Considerations for your clients in the New Year
by David G. Freitag, CLU, ChFC, CRPCMr. Freitag is a Financial Planning Consultant with Massachusetts Mutual Life Insurance Company (MassMutual); Visit www.massmutual.com
According the June 2019 Trustees’ Report, the Social Security Program pays benefits to more than 63 million people each month. Beneficiaries fall into three broad categories – retirement, disability and survivors. Within these categories at the end of 2018 there were:
- More than 6 million survivors
- More than 10 million disabled workers and their dependents; and
- More than 47 million retired workers and their dependents;
The dollar amount paid in benefits in 2018 alone was about $83.3 billion each month!
Based on actuarial assumptions, between 8,000 and 10,000 people each day turn 62 and become eligible to start collecting retirement benefits from the system. In 2019, for the first time half of the baby boomers were 62 or older. There is much confusion about the ability of the Social Security system to pay future benefits. Much of this confusion is reflected in the media headlines. However, what are the facts?
At the end of 2018 the 2019 Trustees report shows that there was $2.895 trillion dollars in the Old Age, Survivors, and Disability Insurance trust fund. In 2018, the Trust Fund received total income of $1.003 trillion. It paid out a total of $1.000 trillion.
Surplus & Shortfalls
However, actuarial projections made by the Social Security Administration and also reported in the 2019 Trustees report, suggest that the Trust Fund surplus savings account will be used to pay a benefit shortfall starting in 2020. The report projects that the Trust Fund surplus savings account will be exhausted by 2035. At that time, with no corrective action by Congress, an across the board benefit reduction of 20% would be needed. Although the system would not be “broke” in 2035, it would be short.
Some proposals would eliminate the entire long-term deficit in Social Security. Others would only go part way. Suggestions include:
- Lifting the cap on earnings subject to Social Security contributions (for 2020: $137,700)
- Schedule a modest increase in the 6.2% contribution rate
- Raise the retirement age
- Switch to a different Consumer Price Index formula from the current formula
So, what should your clients be considering when it comes to Social Security in 2020?
When to start taking benefits
Many Americans access Social Security benefits before Full Retirement Age (FRA). As a result, they face a permanent reduction of benefits by as much as 25% or more at age 62. A client with a full retirement age of 66 and entitled to $1000 a month at age 66, would get $750 a month with early retirement at age 62. Delaying Social Security until age 70 results in a $1,320 per month benefit. If a client is born after 1954 there will be a larger reduction for taking benefits early and a smaller cumulative increase in benefits when starting at age 70.
There are a number of factors to consider before claiming Social Security benefits. Unless in poor health or retiring with very limited resources, most people should consider if delaying claiming benefits would be to their advantage.
The Social Security Administration reports that 69% of those collecting benefits today started receiving benefits at or before their retirement age, which is age 66 for older Baby Boomers born before 1955. While filing early can make sense for some retirees, it may not make sense for the single retiree who expects to live a long life, or for a married couple if one of the spouses may be expected to live a long life. Filing for benefits early can significantly impact cumulative lifetime benefits. And it affects not just the worker’s benefits but spousal and survivor benefits as well.
Filing early, for well-to-do clients, might impact the legacy they leave. Filing early, for clients with more modest means, could put added pressure on their other assets to provide lifetime income. Retirees should base their claiming date on an analysis that will allow them to balance their projected benefits with their objectives in retirement.
Restricted filing for married individuals
Restricted filing is alive and well for some people. Let’s look at an example of the difference that filing strategy can make. We’ll use a hypothetical married couple – Bob and Mary. Both are 66 years old and want to make a filing decision about Social Security. They are inclined to file when they both reach their full retirement age of 66, however, they would like to know more about other possible options.
After creating their own My Social Security web page, they know what their benefits will be at their full retirement age. Based upon their family history, they have a fairly good estimate of their chances of living long lives.
Because Bob and Mary were born on or before January 1, 1954 they are protected by a grandfather provision of the Bipartisan Budget Act – 2015.
In this example, Mary files on her own record. Because she has filed, Bob can now file a restricted application for a spousal benefit and receive benefits from Mary’s record. Bob can do this restricted filing because of his age.
At age 70 Bob will collect his full FRA benefit plus delayed retirement credits. Mary will continue to receive her benefit with cost of living increases each year. Should Bob die before Mary, this strategy could also provide a higher survivor benefit to Mary.
It is best to model this strategy and compare it to just taking benefits. Being informed about restricted filing can provide these clients with more choices about taking their benefits.
Remember that restricted filing is only available to a client born on or before January 1, 1954.
Restricted filing for divorced individuals
The same logic of restricted filing also applies to divorced individuals who meet the following criteria:
- Born on or before January 1, 1954
- Married 10 or more years and not currently married
- Ex-spouse is eligible to receive Social Security Retirement benefits
For divorced individuals, using the restricted filing strategy can make a significant impact on the size of their cumulative benefits over a lifetime.
Making an educated filing decision
With Social Security modeling, there is no one size fits all model. Each individual needs to look at his or her unique situation and make a decision that is right for them.
Remember individuals have one year to make a change in their filing decision. After one year, changes are very difficult if not impossible to do.