Breaking down the financial strength of social security

Michael Finke, The American College of Financial Services Professor and Director of the Granum Center for Financial Security, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss social security cuts and benefits.

Video transcript

ALEXIS CHRISTOFOROUS: April is National Social Security Month. I bet you didn't know that. And the prognosis for the government program is not looking good. Social Security is currently projected to be insolvent in 2035. So how should we all be thinking about planning for retirement?

Joining us now is Michael Finke, the American College of Financial Services Professor and Director of the Granum Center for Financial Security. Michael, I think when we hear things like this we get really nervous, because you know, 2035 sounds far away. But it really isn't. So what do we mean when we say it will be insolvent? Will it be able to pay something out, but just not the full amount it should be paying to the American taxpayer?

MICHAEL FINKE: That's right. There's really good news and bad news when it comes to Social Security insolvency. The newest estimates are 2026. We went through a period where we were not receiving as much in Social Security income from payrolls at the end of last year. So that deadline has actually gotten sooner.

But the good news is that you're still going to get money. And how much money you're going to get really depends on how we try to solve this potential Social Security crisis. It's supposed to be a cut of 27% of your income. Of course, we're still going to be collecting money. Every time that someone gets a paycheck, part of their paycheck goes to pay Social Security. You are going to be entitled to a portion of that income.

Now, the question becomes, how are we going to deal with that potential cut? And I think the answer is that politicians are aware of their own political survival. And if they try to cut it too much, then they're probably not going to be politicians anymore. So the reality is that the cut may be quite modest, and we may end up dealing with it by simply collecting more revenue.

KRISTIN MYERS: Michael, if you are close to retirement age or close to that age where you are able to collect on Social Security, I'm curious to know, as you're mentioning some of the cuts that might be made going forward, if perhaps it might be better just to take some of that money out now while you still can.

MICHAEL FINKE: This is a big misconception, and oftentimes people make emotional decisions about claiming Social Security. Just as a very simple example, if you wait till your full retirement age at age 67, let's say you get $2,000 in Social Security. If you claim at age 62, you get $1,400 per month. If you wait until you're 70, then you could get as much as $2,500 per month.

Now, should you claim it now? Well, in reality, if there is a cut, it's going to cut everyone's income. And if you claim early and get a lower amount, then it's going to cut your income too. If you get a higher amount, it's going to cut part of that income but you're going to have more income every month.

You're not going to get away from that cut. It's a reality for everybody. But I think politically speaking, it's not likely that that's going to happen. And many healthy retirees leave money on the table by failing to spend it.

ALEXIS CHRISTOFOROUS: Michael, I'm wondering, when we're thinking about drawing on those Social Security benefits, do women and men need to think about it differently?

MICHAEL FINKE: This is a really important point. Women tend to live longer than men. And that means that they get an extra benefit from delaying claiming Social Security. So if you think about, what is the likelihood that a woman is going to be alive at the age of 90 versus the man being alive at the age of 90, that payment is far more likely to occur for a woman. Therefore, they get a greater relative benefit than men do from delayed claiming.

It's also important to consider, if there is a higher-earning spouse, the lower-earning spouse is entitled to half of their Social Security [INAUDIBLE]. And they're entitled to the full benefit after they die. So you're shortchanging your spouse if you claim too early. If you claim later, then you both get that higher benefit.

ALEXIS CHRISTOFOROUS: All right, good advice. We're going to leave it there. We'll continue this conversation at another time, because it's going to be ongoing. Michael Fink of the American College of Financial Services, thank you.