Advisors appear to lack sophistication in advising clients about taking Social Security benefits, leading to mistakes that fall hardest on aging widows. That is the conclusion of a new study just published as a working paper of the Pension Research Council, a retirement research center affiliated with the University of Pennsylvania’s Wharton School.
The paper’s authors, Mathew Greenwald, Andrew Biggs and Lisa Schneider, based their findings on a survey of 400 financial advisors, drawn from a variety of different backgrounds including wirehouse and independent advisors, among others.
Yet advisors do not present a barrier to the prevalent tendency of Americans to claim benefits before reaching the full retirement age of 66, thereby ensuring a smaller lifetime benefit into advanced years when many Americans no longer have the option of continued work. Age 62, the first year Americans may elect benefits, is also the most common age chosen to do so.
To cite just one scenario discussed in the study, for a “man in average health earning more than his wife and intending to retire at age 62 with assets of at $800,000, it would clearly be advantageous to the wife if the husband delayed claiming; nevertheless, only 32% [of advisors] suggested the husband should claim at age 62 and only 20% suggested that the man delay as long as possible. Claiming at 62 would result in a significantly lower survivor benefit for the widow later in life.”
In a phone interview with AdvisorOne, Biggs (left), an American Enterprise Institute scholar, attributed advisor errors to an overreliance on what is known as “break-even analysis,” which asks how long it would take for the higher payments of a delayed claim to compensate for the benefits an earlier claim would have ensured.
“Most economists think that’s kind of a simpleminded way of looking at it,” Biggs says, since it overlooks the fact that delayed benefits provide higher income when people typically have the fewest options and also neglects to factor in the higher spousal and survivor benefits a later claim can generate.
Biggs says the persistence of break-even analysis is understandable. “For decades, that’s how the Social Security Administration used to portray it to people,” he said.
It also doesn’t help, Biggs adds, that the typical American is disposed to early benefit claims. Europeans, he says, take longer vacations, whereas Americans take longer retirements.