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Economist Laurence Kotlikoff

Retirement Planning > Social Security > Claiming Strategies

Kotlikoff: Don't Let Social Security Dupe Your Clients Into Claiming Early

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Typical workers’ lifetime spending could increase by 10.4% if they simply waited until age 70 to start Social Security benefits. But, according to a new study, “How Much Lifetime Social Security Benefits Are Americans Leaving on the Table?” only 10.2% of Americans do so. This means a median loss of “lifetime discretionary spending of $182,370.”

To put it bluntly, “You’re giving up eight years of benefits if you take Social Security at age 62,” argues Boston University economics professor Laurence Kotlikoff, in an interview with ThinkAdvisor. “Your real retirement benefits starting at 70 will be 76% higher through your last year of life, which could be 100.”

Kotlikoff and two colleagues conducted the study, released Nov. 16.

Optimizing Social Security benefits is “more important than ever because of the inflation risk factor,” Kotlikoff says. “In the setting we’re in … it’s particularly nuts for anybody not to optimize.”

In the interview, the professor discusses reasons that consumers opt to start Social Security early.

But often it is the Social Security Administration itself that misleads workers into taking benefits before the optimal time. Either they tell them outright to do so, or they fail to fully disclose vital information.

Kotlikoff calls this scamming, and blames some of it on the inefficiency of the administration, where, he says, “It’s like, nobody is in charge. There are problems all over the place, and nobody is addressing them.”

Named by The Economist one of the world’s 25 most influential economists, Kotlikoff is director of the Fiscal Analysis Center and a research associate of the National Bureau of Economic Research. He served on President Ronald Reagan’s Council of Economic Advisers.

Kotlikoff’s newest award-winning book is “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life” (Little, Brown Spark – 2022).

He is founder and president of Economic Security Planning, a financial planning software firm. The economics-based software is available in consumer and advisor versions.

Also, he has recently launched a newsletter and podcast, both titled “Economics Matters.”

ThinkAdvisor held a phone interview Dec. 2 with Kotlikoff, who was speaking from Boston. In our conversation, he explains strategies that folks can use to receive benefits to which they’re entitled.

The former consultant to the International Monetary Fund and to firms including Merrill Lynch and Fidelity Investments has a stern warning: Consumers must not “fall prey to Social Security calling to con you into taking benefits … before 70.”

Here are excerpts from our interview:

THINKADVISOR: A recent study you conducted, “How Much Lifetime Social Security Benefits Are Americans Leaving on the Table?” concluded that “virtually all American workers 45 to 52 should wait” to collect Social Security and that more than 90% “should wait till age 70.”

But only 10.2% “appear to do so,” as you noted in the paper. Why don’t they wait?

Laurence Kotlikoff: People aren’t thinking through the cash-flow issues and how they can get around their cash-flow constraints that they’re facing.

In the paper, you state that the median loss for the above age group is about $182,370 and that “optimizing would produce a 10.4% increase in typical workers’ lifetime spending.” Please elaborate.

That means half the people will lose less than that, and half will lose more.

The main thing is you’re giving up eight years of benefits if you take Social Security at age 62. Your real retirement benefits starting at 70 will be 76% higher through your last year of life, which could be 100.

What other reasons motivate people to take Society Security early and “leave money on the table”?

Part of what’s going on is psychological. Let’s say a husband is working, and his wife is retired and not working.

The wife says she feels guilty spending her husband’s money, so she takes her retirement benefit at 63 because she wants to have her own money.

A friend of ours told us that’s what happened. The wife said, “I always had my own money, and I didn’t feel good spending Joe’s,” even though they’d been married two years and had been partners for 15 years before.

You say that waiting until age 70 is also excellent for a surviving spouse because higher benefits are provided. Please explain.

If they’re the higher earner, they may get nothing. But if they’re the lower earner, they’ll get extra benefits. That could be a huge deal.

We knew a doctor who was diagnosed with pancreatic cancer at 68. His wife essentially had no earnings record.

He went to Social Security, who never asked him about his wife or told him about widows’ benefits.

They said: “Take Social Security immediately; otherwise, you’ll die and get nothing.”

That was exactly the wrong answer. It was much better for him to wait till 70 because [at his death], his widow’s benefit would be 16% higher for the rest of her life.

I told him that, and he went back and fixed it.

Why is it important to file for a particular Social Security benefit when you become eligible for it?

If you don’t file when it’s optimal, you’re going to lose money. You’ll be giving up free money.

I’ve had people 75 years old call and say, “Am I eligible to collect Social Security?”

They were eligible five years ago! [or earlier]. I tell them, “You’re going to get six months’ retroactive benefits, and that’s it.”

Social Security isn’t informing people what they should be doing.

What’s another example of how listening to what Social Security says can be misleading?

I talked to somebody yesterday who said that when they contacted Society Security, the lady said, “You should take your money immediately because you could die tomorrow and lose it.”

Again, that’s exactly the wrong thing to say. Social Security is doing this all the time. And the staff is being told explicitly not to give advice. But this is what’s going down.

When someone is nearing age 70, Social Security will call to offer a deal by which the individual will end up losing money, you maintain. Please elaborate.

They say they’ll give you benefits for six months retroactively if you start benefits now. They don’t say this means your monthly benefits will be significantly lower than if you waited till 70 to collect.

People are being scammed by Social Security. It’s like, nobody is in charge. There are problems all over the place, and nobody is addressing them.

What other abuses have occurred?

There’s the widow scam, where 113,000 widows have been defrauded by underpayments. The Social Security Inspector General’s report about it came out in 2019, and still nothing has been done.

People can start benefits early and then suspend and restart at 70. What’s the big advantage of that?

You can get delayed retirement credits. For example, if you’re single and took your benefits at 62, having just been furloughed from your job. Then, if the day after, your boss calls and says “Come back to work,” you lose every penny through the “earnings test” [“a fictitious” Social Security “tax system,” Kotlikoff called it in a July 22, 2021, interview with this reporter].

But the fact that you lost everything will be compensated for. There’s an adjustment of the reduction of taxes that most people don’t know about.

So you’ll get delayed retirement credits through suspending and restarting as long as you don’t fall prey to Social Security calling to con you into taking benefits early, before 70.

Social Security is telling people they’re going to lose benefits through the earnings test, but they’re not telling them they’ll get those back and their benefit will be adjusted upward.

Again, that’s a scandal.

Please relate filing for Social Security to today’s high rate of inflation.

In the setting we’re in, where inflation has gone crazy, it’s particularly nuts for anybody not to optimize because of the inflation risk factor. This is more important than ever.

Are your firm’s software programs intended for consumer or financial advisor use?

Probably 20,000 people have used our software over the years. It’s the cheapest software out there for financial planners. Every planner should check their solution software against ours before providing it to their clients. You can’t check it against Social Security’s software because, in most cases, they don’t deal with couples.

Also, their software makes crazy assumptions, like there’s never going to be inflation in the future, and there’ll never be wage growth. So a 40-year-old client could be misestimating their benefits by 20%.

Licensing agreements don’t allow you to vet various software programs to compare them. So financial planners shouldn’t be using the software they’re getting from their vendors because there’s no way for them to know whether they’re doing the right thing.

Besides, none of the other software creators have Ph.D.s in economics. Economics values the price of one decision versus another, which is a completely different methodology from what actuaries do [in making these calculations].

Their [software] is set up to work for insurance companies. Clients aren’t insurance companies. They can’t count on dying on time.

And they have no idea what they’re doing [in strategizing about Social Security].

That’s an important point to make. You can quote me.


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