage of delayed retirement credits with one small hitch—you need to pay back any benefits you received with interest.

What’s wrong with that? If someone made a bad choice, why not give them a do-over? Because the only people who can take advantage of this payback option are those with enough money on hand to pay back all their previous Social Security benefits. That does not include most people.

Let’s take a simplified example that ignores the effect of cost-of-living adjustments and interest charges. Mr. Former Wage-Earner started benefits in 2005 at age 62 at the rate of say $10,000 per year. His full retirement age was 66 (in 2009). If Mr. Wage-Earner had waited until 2013 to start benefits they would have been (again ignoring COLA adjustments and Wage Base Increases) roughly $17,500.

Under the payback rules, he could stop benefits, pay back $80,000 (8 years at $10,000/yr.) and for the rest of their life get $7,500 more per year in benefits. Still ignoring interest, as long as he lives to age 81, he’s ahead of the game.

Since most retirees should be much more worried about longevity risk than the date they break even, this is an excellent deal for those in decent health since it provides 75% more benefits for folks who live to ripe old ages, mitigating the risk of living longer than money lasts. Further, if you compare this deal from Social Security to the cost of purchasing a life annuity with full CLOA from an insurance company at age 70, you’ll discover this is a also an excellent monetary deal from that standpoint.

Because people are using the payback for other than “oops” situations, the Social Security Administration wants to change the rule so it only applies for the first year after Social Security benefits start, which covers the purported original intent of the provision.

If you want to take advantage of this loophole (1) get top-notch investment advice about whether this makes sense and all of the ramifications, and (2) hurry—the loophole may not last long.

~ Jim

Monday, August 16, 2010

Prediction: No Social Security CPI increase for 2011

Unless something unexpected happens, we will have positive inflation for 2010, but I do not expect Social Security benefits to increase for 2011. That seems unfair—until we look at the larger picture.

Social Security benefit increases for a calendar year are based on the ratio of the average CPI-W (CPI for Urban Wage Earners and Clerical Earners published by the Bureau of Labor Statistics) factors for the previous July, August and September as compared to the highest average CPI-W for any previous July, August, September period. If inflation monotonically increases (that is there are no decreases) the comparison is from one year’s third quarter average to the previous year’s third quarter average. That’s what happened with the CPI-W index for all years through and including 2008, resulting in annual Social Security benefit increases.

In 2008 the average was 215.495, a whopping 5.8% higher than 2007’s 203.598—and for 2009 Social Security beneficiaries received this 5.8% increase. [You may recall oil prices were skyrocketing during that period, driving up the CPI.]

Oil prices declined, the world went into recession and prices declined. In 2009 the CPI-W third quarter average was only 211.001, a 2.2% decrease from the previous year. Fortunately for Social Security recipients, benefits may not be decreased because of decreases in CPI-W, and so for 2010 they remained unchanged. While it didn’t feel like it to retirees, from a math geek’s perspective, they were getting a bonus during 2010 because their benefits did not decline—relative to the index they were getting a raise.

July 2010’s CPI-W was 213.898—higher than last year, but still not as high as 2008. Unless inflation increases significantly in August and September (it would need to increase at an annual rate of roughly 9%), the average for 2010 will be less than 2008’s average. Consequently, no increase in benefit levels for 2011.

The outlook for a 2012 increase is reasonable. The CPI-W is only about 1.1% below its all-time high in July 2008 and for the last twelve months the CPI-W increased about 1.6%, although the rate of increase has declined recently.

For those not receiving Social Security benefits, the lack of a cost-of-living adjustment will also mean the contribution and benefit base for 2011 will remain unchanged from 2010 (and 2009) even though average wages have continued to increase. Once the average third quarter CPI-W does exceed 2008’s level, the wage base will increase based on the National Average Wage Index.

~ Jim