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The Political Risk of Delaying Social Security Until 70

Some people argue that holding off on claiming Social Security is akin to betting that there won’t be any rule changes. I don’t think that’s true. While certain Social Security reforms would make it advantageous to claim earlier, other reforms wouldn’t change the decision at all, and others could actually make it more advantageous to delay claiming benefits.

The five potential Social Security reforms that I see suggested most often are:

  1. Increasing or eliminating the payroll tax cap,
  2. Increasing the payroll tax rate,
  3. Increasing the full retirement age,
  4. Means testing benefits in some way, and
  5. Switching from regular CPI to chained CPI for calculating cost of living adjustments.

Increasing the Payroll Tax Cap or Tax Rate

Increases to the payroll tax cap or payroll tax rate are the easiest reforms to assess for our purposes: They would have no effect on the way benefits are calculated and therefore would not change the when-to-claim decision in any way.

Increasing the Full Retirement Age (FRA)

Increasing the full retirement age does not change the age at which you can claim benefits. Rather, it’s simply a reduction in the amount of benefits you would get at any particular age. (For example, if you claim retirement benefits at age 64 with a full retirement age of 67, you get 80% of your “primary insurance amount.” If your FRA was 68 instead of 67 and you claimed benefits at age 64, you would only get 75% of your primary insurance amount.)

How would an increase in the full retirement age affect the when-to-claim decision? It wouldn’t dramatically change the break-even math, assuming the change is not applied to anybody already age 62 or older.* Nor would it change the fact that delaying Social Security is like buying an inflation-adjusted lifetime annuity that has a higher payout than what you can get from a private insurance company.

For people who subscribe to the “build a safe floor of income” retirement planning philosophy, an increase in their FRA would actually mean they should claim later than they otherwise would. That is, if you have a certain level of safe income that you’re trying to achieve, and your benefit is reduced due to an increase in your FRA, you would then need to delay benefits until a later date in order to hit the necessary level of safe income.

Means Testing

Given that there are many different ways in which Social Security means testing could be implemented, it’s impossible to make a generalized rule about how means testing would impact the when-should-I-claim-benefits decision. So let’s consider a few different possible scenarios.

If the law implementing means testing includes a grandfather clause exempting people already old enough to receive benefits, the change likely wouldn’t impact the decision in any dramatic way.

Similarly, if your income (or wealth, if that’s how the means testing is done) ends up being below the point where means testing takes effect, your decision process would be no different than it is now.

On the other hand, if means testing is implemented somewhere in the middle of your retirement and people old enough to receive benefits are not exempted via a grandfather clause, then exactly how it plays out for you will depend on the facts and circumstances.

  • Having claimed earlier would mean that you had more years of non-means-adjusted benefits, which is good, but
  • If means testing is done via adjusted gross income or “combined income” then having a larger portion of your income come in the form of Social Security benefits could actually decrease the effect of means testing on you. (In other words, waiting could have turned out to be helpful with regard to the means testing.)

Switching to Chained CPI

One proposal getting a lot of discussion recently is to switch the calculation for Social Security cost of living adjustments to chained-CPI rather than CPI-W. This would result in benefits growing at a slower pace over time. Such a change would make claiming early more advantageous than it currently is, because it would mean that, in inflation-adjusted terms, benefits received later are smaller than benefits received earlier. So the sooner you receive the bulk of your benefits, the better.

*More precisely, for those whose FRA would be increased from 67 to 68, it moves the break-even point a couple of months earlier, meaning it becomes ever-so-slightly more advantageous to delay taking benefits.

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