Confirmed - Social Security Deluged with Early Retirement Requests

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On April 1st, in the context of writing about a newly appreciated shortfall in Social Security funding by the CBO, I wrote this (with the part I wish to discuss in bold):

Here’s a prediction – [the sharply reduced Social Security surplus] will be revised to the worse in about 6 months. I base this prediction on my belief that more people will opt for retirement than are currently projected and that entitlement program tax receipts will be below current projections. Also, nearly every prediction by the CBO has been revised to the worse over the past year, so I am “riding the trend” with this prediction.

At the time, several people commented that they thought this prediction faulty and saw the possibility of the exact opposite as being more likely.

I based my prediction on two concepts:

  1. With jobs hard to find and credit tightening, many folks would simply opt for early retirement as a means of securing any sort of cash flow at all.
  2. Many folks would (rightly) conclude that sooner or later the government would change the rules - perhaps moving the retirement date out a few years or reducing benefits or both - and opt to retire early as a means of grandfathering in their own position.

I can't say for sure which of these reasons is most responsible here, but it looks like #1 is the winner for now:

Early retirement claims increase dramatically

Reporting from Washington -- Instead of seeing older workers staying on the job longer as the economy has worsened, the Social Security system is reporting a major surge in early retirement claims that could have implications for the financial security of millions of baby boomers.

Since the current federal fiscal year began Oct. 1, claims have been running 25% ahead of last year, compared with the 15% increase that had been projected as the post-World War II generation reaches eligibility for early retirement, according to Stephen C. Goss, chief actuary for the Social Security Administration.

Many of the additional retirements are probably laid-off workers who are claiming Social Security early, despite reduced benefits, because they are under immediate financial pressure, Goss and other analysts believe.

Goss said it remained unclear whether the uptick in retirements would accelerate or abate in the months ahead. But another wave of older workers may opt for early retirement when they exhaust unemployment benefits late this year or early in 2010, he noted.

The ramifications of the trend are profound for the new retirees, their families, the government and other social institutions that may be called upon to help support them.

On top of savings ravaged by the stock market decline and the loss of home equity, many retirees now must make do with Social Security benefits reduced by as much as 25% if they retire at age 62 instead of 66.

Despite a major hit to benefits, amounting to a full 25% for only four more years of employment, many people have opted to retire early.

This means that my prediction of another sharp downward revision to the table below is on track:

Next, it was only last year that I was writing about the impeding fiscal calamity that was awaiting us all in 2017 when the outlays for Social Security were slated to exactly match receipts. Now that date could be as early as 2010, apparently.

In the chart above (source), I want you to note the extreme deterioration in surplus funds between the 2008 and 2009 forecasts. Can you spot the trend?

I might speculate that the next version of this table will have a minus 20 where the plus 3 currently sits in the 2010 position.  But I happen to think that the real, final number for 2010 will be closer to minus 50.

Given how small these numbers are, compared to the current fiscal deficits, why are they important?  Two reasons:

  1. The Social Security surplus represents hard cash that is used to fund current government operations.  Hard cash behaves differently than new deficit money in that it simply comes in one door and leaves out the other.  There is no impact to overall money supply.  Government deficit spending, on the other hand, is strongly correlated with future inflation.
  2. A Social Security shortfall represents a long-term liability.  That is, it is not just a shortfall this year, but next year, and the year after that stretching dimly off into the far future.  This means that the difference between a plus 3 and a minus 50 in one year will translate into a collective shortfall with a net present value measured in the hundreds of billions.  It's the difference between receiving a modest one-time tax rebate check and sending a child to college for the next 30 years.

Amidst all the supposed green shoots, the fact remains - the US government is completely and utterly insolvent because of the entitlement programs.  Period.  End of story.  Or, rather, beginning of story.  This should be topic number one in DC, with our foreign creditors, and with the US bond market.

Instead, we seem content, for the moment, to whistle past the graveyard, pretending that it doesn't exist. 

This is a companion discussion topic for the original entry at https://peakprosperity.com/confirmed-social-security-deluged-with-early-retirement-requests-2/

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Chris,
This is exactly the information we need!

I know that the #1 reason is the most likely. I agree that it is BOTH reasons you pointed out. If it were me, I would want to start getting SOME of "my money" back. And, I would as you pointed out, need the cash flow. 75% of something is better than 100% of NOTHING.

I have looked at this equation many times. While I am a long way off of receiving (if ever) SSI I can tell you, I plan on taking the reduced amount at age 62 (if it isn’t gone). It takes many years to make up what you have lost by waiting.

This trend is no surprise to me. Reporting it is dangerous stuff I am afraid. Politically, it is the "third rail" so I seriously doubt much will be done. I remember in the 1980’s we were told SSI wouldn’t be there for us when we retired and how we should all have our "own" retirement accounts.

Now we are being fleeced on both ends.Wall Street has raided our personal accounts, and .gov has raided (for years) our public accounts.

 

FWIW - C.

3

 

Amidst all the green shoots, the fact remains - the US government is completely and utterly insolvent because of the entitlement programs. Period. End of story. Or, rather, beginning of story. This should be topic number one in DC, with our foreign creditors, and with the US bond market.
Instead, we seem content for the moment to whistle past the graveyard pretending that it doesn’t exist.

 

+++++++ 1

Somehow I think that unemployment will factor into this mess [as in less money paid into the system].

4

This will be a very interesting trend to watch. For now, social security is getting drawn down because people simply need money. But this surge in withdrawals will make the funding problems even more apparent. Later on in the game, I think the primary driver will be a lack of faith in the government and the expectation that retirement accounts and social security will be attacked. If and when this becomes a strong movement to "cash out while you can," I would think (hyper)inflation pressures would skyrocket. If the government does not address this issue right now, these trends will continue to play out and austerity will likely be the future "solution" the government pursues. This is troubling, because retirement accounts represent so much to so many. It seems the Tea Party movements are not going to stop.

5

Large corporations (including my employer and several I work with) are under pressures to decrease compensation costs by reducing head count.  Having already cut the "lowest performers" by traditional termination, they are offering early retirement packages, rather than cutting deeper into the productive workers who will have the largest impact in future years.  I have many friends who have opted for the attractive terms of early retirement, and I believe this phenomenon may be adding to the several other factors you’ve cited as stressing Soc Sec. this year.

6

There is another aspect to the Social Security debacle that isn’t mentioned much, but contributes to the whole bankruptcy problem.  The "disability insurance benefits" program is another entitlement with its own so-called trust fund.  In addition to early retirements, you can bet that claims will rise a lot when people are unemployed and looking for additional revenue streams.  There are many who will inflate whatever medical problems they have into disabling impairments that would entitle them to benefits based on what they have contributed to the fund over the years.  Although benefits are paid out of the trust fund, the costs of administering the program come out of general revenues. 
Then there is the "supplemental security income" program.  This is a poverty program that provides income for those who are disabled or elderly and poor.  This all comes out of the general revenues and is used by the states to shift their welfare burden onto the Federal gov’t.  Eligibility for SSI also makes the recipient eligible for Medicaid, also paid by the Feds.

I don’t know the numbers involved, but suspect the total costs are in the hundreds of billions.

 

7

Chris,
This doesn’t surprise me and you called it perfectly. 

I had a feeling this would happen back in late 08’ in a discussion with my parents.  Both just turned the age to start collecting and they were thinking that they would wait (because they really don’t NEED the money) and that if they waited another couple years their payment would be a bit more per month.  I sat them down and did the calculations.  It came out that it would take 14 years at the INCREASED amount to equal what they would get over these next 5 years!  (hope that makes sense, I could do an equation for y’all;-) 

Needless to say, they both applied as well as all of their friends that are in the same boat.  First, there’s no guarantee you’re going to live that extra 5 years/10yrs.  Second, you paid into it for your whole life…USE IT!  Third, it may not be around much longer so get what you can. 

Probably selfish thinking but really, if you paid into a pension fund and expected to be paid at a certain age do it.  Social Security is essentially a pension fund that we’re all paying into.  I’m happy they’re getting it.  I’m sure I won’t as it won’t be around!

Thanks for the info as usual!

8

It also seems the assumption in the article covering this is that people are "retiring" early to get the benefits. I may be wrong here (please let me know if I am) but, who says the people are actually retiring? I know if I was 62 and had a good job I would keep working AND start claiming the social security benefit. My understanding is that currently you must pay income taxers on the social security income if you are under 70 and make enough to have to pay taxes but that once you are 70, the social security is tax free no matter how much you make. Is this correct? If so, I doubt it will be tax free much longer.

9

 Chris,
I love it when you’re right, because, for one thing, it means I’m right in honoring what you tell us.

You continue to amaze me!   I’m so happy that we have found a voice we can trust, amid the delusionary comments, and personal agendas, of so many others who speak so loudly and get so much coverage in MSM.

10

An old saying comes to mind "take when the taking is good, before it is all gone".
Seems like a lot of  people see the big picture and know the end of these services are in sight.

11

Good thought, but you have a couple of things mixed up.  Taxation and the amount of benefits you can receive.  At 62 you can start receiving benefits if your income from employment is less that 13,560k.  Before full retirement you lose $1 of benefit for every $2 of earnings above that amount.  After full retirement age, no limit on "earned income".  If you were born in 1942, full retirement is at 66.  The taxable part of your social security is based on your income regardless of your age.  For instance, someone who is 62 and not working can collect social security.  If they have income (pension, dividends, interest…) over $44k, 85% of the social security benefit will be included as taxable income. To you last point I am not aware of any law that makes social security "tax free" above 70.

12

To add to LogansRun’s pertinent synopsis, let me add a fourth consideration. This is especially pertinent for those planning to retire overseas, but applies domestically as well. Namely –

  1. The purchasing power of the ‘dollars’ paid out by SocSec may drop sharply. Therefore, the net present value of your benefits is likely to be maximized by front-loading them – that is, taking them as early as you possibly can.

The higher inflation goes in the future, the more essential front-loading becomes. And to the rejoinder that SocSec is inflation-indexed, I say – ‘I, TOO, BELIEVE IN A STRONG DOLLAR.’

In a post in the U.S. news section of the forum, I provided an example of my 60-year-old brother-in-law’s sudden change in retirement plans thanks to an unexpected layoff.

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…
 

14

Chris I had not thought of the things that you have pointeed out and they are very important. My thoughts were if the government gets the health care process going there will be many that retire because alot of people continue to work until they get some kind of heath benefit.

15

the race is on…will it be social security or medicare that goes belly up first?
i am putting $2 on medicare by a nose

stay tuned

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WORKERS will be forced to delay retirement until they turn 67 instead of 65 under a plan to make the aged-pension system financially sustainable and avert a "demographic time bomb".
Faced with an ageing population and massive increase in pension payments, Wayne Swan said the Government would begin increasing the aged-pension age from 65 in 2017 to 67 by 2023.
The Treasurer said yesterday the unpopular change - the first time in a century the 65 benchmark has been lifted - was an "essential reform which recognises this demographic time bomb that Australia faces"…

More here… http://www.theaustralian.news.com.au/story/0,25197,25471039-5017014,00.html

And a video… http://www.abc.net.au/reslib/200710/r190483_715918.asx

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MachineHead wrote:
 

4. The purchasing power of the 'dollars' paid out by SocSec may drop sharply. Therefore, the net present value of your benefits is likely to be maximized by front-loading them -- that is, taking them as early as you possibly can.
 
  • 1!! (Well +2 if you count Faber -------

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U.S. Inflation to Approach Zimbabwe Level, Faber Says (Update2)

 

May 27 (Bloomberg) -- The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.  

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said.

“

 

 

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Something else to ponder (from James Quinn)…

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Another reason people are tapping their SS early could be that they do not want to tap their IRA/401k after a 43% drop.They figure the longer they can leave their savings alone, the better chance of a recovery.
Dave

20

Tucked in this story is a quote from Richard Fisher, head of the Dallas Federal Reserve, about the size of unfunded liabilities:

[quote] The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and health-care liabilities built up by a careless political class over the years.

"We at the Dallas Fed believe the total is over $99 trillion," he said in February.[/quote]

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5379285/China-warns-Federal-Reserve-over-printing-money.html

Enron - Here we come!