When clients think Social Security won’t be around, what can you do?
by Marcia Mantell, RMA®, NSSA®
Ms. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is author of “What’s the Deal with Retirement Planning for Women?”, “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.Have you noticed the onslaught of Social Security articles over the past several months? They are all negative. Everything from “Thanks to COVID-19, Social Security’s Day of Reckoning May Be Even Closer Than We Thought” to “The Coming Financial Collapse of Social Security” and “Why Social Security May Run Out of Cash Really Soon.”
They sure are attention grabbers. And, they serve to stoke the flames of a nervous pre-retiree public. In reality, they do nothing but create a frightening situation for many of your clients. And the impact of such misleading headlines can result in clients standing ready to make poor claiming decisions.
Especially when it comes to claiming Social Security. So, how can you help tamp down the skepticism or even douse the flames to help clients stay on the right path? Here are 5 ideas:
1. Show Clients Why Social Security Won’t Stop Paying Them
Communicate to clients that without Social Security, nearly all retirement income plans fail. Even those who have amassed several million dollars cannot withstand a 30-year retirement without Social Security. We simply are not financially equipped to handle such a financial shock.
The best way to illustrate this is to run an analysis for each client. Show them the implications of a Social Security benefit that gets cut by 25%. That’s the current projection when the Reserve Fund will be emptied in 2034 if Congress doesn’t amend the law to shore up Social Security.
Also show clients what their overall success (rather, failure) will be if Social Security goes away entirely.
Running The Analysis
Using Maxifi®, a sophisticated retirement income analysis tool developed by Professor Laurence Kotlikoff, founder of Economic Security Planning, you can see the harsh outcome if Social Security is reduced or eliminated. Take a look at the stark results:
Hypothetical couple Victor and Victoria are 61 and 58. Both are working. His wages are $150,000, her salary is $175,000. Victor plans to retire at 64 but wait to claim Social Security at his Full Retirement Age. Victoria plans to work until 67 and claim her benefit at that point. They each have $1 million in their own IRAs and a joint taxable account with $250,000.
The initial analysis in Maxifi shows a lifetime balance sheet total of just over $6.5 million. The key output in this tool is how much “discretionary” spending they will have. This tool defines “discretionary spending” differently from how many advisors work with expenses. It is defined as any assets left after accounting for housing expenses, specific expenses input by the client (vacations, cars, college, etc.), taxes, and Medicare Part B premiums. Therefore, the “discretionary” fund must cover food, all other health care expenses, clothing, day-to-day living, gas, and utilities, etc.
A Look At The Results
The base case shows Victor and Victoria with $3.7 million in their “discretionary” fund. This gives them $124,000 per year in smoothed spending. (Maxifi uses a consumption smoothing approach to ensure they won’t run out of money.)
The next scenario reduced Social Security by about 23%. The resulting lifetime balance sheet decreased to $6.1 million. Just lowering Social Security decreases lifetime discretionary spending by $300,000. They must now make adjustments to meet their lower $114,000/year spending allocation. Overall, this 8% decrease in discretionary spending may or may not present a problem. But they aren’t happy.
However, if Social Security drops to $0 for both, the changes are drastic. Their lifetime balance sheet decreases to $4.7 million and their discretionary spending takes a $1.4 million hit. They now have just $2.2 million to last 30 years, and their annual spending is reduced to $75,700. That’s a whopping 40% drop in their ability to put food on the table.
Use your own tools or try Maxifi to run these scenarios for your own clients. The results are both startling and sobering. And speak to the fact that the country would have a major catastrophe on hand if nearly all our oldest citizens can’t support themselves in retirement.
2. (Re)Explain How Social Security Gets Funded And COVID Didn’t Change That
Each client had individual experiences during the first waves of COVID pandemic. In addition to hearing the unemployment numbers, clients saw friends and family members retiring earlier than planned. And many claimed Social Security earlier. It’s easy to leap to the conclusion that all these unexpected claims are putting a strain on the system.
By and large, the “COVID-related claimants” are not putting an unusual strain on the system.
The only people who can claim are those who are already eligible. So, they must be at least age 62 and fully entitled to this benefit. They’re already “baked” into Social Security’s calculations.
Furthermore, Social Security has continued to be funded through payroll taxes. While there was a dip in payroll during the early months of the pandemic, unemployment has been dropping quickly and wages have been increasing. Current analysis from powerhouse analysts is that the COVID impact is simply a blip on the radar.
3. Walk Clients Through The Trustee’s Report
Pictures speak louder than words, so show clients the facts. The Trustee’s report and the policy organizations that analyze the Trustee’s report may be effective in explaining what’s really going on “behind the scenes.”
For clients who are especially skeptical about their social safety net, you may find it helpful to pull a number of pages from the latest Trustee’s Report and review the long-range projections during a meeting. Or, consider sending the link to these clients with a suggestion to read the first couple of sections.
Some of the best and brightest actuaries and experts work at the Social Security Administration. They have an 86-year-history to bring into the analysis. And, since the earliest days of the program, both the SSA and Congress keep a 75-year forward-looking view when projecting solvency.
You’ll find excellent information about how Social Security is funded on the Center on Budget and Policy Priorities website.
4. Run Scenarios Where Social Security Is Reduced By 30% When Claiming At 62
Next year, the first group of Baby Boomers crosses the threshold to a Full Retirement Age of 67. They are clients born in 1960 and will be 62. These clients will get a 30% reduction in their monthly income from Social Security if they claim at 62.
In simplest terms, if a client has a $2,400 monthly Social Security Primary Insurance Amount, and they claim at 62, their benefit is permanently cut to $1,680. The month they turn 65, their Medicare Part B premiums will be automatically deducted from their reduced benefit. Estimating premiums of $165 in a few years, their reduced benefit is further reduced to $1,618 (assuming 2% COLA).
Furthermore, if they are concerned about the potential 25% cut in 2034, their benefit is cut back even further to about $1,400 per month.
Let’s not forget if they continue to work between 62 and 67 and make over the earnings limit ($18,960 in 2021), their benefits will be clawed back. What they do receive will likely be taxed. And, if they are the higher-earning spouse, they lock in the least amount of survivor benefits.
All in, claiming at 62 is not a good idea for any clients who can otherwise wait. The numbers on the back of an envelope will tell this powerful story.
5. Talk About Working After Claiming
There’s no earnings limit test after clients reach FRA. Talk about the strategy of waiting until FRA to claim. At that point, they can earn any amount AND receive their full, unreduced Social Security benefit.
Remember that the FRA serves as a “deemed” retirement age for purposes of calculating benefits. It opens options for older workers to claim benefits and continue working without penalty.
For clients who are concerned about potential Social Security reductions, and do not want to wait until age 70 to collect their maximum payout, getting to FRA delivers unreduced benefits. Their benefit payments are taxable income, but they aren’t making a decision that could be financially detrimental late in retirement. For individual clients and for a dependent spouse.
In Summary
The bottom line for financial advisors is to remain calm and help skeptical clients stay the original course. There is significant data, facts, and analyses to support the fact that Social Security is not going anywhere. You might find it helpful to run a webinar on Social Security to all your near-retirement clients. Let them see the correct information before they get wound up in the headlines. Then meet one-on-one to run analyses. Claiming too early can derail even the best laid plans.
