Welcome to Hidden Value, the column where Joe Elsasser, CFP, addresses common financial planning issues with insights advisors and their clients may not have considered.
The Social Security program has been a frequent topic of discussion lately. According to the annual report published by the Social Security trustees, it is projected that right now 100% of promised retirement benefits will be payable through 2034. (The number can fluctuate based on interest rates, contributions to the system, how many people actually elect, when they elect, and other factors.)
Additionally, new legislation has been introduced to try to address some of the current issues affecting the program, and there are lot of questions among those who are nearing retirement. The Social Security program is complex and can be difficult to navigate, but there is hidden value for advisors who can shed light on some of the biggest misconceptions and help clients make the best claiming decision for their particular situation.
Misconception: Benefits will no longer be paid out once Social Security is out of money.
Many people think benefits will cease to be paid out once Social Security is out of money. However, even if Social Security was totally broke, and the only thing coming in was tax dollars, Social Security would still be able to pay 77 cents of every promised benefit dollar, even without any Social Security reform.
If an immediate payroll tax increase were implemented to fully fund both the retirement and disability programs, the increase would need to be approximately 2.7% (a 1.35% increase on the employee, and a 1.35% increase on the employer). If no changes were made until 2035, the increase to fund both programs would need to total 3.65%.
The fear of losing out on their benefits can make many retirees want to claim their benefits early, “why they still can.” However, you know that by claiming early they forfeit what they could be making if they delayed. By explaining that benefits will continue to be paid out, even without new legislation, and that the amount will be significantly higher if they delay, you can help prevent your clients from making a costly mistake.
Misconception: Social Security will be means tested.
Social Security benefits are already calculated to provide a higher replacement of pre-retirement earnings for a lower income wage earner than for a higher wage earner.
The progressive nature of Social Security benefits is based on a calculation that uses “Bend Points” to benefit those with lower income over those with higher income. The wage replacement rate is only 15% for average lifetime wages that fall into the highest income range and is 90% for lifetime average wages falling into the lowest income range.