We Already Have UBI

Edit: This podcast from Econtalk on the same subject came out a day after this post (coincidence? I think not) and was a worthy listen.

Universal Basic Income (UBI) is a concept that has gained significant momentum over the past few years, and is ubiquitous enough that most people are now at least passingly familiar with the concept.

I’m here to break the news that we already have it. Social Security is effectively a UBI that is limited to the elderly (perhaps that means the “U” in UBI needs an asterisk).

According to the SSA, nine out of ten individuals over 65 receive benefits, and I’d wager a few more tenths are waiting to claim either at their FRA or at age 70. Most of the others who don’t qualify probably receive another pension.

Most UBIs have a flat payout, not a formulaic one, but if I were a gambling man, and I am, I’d bet we see flattening payouts as part of the solution to the demographic problems the Social Security system is on track to have. Benefits for high earners are already significantly lower relative to amounts paid into the system thanks to the “bend points“. It would be a natural extension to have earners over a certain amount pay in but not increase their benefit, or to change the current bend points, or both.

This would exacerbate the “problem” of social security alone not covering pre-retirement cost of living, but would allow using social security as a ‘floor’ for the standard of living that we want to allow people to live at.

And, a natural extension of not wanting Grandma living under a bridge eating mustard sandwiches is that we don’t want anyone under a bridge eating mustard sandwiches. There are a lot of subtleties in moving from Grandma to everyone — e.g., if Grandma is eating mustard sandwiches she might not have any viable way to earn an income, while someone younger might, and maybe there are a few 20 year olds who would not work if you guaranteed they did not have to live under a bridge. This is the danger of making UBI equal to the cost of rent + food + netflix. This is called retirement, and most people find it perfectly acceptable from age 65+.

So the question, then, is: Do we wish to allow everybody, if they wanted to, to retire and watch netflix all day? It would certainly make some people better off, but the costs would have to be absorbed by others.

If the answer is yes, we have a fairly easy framework to implement with, simply allowing earlier and earlier (perhaps at more and more reduced amounts) filing for social security.

Retirement Doesn’t Mean It’s Time for Social Security

Retirement != Social Security Time

One of the biggest false constructs people have in their minds about social security is that they have to take it once they retire. I’m still not entirely sure if they think it is a literal requirement, or just an ironclad rule of good financial management, but it is overwhelmingly common.

Part of the problem probably lies with the most common language used around social security, “full retirement age”. Most people who turn 62 begin to educate themselves on their options, at least enough to know that every year they wait up till 70, they will increase their benefit (unless they are going to claim a spousal benefit, in which case they top out at 66 or 67 or some point in between).

For single people, especially healthy, wealthy ones (the kind that retire at 60 so they can travel Europe and hike while they have two good knees), it often makes sense financially to draw a little more from the portfolio from 62 until 70 for the enhanced benefit starting at age 70.

Why? Because the increase to social security is mostly risk free (some political risk, but the odds that two people of the same age won’t get grandfathered in because one started benefits and the other didn’t strikes me as tiny), and that increase is close to 8% (the math changes part-way through), which you would be wise to note, is much higher than that other risk-free return, treasuries.

Yield Curve

Yes, that’s 2% at the top of the graph. And yes, it does feel different to have a social security benefit that is growing at 8% per year versus having a portfolio with a balance that you can see growing at 8%, but the math is pretty much the same, and math doesn’t care how you feel about it.

The other nice thing about social security is that it is a form of insurance (in fact, your benefit at full retirement age is known as your primary insurance amount (PIA). If you do the riskiest thing in finance (well, besides invest with this guy), live a long life, the returns on delaying social security just compound and compound. If you die early (e.g., 72), yes your decision to wait sucked, but it turns out you didn’t need that money anyway!

Now, obviously there are cases where someone has saved next to nothing for retirement and can’t continue to work past 62, and they will draw social security as soon as they can, but for people who don’t fit into that bucket, just remember, you don’t have to take social security when you retire, you can file for medicare separately, and you’ll probably be better off to wait.

Couples is a more complicated issue as far as when they should begin taking benefits, although it got simpler/more complicated with the elimination of file & suspend. I haven’t taken the time to flesh out my new preferred rules of thumb (RIP to my file & suspend spreadsheet, you were so beautiful), so I won’t conjecture. But couples have the same option as single people, waiting to take benefits, even if they consider themselves “retired”.

So please, old(er) folks, don’t feel pressured by your friends or colleagues or CNBC (do they talk about social security?) to begin your social security benefits the day you walk out the door from your retirement party.