Social Security provides retirement income benefits to most American workers who have at least 10 years of working history. Eligible persons can collect benefits as soon as age 62, but at a reduced benefit compared to the full retirement age (FRA) benefit, currently at age 67 (FRA varies based on your date of birth). Alternatively, you could wait until 70 and collect the maximum Social Security benefit.

In prior stock market runs, when annual returns were often in the double digits, there was debate as to whether an eligible person should collect Social Security Income (SSI) at the earliest age and invest proceeds into equities for market rates of return. Alternatively, if a recipient held off on collecting SSI to let the guaranteed benefit grow, the delayed retirement credit, or increase in annual SSI benefits, between FRA and age 70, is an increase of 8% per year – not bad! That means, that for each year a recipient waited to collect SSI after their FRA, the guaranteed benefit would increase 8% higher than the year prior. In contrast, equity markets have no guaranteed returns and are susceptible to unforeseen volatility.

Further, Social Security is one of the few guaranteed sources of income that has built-in inflation protection.  SSI has an annual Cost of Living Adjustment, or COLA, that increases the recipients’ annual benefit for inflation to help retirees keep up with the higher cost of goods and services. For example, the COLA for 2022 will be an increase in SSI benefits of 5.9% over 2021 benefit payments. Other sources of guaranteed income such as annuities and pensions often do not offer the same inflation protection.

In recent years, many are questioning the solvency of Social Security. Based on current projections, the Social Security Trust Fund will run out of money in 2033 if no financing changes are made to the program. This understandably scares retirees reliant on the benefits. However, given working taxpayers are still paying into the system, in a worst-case scenario, if the Trust Fund “ran out of money” SSI would still have incoming cash flows that would enable them to make payments fulfilling 78% of the current benefits promised. It is extremely unlikely that Congress would fail to amend a system that provides benefits to 69 million VOTING Americans – that would be political suicide!

The U.S. House of Representatives recently reintroduced a provision called the Social Security Enhancement and Protection Act that proposes to increase the Trust Fund by phasing out the Social Security payroll tax cap. Currently, the payroll tax only applies to wages up to $142,800. However, if the cap is removed, the Social Security payroll tax would remain in place on income above this threshold and could provide much-needed additional trust Fund revenue. Additionally, the provision includes a proposal to increase the payroll tax rate from 6.2% to 6.5%. These measures are still pending. However, the outlook for the Social Security Trust Fund is optimistic and recipients should not be alarmed at this time.

If you have questions about when you should collect Social Security Income benefits to best support your retirement cash flow needs, seek the advice of a Certified Financial Planner™. A comprehensive financial plan would provide various scenarios and also include customized recommendations tailored for your specific needs.

The opinions expressed above are solely those of Kondo Wealth Advisors, Inc., (626-449-7783 info@kondowealthadvisors.com) a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.

Sources:
Bob Veres Media, Insider Information
https://www.cnbc.com/2021/08/19/bill-in-congress-aims-to-keep-social-security-beneficiaries-out-of-poverty.html