74% say they can’t count on Social Security when planning for retirement. Here’s what not to do

Negative headlines about Social Security’s future may be affecting how prepared people feel when it comes to their own retirement. Almost three-quarters, 74%, of people say they cannot count on Social Security benefits when it comes to the money they will have in retirement, according to a new survey from Allianz Life Insurance Company of North America. The firm included questions on Social Security for the first time in its quarterly market perceptions study, in response to increased focus on the program in the news. The survey, which was conducted in March, included more than 1,000 respondents. In late March, the Social Security Administration trustees issued a new annual report with a more imminent prognosis for the program’s two trust funds, one of which pays retirement benefits and the other disability benefits. In 2034 — one year earlier than previously projected — the program may be able to pay just 80% of the combined funds’ benefits. Notably, the insolvency date only for the fund used to pay retirement benefits is even sooner — 2033, or one decade away. At that point, 77% of those benefits will be payable, the trustees project. “Although the program has been a great success, steps must be taken to ensure its solvency for the long term,” AARP CEO Jo Ann Jenkins wrote in an op-ed Thursday. And while most leaders and experts agree action needs to be taken, it remains uncertain as to what changes exactly may happen. For many, that adds more uncertainty to planning for retirement. Worries about being able to count on Social Security in retirement were most prevalent with Gen Xers, with 84%; followed by millennials, 80%; and baby boomers, 63%, according to Allianz’s survey. Moreover, the survey also found most respondents — 88% — say it’s critical to have another source of guaranteed income in retirement aside from Social Security in order to live comfortably. Yet not everyone is so lucky to have other resources to fall back on. Social Security represents the largest source of income for most people over retirement age, Jenkins noted. Meanwhile, for 14% of those people, it is their only source of income. “Unfortunately, it’s one of the things that makes people make the mistake of claiming their benefits too early,” Kelly LaVigne, vice president of consumer insights at Allianz Life, said of the outlook for the program. They think, ”‘I’m going to get mine before it goes broke,’ when in reality, that is not helping at all,” he said.

‘Still a big advantage to waiting’

To see just how a 23% benefit cut (based on the latest projections for Social Security’s retirement fund) would affect you, experts say it’s best to turn to a calculator or other such online tool for maximizing benefits. Larry Kotlikoff — an economics professor at Boston University and creator of Maximize My Social Security, a claiming software tool — ran the numbers and said there is “still a big advantage to waiting.” “The benefit cut is going to happen even if you take benefits early,” Kotlikoff said. “So the advantage of taking them early is smaller than one might expect,” he said. Changes were enacted in 1983 to shore up Social Security. One key reform — raising the full retirement age, when beneficiaries stand to get 100% of the retirement benefits they’ve earned — is still getting phased in today. For people born in 1960 or later, the retirement age will be 67, not 66, as it was for older cohorts. Lawmakers may follow the same strategy again, and raise the full retirement age to 70, according to Kotlikoff. Indeed, some leaders in Washington are already discussing this idea. Under current rules, claimants stand to get a big boost — up to 8% per year — for waiting beyond full retirement age up to age 70 to start benefits. Particularly for people who are single, who do not have a spouse or children who may qualify for benefits based on their record, it still makes sense to wait, according to Kotlikoff. However, for other situations — a lower life expectancy, disabled children who cannot collect until you collect, a spouse who might also be able to collect benefits for taking care of them — the software will typically recommend starting at an earlier age, according to Kotlikoff. If the retirement age is raised, that will be a benefit cut. However, it is unlikely such a change would affect current or near retirees, both Kotlikoff and LaVigne said.

Why you shouldn’t claim just to get 8.7% COLA

There is yet another reason people may be tempted to claim retirement benefits early — an 8.7% cost-of-living adjustment, or COLA, that went into effect for this year to compensate for high inflation. It is the highest increase in about 40 years. “If you are 62 or older, whether you are claiming your benefit or whether you are waiting, that [COLA] was increased to your Social Security amount,” LaVigne said. In other words, either way you stand to benefit, whether it increased the future amount you receive or the amount you are taking right now, he said. Rather than focusing on the COLA, it’s important for prospective beneficiaries to focus on putting a plan together so they will know how to minimize their tax bills and what to do if inflation spikes again during their retirement years. “If you don’t have a plan in place, how do you know what to do when the unexpected happens?” LaVigne said.