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Presidential Debate: Romney and Obama on Social Security

During the first Presidential Debate the two candidates were directly asked to address the issue of Social Security.  Here is what they said:

LEHRER: All right? All right. This is segment three, the economy. Entitlements. First — first answer goes to you, two minutes, Mr. President. Do you see a major difference between the two of you on Social Security?

OBAMA: You know, I suspect that, on Social Security, we’ve got a somewhat similar position. Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Speaker — Democratic Speaker Tip O’Neill. But it is — the basic structure is sound.

….(digression on Medicare)…..

 When it comes to Social Security, as I said, you don’t need a major structural change in order to make sure that Social Security is there for the future.

LEHRER: We’ll follow up on this.

First, Governor Romney, you have two minutes on Social Security and entitlements.

ROMNEY: Well, Jim, our seniors depend on these programs, and I know anytime we talk about entitlements, people become concerned that something’s going to happen that’s going to change their life for the worse.

And the answer is neither the president nor I are proposing any changes for any current retirees or near retirees, either to Social Security or Medicare. So if you’re 60 or around 60 or older, you don’t need to listen any further.

But for younger people, we need to talk about what changes are going to be occurring. Oh, I just thought about one. And that is, in fact, I was wrong when I said the president isn’t proposing any changes for current retirees. In fact he is on Medicare. On Social Security he’s not.

What can we learn from this exchange?

First, Social Security is not the problem that Medicare is.   While Social Security is underfunded, it can be fixed whereas there is much less agreement on how to fix Medicare.

Secondly, neither candidate is anxious to say that they will lower benefits for people who are 60 or older.  This constituency votes is large numbers, and politicians are loath to change the Social Security benefit structure in a way that will affect them adversely.  This does not mean that younger people will be so lucky.   As we have pointed out in an earlier post, http://www.socialsecuritychoices.com/blog/?p=93, Orszag and Diamond have analyzed the Romney proposals and have calculated that, because Romney’s proposal does not raise taxes, benefits would fall significantly for today’s young people.

“That’s exactly what’s going to happen,” Senator Bernie Sanders (Ind – Vt) said of Social Security being on the proverbial table, “Unless someone of us stops it — and a number of us are working very hard on this — that’s exactly what will happen. Everything being equal, unless we stop it, what will happen is there will be a quote-unquote grand bargain after the election in which the White House, some Democrats will sit down with Republicans, they will move to a chained CPI.”

Chained CPI, or consumer price index, is an alternative measure of calculating inflation that would lessen the cost of living increases for Social Security payments. When the president and Speaker John Boehner (R-Ohio) attempted to craft a deal on the debt ceiling last summer, Obama offered the chained CPI as a concession.

Sanders is one of 29 Senators who have signed a letter to “oppose including Social Security cuts for future or current beneficiaries in any deficit reduction package.” In addition Sanders has supported legislation that would enact the proposal that Obama put forward as a candidate for president in 2008, which entails putting in place a payroll tax on income over $250,000, in the process creating a gap between the current cap of $110,100 and that new level.

Obama’s openness to the tax proposal at the AARP forum prompted Sanders to call The Huffington Post to try and get the president’s commitment to that approach.

“When he says that he’s willing to look at changing the cap, that’s not good enough,” said Sanders. “Four years ago, he told us that, in fact, that was a proper solution, and he was right. I’ve introduced legislation to do just that … I think we’ve got to make sure that we reduce the wiggle room for the president, and he has got to make a very simple statement that, ‘If reelected, I will not cut Social Security.'”

By Monday morning, the Obama campaign had moved slightly in the opposite direction, with top adviser David Axelrod refusing to unveil any specifics about what the president had planned for Social Security reform.

“[T]he approach has to be a balanced one,” Axelrod told MSNBC’s “Morning Joe.” “We’ve had discussions in the past. And the question is, can you raise the cap some? Right now Social Security cuts off at a lower point. Can you raise the cap so people in the upper incomes are paying a little more into the program? And do you adjust the growth of the program? That’s a discussion worth having. But again, we have to approach it in a balanced way. We’re not going to cut our way to prosperity. We’re not going to cut our way to more secure entitlement programs — Social Security and Medicare. We have to have a balance.”

“So what is the president’s proposal?”, asked Time magazine’s Mark Halperin.

“Mark, I’ll tell you what: When you get elected to the United States Senate and sit at that table — this is not the time,” replied Axelrod.

How Do I Maximize My Social Security Benefits?

There are two answers to the question expressed in the title.

First, if you are interested in maximizing your monthly Social Security retirement benefits, all you need to do is wait until age 70 to claim your benefits.  If you are looking to maximize your monthly spousal benefits, then you should wait until your full retirement age to claim them.  (Spouse benefits include ex-spouse and surviving spouse benefits.)

Second, if you are seeking to maximize your lifetime Social Security retirement or spouse benefits, then answering this question can be vastly more complicated than answering the first one.

Let’s consider married couples, the group that faces the most difficulty in finding the claiming strategy that maximizes lifetime Social Security benefits: they face literally hundreds of possible claiming options. At www.SocialSecurityChoices.com  we have found the following factors to be the principal underlying determinants of optimal claiming strategies for married couples:

  1. Length of planning horizon (e.g., do you and your spouse have a relatively short life expectancy because of poor health; or, do you expect to live well into your 80s or even 90s?);
  2. The discount rate for converting future values into present value equivalents (for the details about this factor, see our discussion on the main website).
  3. The ratio of the wife’s primary insurance amount, or PIA (that is, retirement benefit at full retirement age) to the husband’s PIA;
  4. The age differences between the husband and wife.

For ex-spouses and widow(er)s, determinants (3) and (4) above are irrelevant because only one spouse is directly involved in claiming decisions for this group.  The optimal claiming determinants for these two groups include (1) and (2) from above, plus (3′)

3’.  The ratio of the person’s PIA to their maximum ex-spouse or widow(er)’s  benefit.

For singles, the problem is much simpler in that the optimal choice depends only on factors (1) and (2) above.

If you need help in solving your claiming puzzle, check out our separate benefit calculators for married couples, singles, and widow(er)s. (The calculator for ex-spouses is under development and should be available soon.)

A Misleading Tool: Social Security Break-Even Calculator

Those thinking about whether to claim their Social Security benefits now or later often ask the following question: “If I delay claiming and give up benefits now in return for greater benefits later on, how many years must I wait to get those forgone benefits back? This is known as the “Social Security breakeven time period” question.

In this post, I discuss why concentrating on this breakeven question alone may well lead to poor decisions about one’s claiming strategy. Notably, the Social Security Administration agrees with my view. For some years, the SSA website had a Social Security break-even time-period calculator. It was removed about three years ago because the SSA concluded the information generated by the calculator was misleading many people into making poor claiming decisions.

Here is a simple example of how a Social Security breakeven calculator works. Suppose that Don, a single person, could get $9,000 a year in Social Security benefits if he took them at age 62. If he waited one year, his benefits would go up to $9,600. So, he gives up $9,000 for a year in order to get an extra $600 a year for the rest of his life. The breakeven period for Don is 15 years (= $9,000/$600), or when he reaches age 77. Had I discounted future benefits to account for the time value of money, the breakeven age could be several years past age 77.

Delayed claiming is a form of investment: you give up money today in return for more money in the future. Wise investors consider at least three factors when contemplating an investment: 1) how risky is the investment? 2) what is the expected rate of return on the investment? and 3) how liquid is the investment? Breakeven time-period analysis focuses exclusively on the third question: when will I get my money back?

When confronted with a payback time period of 15 to 20 years, many people decide that is too long to wait to get their “investment” back. So, they claim as early as possible. Yet, by ignoring the implied rate of return to delayed claiming, such decisions are usually poorly informed. On our main website,we show that delayed claiming can offer high rates of return, even extraordinarily high rates of return in some circumstances. And these rates of return are inflation protected. A breakeven calculator tells you nothing about this important factor.

Breakeven analysis also says nothing about risk. Delayed claiming essentially provides a risk-free payoff in the form of inflation-protected higher future benefits. The only investments that approach this extremely low level of risk are federally insured forms of savings, like bank CDs.

In this era of low interest rates, it seems impossible to beat delayed claiming as an investment, unless perhaps you want to assume a lot of risk. Of course, the problem with high risk investments is that you might lose everything you invested.

If you are interested in maximizing your Social Security benefits, you should investigate our Social Security calculator, which provides step-by-step guidance as to how to get the most out of Social Security.

Falling Short: The AARP Social Security Benefits Calculator

The AARP Social Security benefit calculator was introduced to much fanfare in July 2011. While the AARP calculator is free and easy to use, it is not as helpful as it first appears, especially for married couples.

According to the AARP, their Social Security benefits calculator “…will show you why most people should wait as long as possible to claim Social Security — and why a few people should claim earlier” (emphasis added), In fact, their calculator does no such thing.

The AARP calculator shows what nearly everyone knows: if you delay claiming your retirement benefits, you can get a higher monthly benefit up to age 70. It offers no explanation as to why most people should want to do this. It simply assumes people want the highest monthly benefit possible, and then it proceeds to show people how to get those benefits. There is nothing new or insightful here. AARP’s suggestion:: just wait until you are age 70 and then claim retirement benefits. (To be fair, the AARP calculator often recommends a special strategy for married couples–like file and suspend –that yields some extra money before the couple turns 70.)   Notably, only about 4% of Social Security claimants wait past their full retirement age to claim benefits. So, the AARP presumption that a married couple will have a serious interest in what they could collect if they both claimed at 70 seems unrealistic.

If a person has another objective in mind, the AARP calculator will likely not help them achieve it. For example, suppose a married couple is interested in maximizing expected lifetime Social Security benefits, discounted to today’s dollars. The AARP calculator won’t help them achieve that goal.  In fact, it will likely seriously mislead them if this is their objective.

To illustrate, consider a husband (H) with benefits at full retirement age (FRA) equal to $2,000 a month and a wife (W) with benefits at FRA equal to $1,900 a month. H is presently 61; W is 58. The AARP calculator advises H to file and suspend his retirement benefits at 69 so that W can claim spousal benefits of $1,000 a month for four years. Then, at age 70, H starts his retirement benefits, which have grown to $2,640 a month. Finally, when W reaches 70 she switches to her own retirement and gets $2,508 a month.

While the above claiming strategy maximizes monthly benefits starting at age 70 for both H and W, it does not maximize their expected lifetime benefits. Our calculator shows that the couple would maximize expected lifetime benefits by having W claim retirement at age 62, allowing H to claim spousal at age 66 and then his own retirement at age 70.  Compared to the AARP strategy, this claiming strategy gets the couple about an extra $35,000 in lifetime benefits (in present value terms), even though it does not maximize the couple’s monthly benefits. The money they gain during their 60s more than offsets what they give up as a result of lower monthly benefits in their 70s and beyond.

What is more, even if you accept the goal of the AARP calculator, it still can seriously mislead and cost you money. To illustrate, consider another example. H and W are both 61. H’s benefit at FRA is $2,400 a month; W’s is $900. The AARP calculator recommends that H file  and suspend at age 66 so that W can start collecting spousal benefits of $1,200 a month (adding up to a total of $57,600 by the time she reaches 70). When they both reach 70, H will be getting $3,168 a month and W continues with the $1,200 a month in spousal benefits.

Our Social Security calculator recommends another strategy that will yield more money but achieve the same end. It suggests that W claim retirement of $900 at age 66, allowing H to claim spousal of $450 at age 66. So, they get $1350 a month for four years, for a total of $64,800, or $7,200 more than provided by AARP’s recommendation. When they both reach 70, H claims his retirement benefits of $3’168 a month and W switches to spousal of $1,200 a month. In other words, once they reach 70 their monthly benefits are the same as under the AARP recommendation, but they have pocketed an extra $7,200.

To summarize: married seniors looking for serious guidance with respect to their claiming decisions are unlikely to get it from the AARP calculator.

Married and Turning 66? Time to Consider Your Social Security Claiming Options

Many people who are still working at age 66 have not looked into their options for claiming Social Security benefits. They simply plan to claim their benefits when they eventually retire or even wait until 70.

Delayed claiming is generally a good idea because it means that you will get a larger retirement benefit, but there are important advantages for many married couples if one spouse claims spousal benefits at 66 and then claims their own benefit later. So it is important to develop a Social Security claiming strategy, especially as the younger spouse nears age 66.

Here is an example. Suppose the husband is one year older than his wife. They both are working and they plan to continue working for some time. The husband’s Social Security Statement shows that he would receive a retirement benefit of $2000 if he had taken his benefit at 66, his full retirement age. The wife’s benefit at age 66, as shown on her statement, would be $1500. The wife has just reached 66. Because she has reached full retirement age, she can file a restricted application for a spousal benefit now, and then claim her own retirement benefit later. If she does this, she will receive a spousal benefit of half her husband’s retirement benefit, or $1000 per month. Then she can wait and claim her own benefit, which has grown by 32% at age 70. So at 70 she will start to receive $1980. In effect,she is being subsidized with the spousal benefit to wait for the larger retirement benefit.

If she does not claim the spousal benefit at 66 and simply waits until 70 to receive her own benefit she will lose $1000 per month or $48,000 in benefits over four years and her benefit at 70 will be the same as it would have been if she had just waited.

For a more complete explanation of these strategies, see our discussion of “file and suspend” and “free spousal.” We can also help you develop an optimal claiming strategy with our Social Security benefits calculator.

Social Security Benefits for Ex-Spouses Better than for Spouses

A little known fact is that Social Security offers ex-spouses two valuable benefit claiming options not available to spouses. These advantages can be worth thousands of dollars to a person who meets Social Security’s definition of a divorced person eligible for ex-spouse benefits.

To illustrate these advantages, we’ll consider a simple example. Suppose Burt is married to Karen. Previously, he was married to Doris who has not remarried. All of them will be turning 62 soon. Burt’s benefit at his full retirement age (FRA) of 66 is $2,000 a month. Karen and Doris happen to have the same retirement benefits at their FRAs, namely, $400 a month. Burt plans to claim his retirement benefits when he turns 66. Let’s turn now to the advantages offered divorced persons.

First, Karen (the spouse) cannot claim spouse benefits on Burt’s record until he claims his own benefit at 66. In contrast, Doris (the ex-spouse) can claim ex-spouse benefits as early as age 62, even though Burt has not claimed retirement benefits. Suppose both Karen and Doris claim their own retirement benefits at age 62, receiving reduced retirement benefits of $300 a month (75% of their FRA amount). In addition Doris can claim early spousal benefits. If she had no benefits of her own, the spousal benefit would equal $700 a month (70% of $1,000). But she has $300 a month in retirement benefits, so she gets only $420 a month in ex-spouse benefits. Doris, the ex-spouse, gets an extra $5,040 a year for 4 years (or a total of $20,160), that is not available to Karen.

Second, since Karen is currently married she cannot claim spousal benefits on the earnings record of any previous ex-husband. In contrast, Doris–who has not remarried–can pick and choose among previous husbands, provided she was married for 10 years or more to each one. For example, suppose Doris was previously married to John for 12 years. John’s retirement benefit at his full retirement age is $2400. In this case, Doris should claim spouse benefits on John’s earnings record, since Burt’s full retirement amount is only $2,000. If she claims spouse benefits at age 62 on John’s record, she would get $860 a month in benefits (retirement and spousal combined).

This favorable financial treatment of ex-spouses, relative to spouses, has a surprising unintended consequence. It sets up an incentive for some couples to divorce so that they can take advantage of that favorable treatment. The SSA is not oblivious to this situation. It requires that a person be divorced for at least two years before he or she can qualify for ex-spousal benefits.

You can learn more about benefits for ex-spouses by checking out the divorced-persons page on our main website.

 

A Tale of Two Social Security Strategies: File and Suspend versus Restricted Application

When at least one spouse reaches full retirement age (presently 66), two potentially valuable Social Security claiming options become available: 1) the file and suspend  option, and 2) the restricted application (or free spousal) option. The former gets far more publicity, and is better known, than the latter option. But, we find good reason to believe that the media emphasis is misplaced. For optimal Social Security claiming strategies, the restricted application option appears much more important. More on this in a moment.

First, let’s illustrate these options. Consider a married couple, Ted and Nancy. Ted is 66, his full retirement age (FRA). Nancy is 64. Under the file and suspend option, Ted files for Social Security retirement benefits and then immediately suspends receipt of them so that Mary can claim spousal benefits while his benefits continue to grow through delayed retirement credits.

Under the restricted application (or free spousal) option, Ted claims spousal benefits on Nancy’s record, assuming she is already receiving retirement benefits. Since he has reached his FRA, he does not need to claim his own retirement benefits. They can continue to grow to age 70.

Now to our main point. Our custom reports for clients identify the optimal strategies for maximizing the present value of a married couple’s Social Security benefits. We examined a small sample of 40 reports to see how often these two options played a role in the optimal strategy. Here is a summary of the results for two-earner couples with normal life expectancies.

Graph of Optimal Strategy Occurance

Another way to put it is: file and suspend is recommended in 27.5% (= 10% + 17.5%) of the reports, while restricted application (or free spousal) is recommended in 75.0% (= 57.5% + 17.5%) of them. This huge difference favoring the restricted application option surprised us, given the media emphasis on file and suspend.

The take-away: don’t simply assume that the file and suspend strategy is best for you and your spouse. Odds are it is not.

To find out whether file and suspend, or some other option, is best for you and your spouse, you can order a custom report.

 

Welcome to our Blog!

Thanks for reading the Social Security Choices blog! It’s certainly worth asking why we have a blog in the first place. We are a company that provides reports to clients hoping to maximize the amount they receive from Social Security. In addition to that, we already have a considerable amount of informational material pertaining to Social Security on our website, so what on earth are we going to talk about in a blog?

Well, we see our blog as more dynamic outlet for information. Some of the topics we’ll cover will be directly related to Social Security claiming decisions, while others will be tangentially related (dealing with related issues facing retirees and those nearing retirement). We may at times discuss news stories about Social Security, both minor stories, like the return of mailed SS Statements, and major stories, like proposals floated to revamp the SS system.

Unlike the information presented on our website, some blog posts may toe the line between fact and opinion, as a blog is wont to do, and others may cross it altogether.  We will do our best to make a clear distinction. We welcome you to share your opinions and highlight new facts in the comment section. Questions about Social Security are always welcome (and even about other topics that we discuss here, or that you’d like us to discuss).

Thanks again for checking out our blog. Please come back often!