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As the US economy plunges into a recession thanks, in part, to the coronavirus, President Donald Trump is looking for ways to stimulate the economy. One of his recent proposals calls for allowing people to claim some of their future Social Security benefits now. For the tens of millions of Americans who are currently unemployed, that money may seem like a godsend, but the long-term costs can weigh heavily on your retirement security.
If you were lucky enough to receive the initial $1,200 stimulus check, that money is likely long gone. As the Democratic-led House of Representatives passed an additional $3 trillion coronavirus relief package on May 15andI expect some pushback trying to push this through the Republican-led Senate.
A Trump White House proposal would allow Americans to take out a $5,000 loan against their future Social Security benefits. Again, that wouldn’t be a handout; you would take out a loan that would be repaid when you eventually claim Social Security benefits. Currently, the earliest you can start receiving Social Security retirement income is at age 62.
The $5,000 stimulus payment would be put in place as a loan. The federal government would set an interest rate on your loan which, in essence, would help repay the Social Security trust fund for the money you received. You wouldn’t have to repay the money until you start claiming Social Security, which could be until you’re 70. Once you applied for Social Security, all of your benefits would go toward paying off the loan until it was paid off in full. From there, you will receive your regular Social Security benefits based on your age and work history.
Can you afford to take out a loan against Social Security?
A check for $5,000 that you won’t have to pay off for years or decades? That would probably be too much for many Americans to pass up at the best of times. Coupled with the fact that tens of millions of Americans are currently unemployed and millions more are underemployed or have seen their incomes plummet, any seemingly “free” money would probably be too much to pass up. for many.
As a financial planner, I have to share some thoughts on the adverse effects this could have on your standard of living. The average Social Security check is just $1,503 a month in 2020, with millions of retirees needing every penny of benefits they can get. Additionally, more than 50% of American workers will likely have to retire earlier than expected for reasons beyond their direct control. Think of health issues, family issues, or an unexpected job loss. With 50% or more of Americans having absolutely nothing saved for retirement, even without the coronavirus, there will be a wave of Americans falling into poverty as they age.
My biggest concern about this Trump proposal is that people will take out this $5,000 loan and then be forced to retire earlier than expected. In this case, these people would not only end up with a smaller Social Security benefit (the earlier you apply for benefits, the lower your monthly income), but they would also likely have several months without money from Social Security because they repaid the loan.
Social Security Loan Might Be Cheaper Than Other Options
The counter-argument, in favor of Trump’s proposed loan, would be if you’re trying to pay off other high-interest debt. The Social Security loan would probably come with a better rate than most credit card debt, maybe even some car loans or student loans.
It is not clear if you would be able to repay the loan at some point in the future. If you are able to repay the loan and it has a lower interest rate than some of your other debts, it may be beneficial to take out the loan, while taking steps to ensure that your the most expensive debt is repaid as quickly as possible. .
How much would you have to repay from a Social Security loan?
How much you eventually owe will depend on the interest rate set by the government, your age when you took out the loan, and when you finally claim Social Security.
Here’s what you would need if you took out $5,000 today, assuming an interest rate of 4.53%, which happens to be the federally subsidized rate for student loans in 2020 (before the lockdown of Covid-19).
Claiming Social Security in 10 years = $7,787
Claiming Social Security in 20 years = $12,128
Claiming Social Security in 30 years = $18,888
Although the dollars owed may not seem like a lot, they could mean several months without Social Security income once you retire. For those who are well prepared to maintain their standard of living in retirement, this probably won’t matter much. When it comes to the people most in need of Social Security income, this could be a devastating way into your golden years. I’m talking about at least 50% of the American population here.
