New Year, New President, Same problems with Social Security.
First off, Happy New Year. I hope that 2017 is one of your best years ever. After taking a break over Christmas, it is time to get back to work. Next week our country will inaugurate a new president. For some, this is a welcome relief and for others a cause for deep concern. My goal in this newsletter is to not focus on the change in leadership but to address perceived concerns on how Social Security will be impacted in the near future. Articles on Facebook, the undisputed source for information, have been extreme:
• Social Security is dead and everyone will have to panhandle in the streets in retirement.
• Social Security will be privatized and every street will be paved with gold.
I doubt either will happen, but this does not stop people from trying to scare us through various media outlets. So maybe the best option is to either block certain people on Facebook or step aside from using it as your main source for news for while and let things calm down.
On the campaign trail, President-elect Trump stated that he does not support any changes to Social Security at this time. Whether you choose to believe this or discard this is up to you but the reality is there will be some changes this year. Some of these changes will be viewed as good and some will be viewed as not so good but look for the following to happen this year:
• Unlike last year there will be a modest Cost of Living Adjustment or COLA this year. It is .3% increase for the upcoming year. This means that if you have been receiving $1000 a month, you can expect an additional $3 a month. I doubt this will make a big difference in the lives of most people, especially since most of this will be absorbed in the increase in Medicare premiums.
• The earnings test limits, which apply to people between the ages of 62 – 66 will increase from $15,720 to $16,920. This is good news for those who choose to file for benefits early and continue to work.
• The final change that will occur is the increase in the limit for income subject to Social Security taxes. This increased from $118,500 to $127,200. This will increase the tax on high net worth individuals by about $540 a year. Proposed Reform
• Change Age for Full Benefits
• Means Testing of Benefits
• Recalculating Benefits Formulas
Once Trump stated he would not make any changes it did not take Congress long to put forward some bills but most of this is politics and posturing. The big changes are to age, testing of benefits and recalculation of benefits. I expect these to get media attention moving forward, but do not expect individual proposals to have any traction. I rather expect to see some form of a commission created, as was done in the 80’s when we had a similar issue. This provides much more cover for any proposals that may not be popular. Adjusting age for full retirement.
Full retirement age is the age from where all benefits are calculated. If you take benefits before this age they are reduced and if you delay you get credits for more benefits. So, adjusting the age significantly impacts people who plan to retire at an early age. Representative Johnson from Texas suggested that the age for full retirement should be moved to 69. This is much better than what a Yale Law Professor suggested, which was 76. There is little doubt that the age needs to more accurately match the mortality rates, but the challenge will be how to present it and implement it to give workers adequate time to plan for retirement. I fully expect this to be part of any reform and the implementation to be addressed like it was in 1983 when the implementation date was gradually moved out and people had plenty of warning of the change. Means Testing
Means testing is another change that comes up frequently. Basically, the goal of means testing is to give a greater benefit to lower-income workers while reducing the benefit for higher-income workers. This is a heavy lift because of how Social Security is funded. Since people contribute financially there is a sense of ownership to the plan and some pension experts believe they have an obligation to pay the money out as a benefit. A much easier way to penalize the wealthy would be to change the way Social Security is taxed based on income. This is probably the route they will take and may be included in the change of marginal tax brackets. On a side note RMD’s (Required Minimum Distributions) may cause a significant tax increase for some people. This change will provide a great opportunity for income planning. Keep this in mind when looking at when and how to start receiving benefits from Social Security. I will update you as details come forward. Cutting Benefits
Cuts in benefits are another option and if nothing is done will probably have to happen in 2034; but only if nothing is done. Representative Johnson also addressed this in his bill. The bill would increase benefits for low-income workers and decrease benefits for high-income workers when cuts are made. As I stated earlier, this would be a difficult change on many levels. The more likely change, that would cut benefits, would be to either eliminate the COLA (Cost of Living Adjustment) or change the way it is calculated to a more favorable formula that minimizes the increase in benefits from year to year. This is important as COLA also impacts the increase in Medicare premiums. Without a change in law, if the COLA was eliminated there could not be any increase in Medicare premiums and the reduced formula proposal would limit the increase to the Medicare premium amount to the COLA increase. So you can see how this would be challenging too. Final Thoughts
The challenge is that Social Security is a very popular program and any change is certain to be politicized. A committee will be the best way to address the much-needed changes and would ensure that all parties are treated fairly. It is a complicated issue and in the end, I do not expect any significant change this year, but I do expect a considerable amount of “talking” will take place. Look to my blog and newsletter to keep up to date on any changes. Social Security education is a key component in retirement planning. We provide education, analysis and consulting to help with any question you may have. Remember that we provide a free class each month to help you and your friends make the best decisions about filing for benefits.
As always, if you have questions give me a call (919) 341-0277.
Steve Gaito, CFP®
Several years ago, at a conference, I heard a story of a commercial pilot that had taken one of his friends flying in his personal plane. After an afternoon soaring above the clouds, it was time to land. Upon approach, the pilot landed at the very end of the runway and taxied all the way to the hanger. When they arrived at the hanger his friend asked, with such a small plane why did you not land in the middle of the runway instead of the end? The pilot answered. That is an easy question. In all my years of flying, I know one thing for certain. You cannot use the runway behind you.
I love this story because it is so applicable to retirement planning and especially optimizing Social Security. You see Social Security, for most people, is a one-time decision. It is very important to get it right the first time. The challenge is like the runway some people will agonize about the decision others have made or what they have or have not done about Social Security. The good news is that through an in-depth analysis of your benefits you can know how to best use this resource in retirement. When you should apply or your spouse should apply depends on your unique situation and waiting to learn the facts like the runway will leave you with fewer options. My preference is to start to understand Social Security around age 57, but the reality is until you turn 70 you may have some options that you need to consider. The beauty of evaluating Social Security early is Social Security impacts many other areas of retirement and you can be more proactive. You see the pilot wanted to land on the end in case something bad happened. He would have more options on the ground than in the air. The sooner you learn about Social Security and how it impacts the rest of your retirement, the sooner you can make any necessary adjustments. Study after study confirm the #1 fear people have is running out of money. The challenge is that because of the decisions most make about Social Security they have actually increased the probability of this situation actually happening. One thing that I know for sure is that not everyone should wait until age 70, but without the facts and analyzing your benefits you will never know if that is your best options. A basic analysis is only $100 and if you want to know more go to the education tab and look at our online education. In retirement there is a long runway, so be sure to take advantage of all of it. If you have questions please feel free to give me a call.
I was watching a special on Olympic Athletes and when they asked the athlete what was the difference between them and all the other athletes that did not make the Olympics his response amazed me. He did not say he was a much better athlete, or he had gifts that others did not have, rather he said he was coachable. He went on to explain that with athletes at his level the differences were so small that any small advantage could be the difference between first and last place. He truly believed that because he was able to take what a coach saw as an area he could improve and work hard to correct small flaws made him the Olympic athlete that he was today. This got me thinking about what else in life could be improved if we listened to our coaches. I know that if I listened and applied all that my Doctor recommended I would be healthier and weigh less. I know that if I listen to my wife she will keep me from making the social mistakes that I am prone to make. If I listen to my boss I will have a better chance of a promotion. If I listen to my financial planner I will have a better chance of a secure financial future. The real question is why do we not listen when we know it is in our best interest. I wish I had a better answer than I don’t know. I specialize in Social Security optimization and have spent a great deal of time understanding how the system works and can coach people how to get more out of their benefits. For me, it is hard to understand why anyone would not want to know how to get more out of a benefit they had worked so hard for their entire life. I see the best athletes going to coaches even as they are at the peak of their profession. The same should be true for us. No matter how good or well prepared we think we are, a good coach can identify areas we can get better. For 99% of Americans, Social Security is the largest retirement asset, yet only 2% get the maximum benefit. In my book, that means 98% of people should hire a coach to improve their benefits. It is easy and I am here to help.
This week started with a series of 3 educational events.
The first was a pilot program sponsored by Municipal Benefits with the Town of Apex. Special thank you to Eleanor Green for working with us and gathering a great group of employees to learn about how to best use Social Security. We discussed how the variables such as age, work history, marital status and how long you expect to live impact how you should claim for benefits. At the end of the pilot program the overwhelming response was we need to be doing this every year. I take that as a positive for moving forward with other municipalities.
Next up was the second client event for Jolley Asset Management. The event was hosted at Benvenue Country Club in Rocky Mount NC. With a packed house, we discussed how to best use Social Security with your other assets and even had a great conversation about second marriages and the special provision that allows people over 60 to remarry and choose which benefit is best for them. I love providing these educational events for financial advisors and I think their clients like hearing from an expert on an important topic.
Finally, today I had the privilege of presenting at the Rockingham County Retirement Day. This event was sponsored by the county for their employees and featured topics and speakers familiar with the State Retirement, Social Security, State 401(k) plan and Estate Planning. This was probably one of the most engaging groups I have spoken with and they had great questions. At this event, we spent some time discussing the impact and traps of the Social Security leveling program offered through the state.
It is through events like these that I can help many people have a better understanding of how to leverage Social Security in retirement. After the events, they are all encouraged to visit my website to either review the material covered or share with a spouse or friend that was not able to attend. In all cases I am sure they now have a much greater understanding of the myths and truths of Social Security and once they get their analysis will be able to make an educated decision based on facts. In my book that is a win. Thanks to all three groups for making this happen. If you would like to schedule an educational event, contact me directly for details.
Well, it happened again. I was on Facebook looking at pictures of friends and trying to ignore political posts when a post came up about Social Security. This always intrigues me, so I opened the link and while I agree with some of their analysis it is not completely accurate. Then deciding to enter into the comments with some of my knowledge since I do teach on the subject I soon realized that many people do not want to understand or even have an intelligent conversation about how to solve the coming challenge. There are several ways to do this and in my classes, I go over these so if you want to know more they are free on the website, but what took me aback was the constant repetition of the lie that Social Security is a Ponzi Scheme. It did not matter to these people that when you look at the definition of a Ponzi Scheme it has several elements that are listed on Investopedia.com. Like any good conspiracy theory, there are a few pieces of truth. The one that is most commonly repeated is taking money from one generation to pay the next. This is an element of a Ponzi Scheme, but if that were the only criteria for defining it as a Ponzi Scheme then all pensions would fall under the same classification, but you never hear people referring to their IBM or GE pension as a Ponzi Scheme. In fact, you seldom hear state employees refer to their pension as a Ponzi Scheme. The truth is that you have to look at the rest of the definition to see that while it may get you several likes on Facebook to post comments like this it is not accurate. The first characteristic of Social Security is a high return for a low risk. Anyone that has looked at the actual return on Social Security knows that this is not true. The second characteristic is consistent flows regardless of market conditions. While Social Security does provide consistent flows it is actuarially calculated based on your own personal history and decisions. There is a characteristic of being not being registered, but neither are pensions. This next characteristic is a big one and that is that the strategy is unknown or too complex. While Social Security has an estimated 22,000 pages of rules, for most it is actually fairly easy to calculate if you know the formulas. This is the reason for software to calculate benefits. This is also similar to private pensions. The last two characteristics I am going to combine. They are a lack of paperwork and not being able to get your money back when you want it. Anyone that has dealt with Social Security knows there is easily accessible paperwork, now you may not get any help in optimizing it but they will certainly help you complete the paperwork. And as far as not getting your money at any time this is common in pensions and annuity contracts. All of this to say that while it might get you some likes on Facebook by claiming Social Security is a Ponzi Scheme it is simply not true. Social Security is complex and you do have to understand it before you make any decision. This is why I have the education on my website and why I provide independent analysis of benefits to help those that want to get the most out of their benefits. For those that think it is a Ponzi Scheme just keep collecting your checks until you die and then your spouse can collect. That is the reality and it is backed by the ability of our government to tax to make up the difference. Will Congress change this who knows but that is a topic for another day?