The Smart Way to Approach Social Security

Social Security is expected to run even faster than previously projected. According to one estimate, funding for the entitlement benefit is now set to expire by 2034 instead of 2035 because of the impact of the pandemic.

In this episode of The Five, recorded on Sept. 1, Fool contributors Jeremy Bowman, Jason Hall, and Trevor Jennewine discuss the best way to think about Social Security and how you should think about your finances more generally in retirement.

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Jason Hall: And we’ve got another finance, econ topic. But I think this one hits right close to home. Social Security, we go back to 2019, early 2020, and the Social Security Administration provided a report that said, hey, we are good till 2035 before we deplete the trust fund. That was a little better than it had been before. There was some good economic stuff ahead, so they said hey, we’re going to make the trust fund last a little bit longer. Then 2021 happened, and 2020 happened, and it looks like the trust fund is going to get depleted a little bit more. Now they’re saying yeah, it’s going to be 2034. We’re going to be insolvent in 2034. We’re going to run out of money.

Here’s what that means. I think it’s important to really explain exactly what that means. The trust fund is going to be depleted, and for Social Security to meet its obligations, one or two things are going to have to happen. One of three things, really. Either Congress is going to have to raise Social Security taxes to increase the funding to pay services at the required levels, it’s going to have to cut benefits — last I checked, retirees are the highest voting population; I’m guessing Congress is not going to cut benefits in 2034 — or some combination of the two, meaning that the younger folks, looking at Trevor and Jeremy, are going to see their benefits kicked further out in some way while taxes get raised for us at the same time. So we’re going to get to pay more in taxes for Social Security that we are going to have to live longer to even get any of.

So here’s what I wanted to ask you guys. Thinking about your retirement, thinking about your financial future and your planning, Trevor, kick us off here. How much are you counting on Social Security to be a part of the way that you meet your needs when you’re retired?

Trevor Jennewine: Personally, the way I’ve always thought about retirement, Social Security is the icing on the cake. I’m not factoring it into my math at all.

Hall: Pizza money.

Jennewine: Yeah, exactly. I don’t really take in to account. That’s my answer.

Hall: That’s a great answer. Jeremy?

Jeremy Bowman: Yeah, I mean, I kind of feel the same way. I don’t think Social Security is going to run out. I understand there’s this problem, but I think maybe once payments come back or something, but —

Hall: It’s not going away.

Bowman: Right. Yeah. I don’t think it’s just going to disappear. That would be really a political outrage. But personally, I’m not counting on Social Security pretty much for the same reason I’m not counting on unemployment if I lose my job. Those are payments, those are cash flows that are outside of my control, and I want to be able to have control of those kind of situations. You want to have an emergency fund and your investments if you can, to keep you afloat in those situations.

I think like you just said, Social Security, think of it as pizza money or gravy, whatever you want to call it. You want to think of it as more of your bonus in retirement rather than your salary, and it’s a way to supplement your lifestyle, not something that you should really be depending on in retirement.

Hall: 2034 is a meaningful date for me, because it’s four years before I turn 62. Sixty-two being the earliest age that you can start to collect Social Security.

Bowman: You just made me think about when I’m turning 62.

Hall: It’s scarily closer than we seem to think sometimes. So I’m not not counting on it, but I’m certainly thinking about the implications. And the implications that I’m thinking of — and here’s the thing. I’m building my financial strategy. I’ve spent a lot of time writing and studying about Social Security. I used to write about it a lot for the Fool. So I spent a ton of time looking at it and thinking about the dates. If you live to 65, you’re probably going to live to 80. That’s what the metrics say. And generally, by the time you’re 65, unless you have some diagnosis, some existing health concern, you are very, very likely to live into your 80s. And that means for the vast majority of money to get the most dollars out of Social Security, you should wait until 68, 69, or 70 and then claim it, and you’ll earn the most dollars from the system because the amount that you can earn increases over time.

So I’ve thought a lot about this, and I come from a pretty long lived family. I like to think I take pretty good care of myself, and I probably wouldn’t be actually taking Social Security until I turn 70. That would be 2034 plus four, so 38 plus eight, what, 2046? Did I do the math right there?

Bowman: Yeah.

Hall: So by 2046, if I wait till I’m 70 to take Social Security, I think the smart math for people to do is assume the worst here. And I think again, the worst, Jeremy, as you were saying, is not Social Security going away. It’s that Social Security, being in a situation where it’s paying out 25% or 30% lower benefits. Because it’s depleted the reserves, Congress hasn’t acted, or the way that it’s acted is not conducive to larger amounts of money for younger workers who are going to be dealing with it years after the fact. You just have to operate under the fact that you’re going to soak up some losses, and maybe you’re only going to be taking in 65% or 70% of what the expected amount would be if you do the calculations and the annual cost-of-living increases based on today.

That’s how I’m thinking about it. I’m thinking about it being probably 30% less than I would’ve expected assuming Congress does the right thing. I will say this, though. You have to help me out here. World War II, British prime minister.

Bowman: Churchill.

Hall: Churchill, thank you. Winston Churchill has a statement, and the statement says Americans, and I’m going to say Congress in here. The thing about Congress is that it will eventually do the right thing, but only after all other alternatives have been exhausted. But he said that about Americans. I think that’s how I think about it.

Any more thoughts on that one, guys?

Jennewine: No, I think you hit it.

Bowman: Yeah, you put it really well.

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