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Retirement Planning > Social Security

Kotlikoff Weighs In: Should Cash-Strapped Seniors Claim Social Security Early?

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The near-nationwide lockdown intended to slow the spread of COVID-19 has created “a perfect macroeconomic storm” that’s put the U.S. on track for a depression worse even than the Great Depression — it is therefore “idiotic exuberance” to invest in the market now, argues Boston University economics professor Laurence Kotlikoff in an interview with ThinkAdvisor.

Kotlikoff, who in 2014 was named by The Economist one of the world’s 25 most influential economists, floats a plan for reopening the U.S. economy: a nationalized household testing program run by the states. He is working with a Cornell University professor on a testing model.

Director of the Fiscal Analysis Center, Kotlikoff served on President Ronald Reagan’s Council of Economic Advisers and as a consultant to the International Monetary Fund, the World Bank, the U.S. Education Department and the U.S. Labor Department, among other organizations and governments.

In the interview, the professor, who made a short-lived bid for the presidency in 2012, is critical of President Donald Trump’s “inactions” in managing the coronavirus crisis, charging him with “playing politics with this plague, causing tens of thousands of deaths” and arguing that “what he’s doing will kill the economy.”

The discussion turned to options for cash-strapped Americans who have lost their jobs. One quite effective one, Kotlikoff says, would be withdrawing cash from a 401(k) account to pay off a mortgage.

Other choices include filing early for Social Security — though the Social Security authority strongly advises that tapping retirement accounts is a better idea — and reducing cost-of-living expenses by moving to a state without state income tax.

An outspoken critic of the Social Security Administration (The government “operated on Social Security’s rules with a meat cleaver”), Kotlikoff is the author of “Get What’s Yours — Revised and Updated: The Secrets to Maxing Out Your Social Security,” written with Philip Moeller (February 2015).

The professor is president of the financial planning software firm Economic Security Planning, with offerings to maximize Social Security lifetime benefits.

ThinkAdvisor interviewed Kotlikoff by phone on Tuesday. His forecast for the wounded U.S. economy: “Everybody is likely to feel some pain unless you removed yourself to an island.”

Here are excerpts from our conversation:

THINKADVISOR: You wrote in Forbes on March 16 that the coronavirus lockdown has created: “the perfect macroeconomic storm — a tremendous supply-side shock due to people not being … allowed to go to work or shop, coupled with a substantial slow-down/shut down in the global supply chain.” Ten days later, you wrote, “Get out of the market immediately.” Why that extreme measure?

LAURENCE KOTLIKOFF: It’s idiotic exuberance to be in the market right now. People should go to cash until the market gets to a reasonable valuation. We’re heading toward the greatest depression: You’ll see the second quarter GDP down 35%-40%. In the Great Depression, it took three years, 1929-1933, for the GDP to fall 26%. Now we’re talking about output falling by a bigger percentage in just three months.

In the Great Depression, people were reduced to selling apples on street corners. Are you predicting a similarly grim scenario?

We have more social programs than we had then — we have ways of redistributing the pain.

What’s the best option for reopening the economy?

There’s a way to get the majority of the country back to work very quickly if we do it intelligently at the federal level. But we have a totally incompetent stable moron running the country: President Trump is causing deaths, and what he’s doing will kill the economy. By his inactions and playing politics with this plague, he’s causing tens of thousands of deaths.

What should be done about reopening the economy?

There’s a route out of this. Some of Trump’s supporters may not like it, but they’re not going to like being on a ventilator either [if they contract COVID-19 and require one]. We need a nationalized testing program under government control for the duration of the pandemic.

How would that work?

We need a once-a-week, then daily, group-household test. Each morning a testing mobile, operated by military personnel, would come to your street. You’d provide swab samples, and 15 minutes later your household could be cleared to go to work and visit stores and restaurants for that day, or not.

What if you’re cleared?

You’d get a green bracelet that would automatically change to red [signaling no longer cleared] after 24 hours. Infected households would need to go into quarantine. Over time, less frequent testing would be needed.

How do you propose developing and running this system?

The only real option is for the states to do their own group testing, but you have to be FDA- approved. So if Trump would just get the hell out of the way and let them work directly with the FDA, they can do the testing. You just have to find the [right] company and command it to do it.

Many older people, because they’ve lost their jobs as a result of the pandemic, want to start receiving Social Security benefits early. Your thoughts?

If they’re 62, 63, 64, they’d be inclined to take Social Security and keep the money in the market because [they figure] the market will definitely come back. But if you wait till age 70 to take these benefits, which is optimal for probably 80% or 85% of households, you’re going to get a much higher [payment].

Is there another approach for them to receive benefits early?

Take Social Security immediately but then go back to work maybe in a year or so. If you’re at full retirement age, you can suspend your benefit and start it again at 70 — at roughly a 30% higher number.

What other choices are there for someone who has a cash-flow problem now — a better one, perhaps, than taking Social Security early?

Cashing out your retirement account and then waiting till age 70 to take Social Security. If you’ve lost your job, you’ll have the advantage of being in a lower tax bracket than maybe in the future. So you can take the money out and pay taxes on it at a lower rate, then put it back into a Roth IRA account and not pay taxes on it again. There’s no deferral value in delaying paying taxes anymore because the real return is zero.

You’ve suggested an alternative that, you say, would realize “a big gain”: That is, cash in your 401(k) to pay off all or part of your mortgage. Please explain.

This allows you to borrow at a low rate and invest at a high rate with no risk. Your 2020 taxes will be higher, but there will likely be a large net gain. You could earn 2-1/2% real on the entire amount that you paid off. This can work even if you have to pay the 10% penalty for making withdrawals before age 59.

Any caveats?

If inflation takes off, a mortgage is a good hedge. But inflation is being predicted at around 1.27% per year for the next 30 years. If we have deflation, as we did in the Great Depression, the real burden of your mortgage would rise, not fall. through time. Right now, the market is priced at the middle, which means you have an equal chance for prices to go down or up.

Are there other options for someone with poor cash flow now and for the immediate future, at least?

There’s still a housing market out there, so you could downsize and move to a state that’s less costly. Or you could half-size your house either where you live or move to a place where housing is cheaper — maybe you could buy a similar house for half the price. And/or you could move to a state that doesn’t have income tax, and where the cost of living may be cheaper, like Washington state [or Florida].

Can Medicare recipients have confidence that this government program will remain viable?

Medicare will be there. The government is going to pay the doctors and hospitals, but whether the real payments to doctors will be meaningful is another question. If prices go up faster than doctors’ and nurses’ salaries go up and the real payment goes down, they might switch [to a different profession]. If pharmaceutical companies are told they can’t raise prices, we might have price controls set, or they’ll stop shipping drugs. All kinds of distortions can happen.

Broadly, what’s your forecast for the American economy?

Everybody is likely to feel some pain unless you removed yourself to an island. The U.S. economy is going to be for the elite, and everybody else “will eat rice and potatoes.” Right now, on the French Riviera, billionaires are in a [gated compound] where they have their own coronavirus testing capacity.

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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.