As @LSLGuy alluded to in his excellent post near the beginning of the discussion, the motive seems to have been to disincentivize people from working beyond a certain age (arbirtrarly set at 70), so they would retire and ‘free up’ the job for a younger person.
The government and politicians don’t like to depend on market and societal factors in determining what their future outflows will be. “some will or may choose” isn’t good enough.
I disagree. These things can always be chosen conservatively and provisionally, and subject to change if reality proves different from expectations. I don’t see a valid basis for a cutoff in increased benefits at any age. Congress has chosen this way to operate, and we seem to be stuck with it, but it doesn’t make a world of sense to me.
I don’t get the incentive to retire at age 70 either. I think most people are like me, kind of sick of working after building up a nest egg, and don’t need much incentive to retire once they’ve got enough to live on. Knowing exactly what my social security benefits would be didn’t influence my decision to retire very much, and I suspect I would have chosen to retire at that point whether the maximum benefits would have been capped at 66 or 70 or 75 or whatever.
That was me too but I’m pretty sure that most people don’t have that privilege and need SS to survive. The statistics on savings for people in the US nearing retirement age is dismal.
Right. So the argument about incentivizing retirement at age 70 falls apart. Most people need to collect SS before that point, and some, like you and me, don’t think their SS benefits are a big factor in deciding when to retire.
Indeed so. From an article in The Hill from earlier this week, only 58% of Baby Boomers who are currently under age 65 have any (non-Social Security) retirement savings at all; the percentages for younger cohorts are even worse.
And, this passage demonstrates how dire it is:
By the way, one can take SS while they are working but if you earn more than a certain amount, most of it is taxed.
Never mind, I need to learn to proofread
It’s worse than that. You’ve conflated two different provisions.
If you both work and draw SS prior to your FRA, then $1 of SS benefits will be forfeited (not taxed) from your benefits for each $2 of paid work you do. This kicks in someplace around $18K annual wage income and the 1 for 2 reduction in benefits applies to all wages above that. This applies only to W2 work done before your FRA while also drawing benefits. Once you’re at/past FRA, this provision goes away and there are no benefit cuts for working.
Completely unrelated to the above, either 0%, 50%, or 85% of your SS benefits are always subject to ordinary income tax. The percentage of tax-eligible benefits depends on your AGI. Which includes income from taxable pensions, IRA & 401K withdrawals, ordinary interest and dividends, rental income, side gigs, etc. And any W2 earnings you may have. So pretty much any source of money to live on.
This taxation has no age limits or upper or lower SS dollar limit. It applies to all your SS benefits received from the first dollar you ever get to the last one just before you die.
I will have a comfy retirement, funded almost entirely by investments and IRA/401K withdrawals. I will be paying ordinary income tax on 85% of my SS benefits for life.
Someone who has little of that and not a very large SS benefit either, would be in the zero percent bracket for paying tax on SS earnings. So none of their SS benefits will be taxed. Even if they did have some other income that was subject to ordinary income tax, the SS benefits would not be included in there.
The common intermediate case for a non-poor middle class retiree is that they will pay ordinary income tax on 50% of their SS benefits.
Thanks for the correction.
One point that @LSLGuy mentioned but didn’t emphasize that goes to explain the cutoff at 70 is that SS was originally conceived to incentivize retirements to make room for hiring young people. It was passed during the depression and SS benefits were paid to people who had paid nothing or very little into it. People who worked past 65 had their benefits cut.
Anyway, that would seem to be the basic reason for the failure of the benefits to rise after 70. But the choice of 70 was a political decision.
But does it work as a disincentive to work past 70? I would think that applies only to a very small number of 70 year old workers. Most of them are eager to retire, if they haven’t retired already. Of the others, some still thrive on working and wouldn’t give it up for anything. Does it work as a disincentive for 10% of 70-year-old workers? 5%? Fewer?
I think the main point was that SS was supposed to be an old age pension, not “guess how long you live and win” lottery. Plus, the only logic to deferring past 70 would be you have a large amount of existing savings like you say, or to continue to work - neither serves the purpose of politicians trying to pat themselves on the back by providing a government pension.
Recall that when Bismark instituted the first old age pension (in Germany) before WWI, 65 was a decent life expectancy. MY grandfather and great uncles died in their 60’s. My father and uncles lived to 90, my grandmother and stepmother to late 90’s. My mother, despite parkinsons, died at 85. If you have serious medical issues, best bet to start early. If you honestly expect to make it past that break-even point (81?) and have the finances, start late. (Of course, we’re talking socialized medicine in my case. Whether you have the medical care to last in the USA is another topic).
Sort of like “He who dies with the most toys wins”?
Honestly, I got my inheritance at 63 depleted by 3 years of old age home payments. The longer people last, the less likely they are financing anything other than their children’s later retirement.
IHMO the simplest is to enjoy what you’ve earned before you stop remembering what you did yesterday.
BTW - your rules are sooo complicated. In Canada, CPP/OAS is simply taxable income like anything else. There’s simply a higher personal deduction from total taxable income for seniors.
I guess , sort of - but why would I want to delay SS until I’m 70 and instead take $50K a year out of retirement savings when we might get in a fatal car accident when we are 69? We will have never collected a dime of SS payments and would have taken about $350K out of retirement accounts.
I’m planning to do that, but even so, either my kids will get money or the government will keep the SS we didn’t collect. I’d rather my kids get it.
True. Depends on what you think the markets will do while you are between 62 and 70. And whether you will live to the break-even date. After that, you’re behind money each year, unless your savings in the market grew enough and made up for that difference.
You never know what life will throw at you, but there’s a happy balance somewhere between “live only for today” and never spending a dime. The trick is to find that balance.
No you aren’t because, in the case of doreen, you haven’t included present value of the money, paying lots of extra taxes and missed opportunity of tax free investment gains.
One reason to delay is to treat your SS as an insurance policy against your investments losing their values. If that fatal car accident is instead just near-fatal, your medical costs may end up eating a big chunk of your savings. Throw in a market downturn or two and you may be in the unexpected situation of having little in your retirement accounts. Delaying SS as long as possible would mean that your benefit payment would be larger if you ended up being in a situation where you needed it to live on.
That is my logic. SS is the only asset I can’t deplete through bad luck, fraud, etc. All other sources of my retirement income are less safe and most importantly are highly finite in the face of market risk and extreme longevity.
To me, and millions of others in my spot, SS is not about retirement income. It’s about asset depletion insurance. For me, waiting to 70 gives me an SS payment I can actually live on as an elderly decrepit broke person if that should be my fate. Taking it this fall at age 65 when my W2 runs dry does not. That SS-only lifestyle would be very crabbed and cramped. The life of a 90yo is crabbed and cramped anyhow.
I am willing to run the risk that I die early or that I don’t in fact run out of assets and so waiting was unnecessary. I see that risk I take on as the “premium” I’m paying to preserve SS for its original purpose: longevity insurance. And longevity insurance with inflation correction and of unlimited duration. I want that at the highest dollar amount that my earnings history can provide. Under current law that comes from waiting to age 70 to start collecting.
Obviously SS is not absolutely guaranteed against political risk, nuclear war, meteor strikes, etc. It is not zero risk. But an SS payment is real close to zero risk, much more so than is my brand name mutual fund that I hope isn’t a long-running scam.
@doreen and I are not talking about some sort of weird scheme. This is Financial Planning 101 for our use case. I have enough saved up that I will never need SS, it’s just a nice bonus, and I will be invested less and less in stocks as I age so that a market downturn won’t affect me (much). I also have a shit ton of home equity.
There are many many millions of people who were born in the late 1950s to mid 1960s who are retiring or soon to be who are: professional career, fat 401k where the big majority of our savings are, big home equity, frugal-ish lifestyle, no debt other than maybe the end of the mortgage. The greatest minds have run the numbers and it’s clear cut that in this situation you take it at 62 if you are no longer working.
Just in case there aren’t enough factors to consider already, if you’re a married couple that has very different earnings records, the SS benefits of the lower-earner can be based on the higher-earner’s record instead. That benefit is 50% of what the higher earner is entitled to. In the event of that person’s death, the survivor’s benefit jumps to 100%. So if, say, a man is a number of years older than his wife and she didn’t work for pay for a significant time, if he delays taking SS until the upper age, she’ll also be able to draw the larger amount.