Working Longer Versus Saving More

One of the big decisions Americans must make as they plant their retirement is when to start collecting Social Security benefits. The popular wisdom is that each year you delay collecting Social Security translates into an 8% increase in annual benefits. The Social Security Administration can afford to goose the payout because (1) it pays you one year less than it would have otherwise, and (2) it collects the interest on the money.

Now comes Sita N. Slavov, a George Mason University economics professor, and four colleagues with a paper, “The Power of Working Longer,” that compares the monetary rewards of working longer versus saving. The bottom line:

Delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.

I’m not smart enough to follow their methodology, so I’ll just assume that they’re right. But they’re making one critical assumption — that Social Security payouts remain the same, even though the Social Security Trust Fund is scheduled to run out in 2033. At that point, payroll taxes will cover only 75% of promised payouts.

For readers of Bacon’s Rebellion, who from my observation are more affluent than the average American, the news gets worse. When the Social Security Trust Fund runs out of money — as seems inevitable, given the bipartisan refusal of presidents and Congress since George W. Bush to touch the issue — you won’t even get 75% of what you were promised. Too many senior Americans rely upon Social Security as their sole source of income, and a cut of 25% would prove devastating. Inevitably, Congress will tweak the program to soften the blow. Thanks to the chronic budget deficits and the massive national debt that will prevail 15 years from now, the United States will be in no position to bail out the program entirely through borrowing.

There is no way to know what a future Congress will do, but I expect it will resort to some combination of borrowing, higher payroll taxes, and redistribution of Social Security benefits from higher-income Americans to lower-income Americans. There’s no way around it: The middle-class will get hosed.

I’ll qualify for Social Security benefits next year. Even though I plan to continue working and earning income, I’m going to start cashing in on the program while I’m still entitled to 100% of my benefits. I fully expect the Trust Fund to run out by the time I’m 80, and I’m arranging my financial affairs to accommodate a 25% to 30% cut in my Social Security benefits by then. In the meantime, I’m making sure I get what I’ve been promised.

I’m also telling my Millennial kids both to start saving now and to plan to work well into their late 60s. Hopefully, modern medicine will help them remain healthy, active and vigorous a bit longer than our generation, so a few extra years of work won’t prove too burdensome.

Nobody should trust the American political class to live up to its promises — especially when the consequences are 15 years down the road.

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23 responses to “Working Longer Versus Saving More

  1. If I remember it correct there was a similar crisis in the 1980s and Ronald Reagan and Tip O’Neil got together and worked out a compromise that extended the SS another 30 years. Would it be possible for Ronald and Chuck to work out something?
    And, as I remember it W cut the “Payroll” tax in the last recession to “stimulate” the economy. I assume that he put some paper OIUs in the SS Trust Fund to off set that cut in SS taxes even it it was temporary?
    And, as I remember it Ryan ran for congress partly on doing away with SS and other socialist programs and in 2005 he convinced W to try to make SS into an IRA but W’s bill never even got a hearing in congress.
    Now we are moving in a different direction to eliminate SS. Ryan decided to forget about the national debt and let it grow which in time will force a slashing of “entitlements” like SS for there will be no other choice.
    Just before the major cut taxes and dramatically increased budget Alan Greenspan warned against it. He said deal with spending first and then cut taxes…do not wreck the train to get rid of SS etc.
    I am reminded of another Wisconsin anti-socialism before Ryan who was open in his quest but went wild. He accused General George Marshall of being in the pocket of Moscow until Ike at a news conference gave him the tongue lashing of all United States history. Can any one remember that card the forerunner of Paul Ryan from Wisconsin? Anyone who disagreed with him was a Communist which was a worse word then than Nazism.

    • Yep, President Reagan did the deal that moved the full benefit retirement age for me to 66, and for my kids to 67…kicked the can a few decades. But no, I do not think it fair to compare Speaker Ryan to “Tail Gunner” Joe McCarthy.

      • McCarthy railed and railed against SS saying it was a road to Communism. And it scared many, many people. Some unions decided not to do SS because it was so scary. My grandfather worked for the railroad and while he had a union pension he did not have SS which is supposed to be supplemental.
        The state of Virginia had to choose to enter SS for its employees and delayed it until well after WWII.
        And, while he is not yelling and screaming like Ole Joe McC. Ryan is dead set on killing SS even if it throws the government into a major financial crisis. And, he helped Obama like John Edwards helped W and like Palin helped Obama.
        No Ryan is not the future of America or the RP. ..that is for sure.

        • The Republican Party has no future. The dustbin of history awaits. Trump is the final GOP president. McCarthy had four years in the bright spotlight and I can’t prove you wrong, but I doubt he had much influence at the time the groups you are talking about made those decisions. The US military was also outside of the SS system for a long time.

        • It was a lot easier for Mr. Macron to turn the tables on the existing parties in the French parliamentary system than it will be to launch a third party in 50 States here. I agree, the Republican Party as we know it is doomed, and soon. But how will that revolution take place? Might it turn out to be easier to take over the Party state-by-state from within than to build a new organization alongside?

    • the “irony” here is that the “trust fund that will go broke”… i.e. the “surplus” WAS, in fact, created as a transition window to “fix” social security ..

      and the govt promptly spent it for other things. Remember.. the money in that trust fund was created from FICA dollars..

      the “fixes” to FICA/Social Security are ridiculously easy… but it’s a measure of the GOP opposition to SS that keeps anything at all from being done. Don’t blame this on an inability between the GOP and the Dems to agree. The Dems want to fix it. The GOP wants it to twist in the wind.

  2. Income in retirement can be manipulated. If you have a large investment portfolio you can lower income by selling both winning and losing investments to generate cash. You can remortgage your house to generate cash. You can borrow with your portfolio as collateral. You can borrow from your children with the payback coming in the form of inheritance. Anyone can give you a $14,500 per year gift. You can put anyone in your will.

    I’m afraid the swamp dwellers will have to find some way to make you inventory, assess and declare your assets rather than tie their latest thievery to income for retired people.

    • Keep in mind the Democrats need more money to fund benefits for illegal immigrants and keep that chain immigration going.

      If my grandfather were alive to see the Democrats tossing working Americans to the sidelines for illegals, he’d consider voting for Trump.

      Steve – been reading a couple of articles suggesting a breakup of the two existing parties and, over time, some new combinations. Like the white Catholic vote, which was almost 100% Dem, more recent immigrants will, over time, get sick and tired of paying for government featherbedding, giveaways to the wealthy for “environmental goods” and paying for social program over social program.

  3. Totally agree. I already plan to work into my 70’s, some years after paying off my home.

  4. What folks who plain on taking Social Security and keep on working need to know is that is a bad strategy because it causes your Social Security to be subject to tax like other income… up to 85% of it can be taxed – at the tax bracket you are in.

    Once your social security is taxable.. even dollar of non-social-security and cause another dollar of income of SS to be taxed.

    so say you get 25K in social security.. if that’s all you get none of it is taxed. But say you get another 20K in W2 (or even pension).. that can then subject 5, 10, 15k of your social security to be taxed.

  5. The French have tackled this problem in their typically socialist way. They have an asset tax. You inventory you assets and compute their value. There is a minimum amount of tax you must pay per year based on a percentage of your assets. If you are working you might well pay that tax based on normal income taxes. However, if you’re among the wealthy retired then you need to liquidate some of your assets every year to pay the minimum tax.

    • Shhh – now you’ve gone and done it. Once control in DC flips, President Sanders will love that idea. The fact that the top 10-20 percent are already paying most of the income taxes (and I don’t think the new law changed that much) will not deter them.

      • We have that French system to some extent…for those who have their savings in IRA’s you have to make mandated withdrawals after 70.5

        Steve- the death of Repub party OK (re: your quote above) but that assumes Pres. Sanders does not kill the Goose, which is a approx quote from Warren Buffet re: candidates left of Hillary.

        Ugh apparently I have a few years on Jim as I am Medicare eligible this year.

        • The reason you MUST take distributions from your 401k is that the govt…. yes.. the govt – allowed you to divert your income taxfree into that IRA (unless you did it with post tax money into a Roth which is not taxed again) but with a traditional IRA, once you reach that magic age – the govt wants it’s taxes back. They still don’t want them all at once – they take a little every year with the number of years of payback determined by actuarials for life expectancy.

          As said above ROTH IRAs built with post-tax money are not taxed again at distribution and there are fewer rules for how much to “take”. How many workers have IRAs? 1/3 of the workforce.

          People also forget or take for granted a wide array of benefits the govt provides to – everyone – not just those we typically think as receiving “entitlements”. HSAs , tuition credits, child credits and employer-provided insurance.

          Medicare is another one. Yes you paid into Medicare Part A but never Part B – which ANY citizen – regardless of their age or health status is ENTITLED to purchase if they want to – they are not required to – for the sum of $134 a month. Try to get regular health i insurance from the “market” at age 65 and see what it costs…

          Without Medicare – most people who DID have IRAs would be exhausted quickly and people with only Social Security would be in even worse shape without Medicare. It is estimated that 1/3 or more of retired would live in poverty without SS and Medicare.

      • While it IS true that the top 20% pay most all the FEDERAL taxes – even people who make only 10K – also end up paying Federal taxes unless they have kids…

        And not well recognized is the myriad tax breaks that the middle class receives from untaxed Employer-provided health care , tax-advantaged IRAs, tuition and fees credits and deductions for college, no tax on the sale of the main home, no tax on inherited property up to 5 million per individual taxpayer, etc…

        here’s a more complete list – that generally go to people who are more well off than the lower tier folks who are said to not pay any Federal Tax (which is not true -they pay LESS commensurate with their income)

  6. the US – each worker must set aside money for their retirement.

    SS is an insurance annuity as opposed to a 401k.

    People forget – the SS “trust fund” is a fund that was actually created from FICA taxes – payroll taxes taken from folks paychecks. When/if it runs out then benefits will have to be reduced but the original premise in creating that trust fund in the first place was for it to provide a window to change SS so that benefits would not have to be reduced.

    But when you think about it – Social Security is unique in the govt in that it is one of very few expenditures that is self-regulating and if taxes are insufficient to pay full benefits – the benefits reduce instead of taking more money from general revenues to subsidize it.

    Imagine if other entitlements actually worked that way. Instead of keeping benefits the same with deficit funding – the benefits reduce to match the reduced funding.

    Some call this reductions of benefits – “devastating” and it is but it’s a lot less “devastating” than having no benefits at all.. which is what would actually happen if we accepted some folks arguments to kill it all together.

    Consider also that some Conservatives have advocated FICA taxes going into individual retirement accounts that the recipient will “own” but remember a 401K is not an annuity like SS. An annuity will never stop paying benefits… as long as you live.. it will never “run out”. On the other hand, if you die early – you may not have gotten everything back you paid into it.

    That’s not a nefarious and evil govt idea.. it’s the way ALL annuities work!

    It’s the very way that Virginia teachers pensions and Federal Govt pensions “work”. It’s the way most pensions work .. there is no fund that is “inherited”.

    SS was never meant to be the only retirement fund … it was intended to be one leg of a 3-legged stool.. with some employer pension and some 401K.

    Unfortunately some folks on the lower economic tiers especially in service sector jobs, get no employer pensions and are not paid enough to set aside money for a 401K.. not even enough money for their own health insurance – and SS becomes the sole safety net for them.

    So it’s interesting hearing the different “ideas” on what to do about SS -with some of those ideas from folks of Conservative politics advocating getting rid of SS all together on an ebb and flow basis….sometimes they’re hot and heavy on the idea.. other times they stay quiet but in their heart of hearts if SS really did go belly up.. they’d be right there clapping with an “I told you so”.

    That, notwithstanding… one of the primary differences between industrialized nations with long life expectancies and 3rd world and developing world countries with lower life expectancies is … some form of social security (as well as universal health care).

    SS is funded primarily with FICA taxes paid by workers… as opposed to being funded by taxes on the wealthy.

  7. My grandparents collected far more value from SS than their contributions paid for on a “present value” basis, my parents collected substantially more, and we will have to make it to a ripe old age to break even, especially since my wife has her own career and account – while my mother and one grandmother had little outside income.

    But this idea, which actually goes back to Bismarck (I think) has worked well and I think the politicians who fear voter backlash (and the problem is us as much as them) should take this on. Some substantial benefit can be reaped from some minor tweaks (we’re about to see the window close on easy CPI adjustments because real inflation is coming back…). But if I see a benefit cut in my 80s, well, that mainly means less for the estate. Social Security, Medicare and Medicaid take huge pressure off of working middle class and upper middle class families, who 75-100 years ago were expected to take in their aging parents as dependents. Once again, programs for the “less fortunate” actually generate major wealth accumulation for the next generation….

    But shhhhhh – don’t tell anybody! We’re not supposed to notice!

  8. If you really want to stabilize the system, 1) have more kids (DINKs are the one’s killing SS) and 2) embrace immigration. The xenophobes at the top of the modern GOP trying to keep out immigrants and extend their (doomed) political power are also reducing future SS revenue. Look at Japan….

  9. I’d argue that dinks and immigrants actually give more in taxes than they utilize in benefits. For instance, dinks do not get child tax credits, and with no kids in schools – their taxes actually subsidize the parents who have kids in school.. Ditto for higher ed.. MedicAid, etc…

    America is now and has been always a land of immigrants… and yes. .. chain migration… … yes.. the GOP has pushed that xenophobia button long and had – and effectively – unfortunately.

    It’s “I’ve got mine, screw you” on steroids..

    • I agree on immigrants, but when it comes to Social Security and Medicare, DINKs are not giving us extra taxpayers down the line 🙂 Mr. Ponzi needs new donors!

  10. Au Contraire!

    People DO pay into SS and Medicare Part A but NOT for Medicare Part B which is eating the US Budget alive… as each new “donor” received guaranteed coverage no matter their health problems – for the princely sum of $134 a month

    The govt is currently obligated to pay 75% of the actual cost of the premiums as more and more boomers are retiring (more than 60 million) that is driving up the total cost of the program to other taxpayers which is right now at about 600 billion a year out of the 3.3 trillion total budget.

    in the case of Medicare Part B – “more” is not better… and if you like this graphic.. you’ll LOVE the next one!

  11. here’s the REAL “ponzi”:

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