As the US economy plunges into 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 currently unemployed, this 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 original $ 1,200 stimulus check, that money is probably long gone. As the Democratic-led House of Representatives passed an additional $ 3 trillion coronavirus relief package on May 15^eI expect some step back in trying to get 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 handouts; you will take out a loan that will 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 stimulus payment of $ 5,000 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 pay the money back until you start claiming Social Security, which could be as late as 70. Once you have claimed Social Security, your entire benefit would be used to pay off the loan until it is fully paid off. From there, you will receive your regular social security benefit based on your age and work history.

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Can You Afford To Take A Social Security Loan?

A check for $ 5,000 that you won’t have to pay off for years or decades? It would probably be too hard for many Americans to pass up at the best of times. Add in the fact that tens of millions of Americans are currently unemployed and millions more are underemployed or have seen their incomes drop, any seemingly “free” money would probably be too hard to pass up. for many.

As a financial planner, I need to share some thoughts on how serious this situation is for your standard of living. The average Social Security check costs just $ 1,503 a month in 2020, with millions of retirees needing every penny of benefits they can get. Additionally, over 50% of U.S. workers are likely to have to retire earlier than expected for reasons beyond their control.. Think about 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.

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My biggest concern with 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 sooner you claim benefits the lower your monthly income), they would also likely have several months without having any money from Social Security. . as they repaid the loan.

Social Security Loan Could Be Cheaper Than Other Options

The counter-argument, in favor of borrowing as proposed by Trump, would be if you try to pay off other high-interest debt. The Social Security loan would probably have a better rate than most credit card debt, maybe even some car loans or student loan debt.

It is not known 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 the necessary steps to repay your debt. most expensive debt as quickly as possible. .

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How Much Should You Pay Back on a Social Security Loan?

The amount 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 should have if you took $ 5,000 today, assuming an interest rate of 4.53%, which happens to be the federally subsidized rate for student loans in 2020 (before Covid-19 containment).

Claim social security in 10 years = $ 7,787

Claim social security in 20 years = $ 12,128

Claim social security in 30 years = $ 18,888

While the dollars owed may not seem that large, they could mean several months without Social Security income once you enter retirement. For those who are well prepared to maintain their standard of living in retirement, it probably won’t matter much. When you talk about the people who need Social Security income the most, it could be a devastating way to step into your golden years. I’m talking about at least 50% of the American population here.