Who will solve the ever-growing Social Security funding dilemma? Maybe not President-elect Donald Trump, who thus far has presented no plan. But with promised benefits exceeding incoming taxes and Social Security’s trust fund forecast to dry up in 17 years, the situation is like a speeding train heading toward a mountain crash.
So says Social Security authority William Reichenstein, a Baylor University professor and chairman of investment management, in an interview with ThinkAdvisor. The co-founder and research principal of Social Security Solutions has created numerous claiming strategies based on his decades of research that aim to optimize Social Security benefits and portfolio longevity.
While Social Security reform remains a vexing issue and political hot potato, advisory clients nonetheless need immediate advice about factoring benefits into their retirement plans.
Reichenstein, a chartered financial analyst who has taught and researched in finance since 1978, has written more than 150 articles for professional and academic journals and is a member of The Wall Street Journal’s panel of experts that contribute essays on financial issues.
Social Security Solutions, based in Leawood, Kansas, turns Reichenstein’s strategies into software tools for making smart claiming decisions, its team of professionals working both with advisors and consumers. Corporate clients include Ameriprise, LPL Financial, Northern Trust and Vanguard.
Last September, Solutions’ co-founder and managing principal, William Meyer, testifying at a hearing before the U.S. Senate Special Committee on Aging, suggested a handful of uncomplicated changes the Social Security Administration could make that would help improve folks’ retirement years. These include delivering more information and support to financial advisors and permitting Social Security agents – after receiving training – to provide claiming advice.
ThinkAdvisor recently spoke with Reichenstein, on the phone from his Baylor office in Waco, Texas, about what FAs need to know to help clients navigate the complicated, confusing Social Security maze. Here are highlights of our interview:
THINKADVISOR: How many different Social Security claiming strategies are there?
WILLIAM REICHENSTEIN: Over 10,000 for a couple who starts benefits between the ages of 62-and-zero months, and 70-and-zero months.
Quite a few! How critical is it for financial advisors to factor Social Security into clients’ retirement plans?
If you don’t help a client make the right Social Security decision, you’ve mismanaged their portfolio. Social Security is a very important decision and needs to be looked at carefully. A typical couple will get financial resources to meet their retirement needs from two sources: Social Security and their financial portfolio. The question is: How can they make sure they won’t run out of money?
But the Social Security trust fund itself is projected to run out by 2034, at which time promised benefits will likely be reduced to about 79%. What is President-elect Trump’s plan for Social Security?
He has no plan for changing or reforming Social Security, which is already having outflows that exceed incoming taxes – so the trust fund is now being used. Reform is inevitable: Social Security is like a train speeding toward crashing into a mountain that has no tunnel. Why has nothing substantial been done to fix Social Security?
For decades we’ve known that something has to change. But it’s been politically easier to postpone adjustments than to be the party blamed for decreasing promised benefits. We know we must do something, but the political will isn’t there! Knowing that we’ve got this potential train wreck, it’s irresponsible to continue to promise more benefits than the system can produce.
What’s the most important thing for FAs to know regarding the Bipartisan Budget Act of 2015 that changed or killed certain claiming strategies?
The file-and-suspend option is now over with [except for earners who were grandfathered in]. No one can file and suspend anymore. The No. 1 thing to know is that it pays to wait till age 70 [to file for Social Security] because you can maximize your lifetime benefits. For every year that you delay, you get 8% more in benefits. But very few people delay beyond full retirement age; instead, they take Social Security as soon as they can. Starting next January, full retirement age goes from 66 to 66-and-two-months.
Is Social Security a brilliant program or a terrible one with hidden traps and hidden penalties?
There are problems with the system, which has two parts: a welfare feature and a retirement income portion, which, I think, should be mainly a required savings program and more like a 401(k) plan because the system is very one-sided. It’s almost entirely an income-confiscation plan.
If Peter earns $60,000 a year for 30 years and Paul earns $30,000 for 10 years [total], Paul will get six times as much pretax benefit as Peter for the last thousand dollars of earnings. If you’ve put $6,000 into Social Security this year and have already worked 30 years, you’re potentially going to get almost none of it back. That’s too much of an income redistribution plan.
Compare that to a 401(k) plan.
If you put money into a 401(k) plan, it’s there for you. But with Social Security, the government has said, “We’re going to take that from you, and you don’t get any benefit.” They don’t have the right to do that. The Constitution says they can’t confiscate private property without due compensation.
Does the Social Security system need to be overhauled?
Not overhauled, but there are some changes we can make. I don’t think it takes draconian efforts to revive Social Security. But something has to happen because when they run out of money, the Social Security Administration is legally not able to borrow; they can reduce benefits only. Social Security reform is inevitable, and the sooner we address this reality, the less onerous the changes will be.
What sorts of changes?
We probably ought to raise full retirement age by about two years. And we’re going to end up raising the tax rate a little bit for both employer and employee. But with the combination of those two, the system will last another 75 years. An academic told the government that wealthy people were abusing the file-and-suspend strategy. But now the middle class and poor have been deprived of it. They were using file-and-suspend as well.
Absolutely. Obama put that [law] through. It didn’t get a second look and the usual vetting process. If it did, I don’t think it would have [passed]. That’s one way they’ve cut back on promises, and maybe it will help to extend the longevity of the Social Security fund; but despite those changes, it’s still projected to run out by 2034.
Most people don’t realize that they can redo – that is, change and start over – a prior Social Security claiming decision. How is that done?
There are two major strategies: One is that you can withdraw your application for benefits within 12 months of starting to receive them, and that includes spousal and child benefits.
Say the higher earner in a couple has a short life expectancy. He started Social Security at 62 but then realized that his wife, a lot younger and with a long life expectancy, would be cheated out of survivor benefits. So he decided to redo and delay. That means all the benefits he got up to that point had to be repaid. So, if you use this strategy, it’s like you never started to receive Social Security.
What’s the other major redo strategy?
If you’re worried about running out of money, this might be appropriate: Once you’ve reached full retirement age, then or any time thereafter, you can suspend benefits and still earn late-retirement credits, or 8% a year, till you hit 70. Let’s say someone became unemployed at age 63 and started to receive benefits. But at 64-and-a-half, he gets a job. He can’t withdraw his application; but at 66, his full retirement age, he can suspend benefits and doesn’t have to pay back the prior benefits. He can then resume receiving Social Security starting at another date.
Is it a good idea for folks to buy an annuity to supplement Social Security?
They already have an annuity: Social Security. With interest rates so low today, the amount that a private-sector insurance firm can pay will be lower than Social Security. By delaying when you start to receive benefits, you can get 8% more a year. That’s huge! The best deal going is the Social Security annuity with delayed retirement credit. It’s the best annuity available in the marketplace.
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