What the Future of Social Security Looks Like: Bill Reichenstein

How so?

If Peter earns $60,000 a year for 30 years and Paul earns $30,000 for 10 years [total], Paul will get six times as much pretax benefit as Peter for the last thousand dollars of earnings. If you've put $6,000 into Social Security this year and have already worked 30 years, you're potentially going to get almost none of it back. That's too much of an income redistribution plan.

Compare that to a 401(k) plan.

If you put money into a 401(k) plan, it's there for you. But with Social Security, the government has said, "We're going to take that from you, and you don't get any benefit." They don't have the right to do that. The Constitution says they can't confiscate private property without due compensation.

Does the Social Security system need to be overhauled?

Not overhauled, but there are some changes we can make. I don't think it takes draconian efforts to revive Social Security. But something has to happen because when they run out of money, the Social Security Administration is legally not able to borrow; they can reduce benefits only. Social Security reform is inevitable, and the sooner we address this reality, the less onerous the changes will be.

What sorts of changes?

We probably ought to raise full retirement age by about two years. And we're going to end up raising the tax rate a little bit for both employer and employee. But with the combination of those two, the system will last another 75 years. An academic told the government that wealthy people were abusing the file-and-suspend strategy. But now the middle class and poor have been deprived of it. They were using file-and-suspend as well.

Absolutely. Obama put that [law] through. It didn't get a second look and the usual vetting process. If it did, I don't think it would have [passed]. That's one way they've cut back on promises, and maybe it will help to extend the longevity of the Social Security fund; but despite those changes, it's still projected to run out by 2034. 

Most people don't realize that they can redo – that is, change and start over – a prior Social Security claiming decision. How is that done?

There are two major strategies: One is that you can withdraw your application for benefits within 12 months of starting to receive them, and that includes spousal and child benefits.

For example?

Say the higher earner in a couple has a short life expectancy. He started Social Security at 62 but then realized that his wife, a lot younger and with a long life expectancy, would be cheated out of survivor benefits.  So he decided to redo and delay. That means all the benefits he got up to that point had to be repaid. So, if you use this strategy, it's like you never started to receive Social Security.

What's the other major redo strategy?

If you're worried about running out of money, this might be appropriate: Once you've reached full retirement age, then or any time thereafter, you can suspend benefits and still earn late-retirement credits, or 8% a year, till you hit 70. Let's say someone became unemployed at age 63 and started to receive benefits. But at 64-and-a-half, he gets a job. He can't withdraw his application; but at 66, his full retirement age, he can suspend benefits and doesn't have to pay back the prior benefits. He can then resume receiving Social Security starting at another date.

Is it a good idea for folks to buy an annuity to supplement Social Security?

They already have an annuity: Social Security. With interest rates so low today, the amount that a private-sector insurance firm can pay will be lower than Social Security. By delaying when you start to receive benefits, you can get 8% more a year. That's huge! The best deal going is the Social Security annuity with delayed retirement credit. It's the best annuity available in the marketplace.

— Related on ThinkAdvisor:

• New Social Security Rules: How to Maximize Benefits
• Moeller on Medicare: Advisors, Beware of Land Mines on Timing, Coverage
• 18 Reasons Americans Are Afraid to Retire