Republished from: https://www.nextavenue.org/trillion-retirees-social-security/
A new study's findings, and what could get more money in retirees' pockets
By Laurence J. Kotlikoff
Social Security expert
July 1, 2019
Social Security expert
July 1, 2019
United Income, a financial planning advisory service, just
released an important study called, “The
Retirement Solution Hiding In Plain Sight.” Using government data and
proprietary software, it calculates how much money retirees have lost, and are
losing, by making mistakes about when to start claiming Social Security
benefits. United Income’s answer: a whopping $3.4 trillion or $111,000 per
household!
That’s enough to move half of the oldest Americans now in
poverty out of that terrible state. Put another way, according to United
Income, the average Social Security recipient would get 9% more income in
retirement by making the “financially optimal” decision about when to claim benefits.
Increasing Your
Social Security Benefit By 177%
According to United Income, someone who’d get a $725 monthly
Social Security benefit by starting to claim at 62 (the earliest age) would see
a benefit increase to $1,280 by delaying to age 70 — an increase of 177%.
By United Income’s calculations, however, only 4% of
retirees make the financially optimal Social Security claiming decision. The
rest of them are claiming too early. United Income estimates that 92% of
retirees would be better off waiting to claim until at least 65.
The study’s conclusion: if boomer workers would take the
most appropriate Social Security benefits at the right time, they’d increase
their prospects for financial security in retirement.
““A daunting task awaits individuals striving to make an optimal Social
Security claiming decision.”
he team that produced the study includes these impressive
people: Jason Fichtner, a former chief economist and acting deputy commissioner
at the Social Security Administration; Kevin Whitman, a former Social Security
Administration policy research director and Matt Fellowes, CEO of United Income,
who has had an impressive career studying and delivering personal financial
services.
The United Income study indicates significant attention to
detail and uses the best available data to answer its question about optimal
Social Security claiming. So, as someone who has been a Social Security analyst
for decades and co-wrote Get What’s Yours: The Secrets to Maxing Out Your
Social Security, I take its estimates seriously.
Personally, I would have made different methodological
choices. But, in the end, I too would likely have arrived at a figure for lost
Social Security benefits running in the trillions.
6 Reasons Why
Retirees Are Leaving Trillions on the Table
So why are retirees leaving trillions on the table? And how
can those trillions be used to support Americans in retirement?
As United Income’s report says, “a daunting task awaits
individuals striving to make an optimal decision.”
There are, I think, six reasons people make the “wrong”
Social Security moves:
First, many, if not most, people in the second half of life,
are cash poor. They can’t wait until age 70 to collect their retirement benefit
when they’d be roughly 70% higher, after inflation, than if they started
claiming at 62.
Second, retirees don’t know how to value the extra Social
Security benefits they’d receive in the future from exercising patience.
Indeed, virtually none of the Social Security claiming tools from financial
services companies I’ve seen get optimal claiming right. They focus on the
actuarial value of benefits. This is off base, since any given household can’t
play the actuarial averages. Social Security — by paying benefits in the form
of inflation-adjusted income that don’t stop until you die — insures you
against this financially catastrophic event. Properly valuing Social Security
requires correctly incorporating the value of its insurance.
Third, the vast majority of retirees don’t use any Social
Security software to make what, for many, is their most important financial
decision.
The fourth reason is that retirees fear they will die before
collecting what they are owed from Social Security. “Take your benefits. You
could die tomorrow,” is what many Social Security staffers inappropriately tell
people when they make benefit inquiries. But none of us will be kicking
ourselves in heaven for not taking Social Security early. The real danger is
not dying and kicking yourself in heaven for the money you could’ve received.
The fifth reason people take their Social Security benefits
too early is they think they can invest that money in the stock market and make
a killing. This is nuts. The implicit, perfectly safe, real investment return
from waiting to collect higher benefits is three times more than you can earn
on the market, based on historical averages.
The sixth reason is that Social Security recipients fear
future cuts in benefits because they’ve heard Social Security is insolvent. But
the politicians aren’t likely to cut benefits of current beneficiaries or
people close to retirement. So a benefits cut is a worry for the young, not for
those now retired or about to retire.
What Could Fix This
Social Security Problem
How can retirees be kept from squandering trillions?
The study’s authors suggest eliminating the option to take
retirement benefits early with exceptions for those with an incontrovertible
need to do so.
This will force millions to work longer, which may not be a
bad thing. But it’s very Big Brother social engineering.
United Income also suggests the Social Security Administration
change how it frames claiming options to the public. Instead of calling age 62
the “early eligibility age,” the researchers say, claiming at 62 could be
labeled “the minimum benefit age” and age 70 could be labeled “the maximum
benefit age.”
A better option is to let some take a portion — say, one
third — of his or her Social Security benefit early while letting the rest of
the benefit grow. This would alleviate the cash flow constraints facing so many
early beneficiaries. Mechanically, this would be fairly easy to implement.
Would this plan cost Social Security more money? Yes, based
on proper accounting. But the additional costs are clearly worth it
The boomers, with the help of Uncle Sam and their employers,
have made a financial mess of their retirement. As this new and highly valuable
United Income study shows, the boomers are compounding their financial problems
by making terrible Social Security decisions.
It’s time to turn this situation around.
Laurence J. Kotlikoff
is co-author of Get What's Yours: The Secrets to Maxing Out Your Social
Security, an economics professor at Boston University and president of Economic
Security Planning, which creates financial planning software. He also writes a
regular column for Forbes; his articles can be found here. He was an
independent write-in candidate for President in the 2016 election.
