Social Security: It’s one of the most talked-about retirement topics – and one of the most misunderstood. Most seniors know they’ll get more money the longer they delay collecting, for instance, but few understand the long-term implications of filing early versus later. Likewise, plenty of people have a surface-level knowledge of spousal benefits, SSI taxation and earnings histories, but not many know the nuances well enough to incorporate them into a tax-efficient income plan.

By and large, retirees aren’t getting much help from their advisors, either. While the lack of professional insight poses problems for seniors seeking counsel, it presents a perfect opportunity to advisors who want to add value and expand their practices. By fully educating your clients – and yourself – on Social Security, you’ll better help them make sound retirement plans, positioning yourself as a trusted expert in the process.

In the first of this two-part series, we’ll cover the current state of affairs regarding client knowledge and advisor help, as well as the most important Social Security question: when to collect.

The state of affairs

According to the Nationwide Retirement Institute, seniors who have yet to collect say they expect to start at age 66. But the average collection age dropped from 2014 to 2016, and 86 percent of recent retirees began collecting at the earliest allowable age of 62 ½.

And while most retirees wouldn’t change the age they started collecting if they could, recent retirees are significantly more likely those who retired 10+ years ago to say they’d go back and collect later if they could. Among early collectors, the top reasons were need-based: unexpected early retirement, health problems and a lack of additional income. Still, about 10 percent of recent retirees collected early simply because they didn’t believe Social Security would be around much longer.

As for advisors, 48 percent of future retirees, 59 percent of recent retirees and 77 percent of people retired 10 or more years say their advisor didn’t provide Social Security advice despite having worked with them for an average of 9.4, 15.6 and 16.1 years, respectively. Of those who were given advice, more than half had to initiate the discussion themselves.

That said, the vast majority who did receive Social Security counsel followed their advisors’ recommendations, and those who didn’t retired either earlier or later than they had planned. Bottom line: Your clients are likely in need of sound Social Security advice, and most will follow your lead. You simply need to start the conversation and fill their knowledge gaps.

The impacts of collection age

“Most people understand the longer they wait, the bigger their monthly checks will be,” says Gail Buckner, Franklin Templeton financial planning spokesperson. “The eye opener is the magnitude.”

Collecting too early is the biggest mistake retirees make, and while it’s possible to reverse the decision, it can only be done with a lump sum payback within 12 months of their first check.

How much do retirees stand to gain or lose on this point? For anyone born in before 1955, the full retirement age (FRA) is 66, and early collection between 62 ½ and 66 leads to a 25 percent lifetime benefits reduction. Each year of delay beyond the FRA, on the other hand, nets the recipient an 8 percent increase – up to a maximum of 132 percent of the original benefit at age 70.

“Collection age is actuarially neutral and doesn’t affect the program’s finances, but on an individual level, it absolutely matters,” says Doug Amis, CFP with Cardinal Retirement Planning.

There’s also quite a bit of confusion about the FRA.

“A lot of people think it’s 65, but that’s Medicare age,” says Merrill Lynch financial advisor Judith Chipps. “It’s 66 for current retirees, and for people a little younger, it’s going to be higher.”

The FRA rises by 2 months for every birth year after 1954; people born 1960 and later won’t receive full benefits until 67.

Early retirement stays at 62 ½, however, and anyone at the new FRA will receive a whopping 30 percent benefit reduction if they collect as early as possible. The reverse, unfortunately, isn’t true, and they’ll still only receive delayed retirement credits until 70 – a 24 percent bump, in their case. For these younger pre-retirees, that’s just one more reason to continue working, delay benefits and maximize their SSI.

Still, clients might make the – often valid – point that may not won’t live long enough to reap the benefits of waiting. After all, the break-even points for collecting are…

  • 62 vs. 66: age 78
  • 62 vs. 70: age 81
  • 66 vs. 70: age 83

The average U.S. life expectancy, however, is around 79. According to the Social Security Administration, however, a man who reaches 65 can expect to live to 84.3; a woman, 86.6. One in four of today’s 65-year-olds will live past 90. Cash flow concerns aside, it’s a safe bet that waiting until at least the full retirement age will lead to a greater lifetime benefit.

Finally, clients need to consider how early retirement can affect their work and earnings history.

“Your benefit is based on your best 35 years of work, and for people who’ve taken years off, they have lots of zeros when they go to collect,” says Beth Blecker, CEO of Eastern Financial Planning. “If you can just work two to three more years, it makes a big difference.”

The future of Social Security

Even with the facts and figures, plenty of retirees still opt for early collection out of fear that their benefits will be cut, Social Security will become insolvent or the program will collapse altogether. Adding to these fears are the annual trustee reports, the most recent of which says the trust fund will be depleted by 2034 and benefits will need to be reduced by 21 percent.

The likely truth?

“[Social Security is] not going away,” says Buckner. “All people hear is the deficit figure from the actuaries, and they think Social Security is going broke. That’s a huge mistake.”

The full story is this: In years when the SSA collects more in payroll taxes than it pays out in benefits – which it has for the last three decades – it invests the surplus in Treasury bonds. Those bonds and the interest they accrue are then used to pay out benefits before the current year’s payroll taxes. The bonds are projected to run out in 2034, at which point payroll taxes will be the only source for beneficiary payments.

At that point, enough money will come in through payroll taxes to fund 79 percent of promised benefits – but even that figure isn’t cause for alarm.

“In that same report, the trustees said that over a 75-year outlook, the actuarial deficit is only 2.66 percent,” says Buckner.

Given that payroll taxes are split between employer and employee, a 1.33 percent increase for each party would cover the deficit or not only the current generation of retirees, but for at least two generations thereafter.

That tax hike is also more politically feasible than one might assume.

“The last time Social Security was in this situation was 1981, right after President Reagan was inaugurated,” says Buckner. “We have 17 years to cover the deficit now, but he was told that in two years, Social Security would be insolvent.”

Reagan appointed a commission to address the deficit, and in 1983, Congress passed the most recent Social Security Act amendment to increase payroll tax. Only now, 34 years later and with the boomer retirement wave upon us, has another bump become necessary.

Why explain all of this to your clients?

“The overwhelming response I hear is, ‘Are you kidding me – that’s all we’re talking about?’” says Buckner. “They get angry because that’s not how it’s being explained to them by folks in Washington, and this explanation prevents them from collecting early.”

Education and opportunity

Social Security is a controversial, politically charged topic – and for most retirees the waters are muddied by pundits, peers and understandable fears about retirement.

“Education is by far the biggest lack and need, and we find most people are not getting sound advice on Social Security,” says Amis. Fortunately, most clients are ready and willing to listen, and clarifying the issues will put them on the path to sound collection decisions.

In part two of this series, we’ll dive into the details of clients’ SSI: how it’s determined, how to maximize it and how to incorporate it into a tax-efficient income plan.