Forget Chicken Little-like predictions of Social Security’s demise. It’s a popular government program (we have never written that phrase before) and one of the few that can claim the moniker. The hype and hyperbole surrounding the Social Security Board of Trustees’ annual report fuels the perennial prediction that political PAYGO looters have all but exhausted the entitlement, or soon will.
This year is no exception. Headline-grabbing news noted that the total cost of the program will likely exceed its income in 2018, causing it to dip into its reserves for the first time since 1982 to account for the shortfall.
Never mind that it was fully expected, with the Board adding, “The Trustees’ projected depletion date of the combined Social Security Trust Funds has not changed, and slightly more than three-fourths of benefits would still be payable after depletion.”
Sensationalism sells, and it’s wreaking havoc not only on how and when American workers collect Social Security benefits, but also with their retirement planning allocation and diversification decisions as a whole.
It’s also driving Gail Buckner mad.
“It’s a crying shame that Americans—by a huge majority—have the impression that Social Security is going broke,” says Buckner, author, Fox Business Network contributor and retirement planning expert with Franklin Templeton Investments. “It gets me really upset, because nothing could be further from the truth.”
It’s also the reason 401k advisors need to step up to dispel solvency myths and assist in influencing better planning behavior on the part of participants that comes from “knowing the money will be there.”
The most obvious and widely reported result of the scare tactics is that recipients think, “‘I better get it as quick as I can,’” Buckner adds. “They therefore file early, take a much smaller benefit than they could otherwise get, and it’s just too bad that something that affects so many Americans is still such a misunderstood mystery.”
Part of the solution is to steer the conversation—and terminology—away from the stereotype of the elderly widow dutifully clipping coupons in order to supplement a meager fixed income, to Social Security as a lifetime annuity backed by the full faith and credit of the United States government—one that pays pretty darn well.
“Some people are nervous and defensive in enrollment meetings because they don’t think they can afford to participate,” says George Fraser, managing director and financial consultant with Retirement Benefits Group in Phoenix. “We therefore begin by telling them what they have, which is an average of $1,000 a month in Social Security benefits. That’s like having a quarter of a million dollars in a retirement plan that pays 5 percent a year.”
It’s a ‘wow’ factor that adds hope, because most don’t realize they have that kind of a retirement resource.
It also serves as a natural segue to why it’s important to participate in the 401k plan and, more specifically, why it’s important to include equity allocations in their investment choice. Since Social Security guarantees at least a portion of their retirement income, it allows them to be more aggressive in other areas.
It’s just one example of the peace-of-mind and resulting excitement that comes from taking the time to engage individuals in Social Security education, yet too many advisors fail to do so, mainly because they fall victim to the same misinformation as their clients.
“People don’t understand the trust fund,” Buckner explains, when asked to provide a list of the errors she routinely encounters. “The trust funds do not lend money to the Treasury Department. People think Congress borrows from the trust fund. They don’t. They can’t. They’re not allowed.”
And contrary to the attention-getting headlines, Social Security’s outlook actually improved in 2018, with a big drop in disability claims, a byproduct of a strong economy and low unemployment.
“For several years, Congress was steering money that was supposed to go into the retirement trust fund into the disability trust fund, so it could cover the increase in claims because of a poor economy. It will now shift back.”
So not only is it not going broke, it’s in much better shape than most people think.
It sounds great, but we’re skeptical and push back, arguing that the increase in longevity has to have a detrimental impact—it’s just simple math.
“Yes, what’s driving the issues behind the supposed decline long-term in the ability to cover retirement benefits is not government waste or overspending; it’s the fact that people are living longer due to health care and medical technology innovation,” she concedes, before reiterating that it’s nonetheless far from the fiscal cliff pundits and politicians profess, and therefore won’t take much to fix.
“Look at the Social Security tax rate now; employers pay half and employees pay half, with a total of 12.4 percent. So, 6.2 percent comes out of your paycheck, up to a maximum of $128,400 in earned income. What hey said this year is, ‘Look, if you want to solve the funding problem for Social Security, raise the tax rate by 2.84 percent.’”
The increase would be split between employee and employer, each paying 1.4 percent more, or $14 for every $1,000 up to $128,400.
“Do that, and everybody gets what’s coming to them for the next 75 years. When we do seminars, the expressions on people’s faces are like, ‘Are you kidding me?’ They’re relieved, and then they’re angry, because this is not how it’s being explained to them.”
The devastation that results from this lack of explanation and education is all too real.
If they start at age 62, the earliest allowed for withdrawal and four years short of the full retirement age of 66 (currently), the benefit received will be permanently reduced by 25 percent.
But Buckner argues it might actually be worse.
“I ask people, ‘How much is your benefit reduced if you start at 62 instead of full retirement age?’ Everyone will say, ‘25 percent!’ but it could be as much as 30 percent. If your full retirement age is 66 and you start at 62, you’re receiving benefits four years early, so yes, you’re getting a 25 percent reduction. But if your full retirement age is 67, you’re starting five years early if you claim at age 62, and your benefit is going to be reduced 30 percent. And that’s permanent.”
Delaying the start of Social Security to the maximum allowable age of 70, of course, has the opposite effect; an 8 percent per year delayed retirement credit. It results in a total of 32 percent more in benefits, and one of the best annuity deals on the market.
She frequently quotes University of Chicago behavioral economist and Nobel Laureate Richard Thaler when advocating for delaying Social Security as a longevity hedge.
“If you are in good health and you can afford to wait, my advice is that you should wait as long as possible,” Thaler says. “The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living ‘too long.’”
Real World Application
If it’s all beginning to sound a bit academic, a situation in which Fraser found himself illustrates the real-world impact that advisors can have on the lives of participants when they take the time to explain and incorporate Social Security planning.
A longtime employee of a wood manufacturing company reached age 65, and while he enjoyed his work, he considering retiring.
Despite a low income (having never made more than $26,000 in a given year), the employee and his wife lived simply while diligently contributing to the company’s retirement plan, resulting in $270,000 saved in his 401k.
“In our one-on-one meeting with both he and his wife, we determined that, based on a full retirement age of 66, they would receive an annual benefit of $32,000—$6,000 more than his current salary,” Fraser explains. “They were shocked it would be that much, but this is where it gets good.”
Since the man still enjoyed and found purpose in his work, Fraser advised him to continue working for three more years. He would begin taking his full Social Security benefit immediately, in essence awarding himself a raise, and contribute $24,000 of his $26,000 salary to his 401k, the maximum allowed at the time for workers over age 50.
The amount of the additional contribution would total $72,000 over three years.
“So, he had $270,000 in his 401k, plus the additional $72,000 he would contribute,” Fraser notes. “If he lived to age 85, he would collect a total of $640,000 in benefits over the 20-year period. We added it all together and could tell him he had almost $1 million saved for retirement.”
His wife had tears in her eyes, “and he was as proud as could be because he had done right by his family. They left the meeting and told everyone at the company, ‘Go see George.’”
Because it was a smaller-sized plan, non-discrimination testing issues were effectively addressed with that one employee, and highly-compensated employees could now put in more.
“They were ecstatic,” he says. “And this is why I do what I do. As advisors, we can make a difference, but when it comes to Social Security, we haven’t.”
“People are not motivated by fear,” Buckner agrees. “They shut down when you start scaring them. Give them hope and reassure them that they can relax; Social Security will be there. It doesn’t have to be that hard. The more successful plan advisors, like George and others, are doing it. And they’re seeing higher participation and higher 401k contributions as a result.”