Will Delaying Social Security Benefits Be a Tough Sell to Clients in 2014?

Retirement planners may have a tough time in 2014 convincing clients to hold off on claiming Social Security benefits until the last year possible. But for starters, all you’ll have to do is remind clients how little benefits increased in January: a meager 1.5%.

This year’s benefits increase is one of the smallest since 1975, and amounts to an average raise of $19 per month for most seniors. The small increase reflects the fact that consumer prices have not changed much this year, so the federal COLA is following suit, according to The Associated Press.

The typical Social Security recipient collects $1,272 per month, so the 1.5% increase adds $19 to that. The COLA has typically increased by about 4% each year, until the recent recession. There was no COLA in 2010 or 2011; in 2012 the increase was 1.7%.

As small as the 1.5% increase sounds, “at least it is better than nothing,” according to Ann Vanderslice, principal at Ann Vanderslice Retirement Planning Strategies.

Approximately 58 million Americans receive benefits that are impacted by the COLA, according to the Social Security Administration. Also affected are millions of disabled veterans and federal retirees.

Depending on an individual’s overall financial portfolio, of course, it is usually wise to delay Social Security benefits for as long as possible anyway. The recommended strategy is to draw on other assets in the meantime, such as an IRA, pension or 401(k) plan. By delaying the start of Social Security payments an individual receives larger monthly payments once they do collect. In light of this year’s small benefit increase, that strategy may hold more appeal.

Vanderslice hopes so. She said that older workers she initially meets with expect to start collecting Social Security as soon as they reach age 62. Among her first questions: ‘Have you thought of delaying Social Security? Most haven’t even considered it,” Vanderslice said.

New Wage Limit for Social Security Taxes

The other change that retirement planners will be advising clients about is that the amount of wages subject to Social Security tax is going up in 2014.

Currently, Social Security is funded by a 12.4% tax on the first $113,700 in wages that an individual earns. Half of the Social Security tax is paid by the employee, and the other half by their employer. The Social Security Administration announced recently that the wage limit is increasing in 2014 to $117,000. After an individual’s income exceeds that limit, the rest is not taxed for Social Security purposes.

Fortunately for the Social Security Administration’s public relations efforts, a majority of older workers say they are willing to have more of their wages taxed, recent research reveals. It is generally accepted that this is one of the best ways to help ensure Social Security solvency for the next generation.

Retirement planners take note: Although the small benefits increase in 2014 may help your case, you do still have your work cut out for you in convincing clients to delay receiving Social Security benefits.

According to a new study on the attitude of seniors toward Social Security, a majority of seniors today do expect to collect benefits close to the traditional retirement age of 65. Further, they have little appetite for significant changes to the current Social Security system.

That is especially true of any suggestion for increasing the age for full qualification. If an individual decides to delay collecting, that is fine. But seniors say they want that control.

The survey was conducted this fall at the University of Chicago by the Associated Press and the NORC Center for Public Affairs Research. Survey participants included 1,024 people aged 50 or older. Funding for the survey was provided by the Alfred P. Sloan Foundation.

The study found that American seniors generally have a hands-off attitude toward Social Security. They view it as a hard-earned entitlement, and expect to receive in retirement what they feel they have been promised while contributing in the workforce.

Nearly two-thirds (62%) of survey participants said they are opposed to any change in the way that Social Security benefits are calculated that would result in smaller annual raises. It has been proposed that the chained Consumer Price Index (CPI) replace the COLA formula, but that would reduce annual increases. Still, the chained CPI has the support of both President Obama and House Speaker John Boehner (R-Ohio).

A third of older workers feel they should also be able to collect full Social Security benefits before age 65, while 10% say full benefits should be available only at age 67.

“When I mention delaying Social Security to clients, their eyes pop out,” said Frank Boucher, principal at Boucher Financial Planning Services. “The first thing they want to know is, ‘How will we live?”

As with Ann Vanderslice, Boucher said the majority of his new clients show up at his office expecting to collect at age 62, or certainly no later than age 65.

Rather than think in terms of holding off on Social Security, most clients want to know “how do I get the most dollars out of Social Security. Which works best for me from a cash flow and taxes perspective? The concern I hear is with toying with the age for full benefits,” Boucher says.

As to survey participants, asked if they would support efforts to gradually increase the age when retirees quality for full benefits, 58% opposed such a move, while 29% said they would support it.

But the study found that there is support by Americans age 50 and older to raise the cap on earnings that are taxed to fund Social Security. Furthermore, 41% said they support reducing Social Security benefits for seniors with higher incomes (44% said they oppose that notion).

“Most people are fine with that,” said Philip Maliniak, principal of Virginia Financial Planning. “The mentality is that if we don’t do that, benefits will be lessened.”

Maliniak also confirms that older workers assume they will start collecting Social Security at the earliest opportunity possible.

“Most say they will take it sooner rather than later; more than I would have thought,” Maliniak said. “Part of that is due to the fact that they don’t trust the government.”

What will ultimately happen with all of these remains to be seen. But some expect changes will be made to the system soon. Currently the trust funds that support the program are projected to run out in 2033. When that happens the Social Security program will be collecting only three-fourths of the taxes it needs to meet individual payments.

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