Category Archives: Social Security

Items pertaining to Social Security.

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.

Social Security COLA Watch: September 2012

New data have been released. Check here for more!

The CPI-W for August 2012 was released this morning by the Bureau of Labor Statistics, and, as we predicted in our last post, the index increased considerably from last month, moving up from 225.568 to 227.056. The average of the July and August CPI-Ws is 226.312 which is 1.4% higher than the third quarter 2011 average (the baseline for COLA calculations). The September index, which will be released on October 16, is the last piece to the COLA puzzle. If the September number exceeds 226.312, the COLA will be greater than 1.4, if it is less than 226.312, the COLA will be less than 1.4. It is all but certain that SS recipients will receive a COLA this year.

Let’s look at a few scenarios:

  • If the increase in CPI-W is wiped out, and the index returns to its July value for September, the COLA will be just under 1.3%.
  • If the CPI-W is unchanged between August and September, the COLA will be about 1.5%
  • If the CPI-W increases at the same rate as it did between July and August, the COLA will be about 1.7%

I think it’s likely that the COLA will be somewhere in the range of 1.4 to 1.6 percent next year. The CPI-W increased at a very high rate in August, and I don’t expect the change in September to be as great. The biggest driver in the August increase was energy prices, so they will likely dictate the final COLA. Check back on October 16 for a look at the September numbers!

Social Security COLA Watch: August 2012

New data have been released. Check here for more!

The CPI-W for July 2012 was released this morning by the Bureau of Labor Statistics, and the index continued its decline from last month. The CPI-W index fell from 226.036 to 225.568, which is only 1% higher than the third quarter 2011 average (the baseline for COLA calculations). Once again, energy prices appear to be the culprit, as food prices and other prices increased slightly or were unchanged.

The July report is the first one that factors into the 2012 COLA calculation (recall that the COLA is based on the 3rd quarter only). If the CPI-W doesn’t change over the next two months, Social Security beneficiaries will receive a COLA of approximately 1%. If the downward trend in CPI-W continues, the COLA will be smaller. However, I would expect the CPI-W to actually increase, rather than decrease over the next few months. First, one very transparent element of energy prices – gasoline prices – have been increasing rapidly since the end of July. Gasoline prices have been a big contributor to the decline in CPI-W in recent months, so a reverse in that trend should contribute to an increase in CPI-W. Second, the impact of the drought in the midwestern US has been putting pressure on food prices.

Increases in food and energy prices are certainly not beneficial to US consumers. However, if they occur during the third quarter of the year, they may result in a higher COLA for SS recipients. The analysis in this post is far from conclusive, but the beauty of a blog is the ability to speculate a bit (our custom reports are comprised of much more careful analysis). The August CPI report will be released on September 14, so check back then for an updated analysis.

Social Security COLA Watch: July 2012

New data have been released. Check here for more!

The CPI-W for June 2012 was released this morning by the Bureau of Labor Statistics, and unfortunately, the index continued its decline from last month. The CPI-W index fell from 226.600 to 226.036, which is 1.3% higher than the third quarter 2011 average (the baseline for COLA calculations). Once again, energy prices appear to be the culprit, as food prices and other prices increased slightly or were unchanged.

The June report is the last one that doesn’t “count” toward the COLA calculation (recall that the COLA is based on the 3rd quarter only). It seems likely that the size of the 2012 COLA will depend on what happens to energy prices over the coming months. The July CPI report will be released on August 15, so check back then for an updated analysis.

Social Security Nonsense Watch: Beware the Uninformed Expert

Statistics show that delaying Social Security benefits, as opposed to claiming immediately at 62, is becoming more popular. People realize the impact that a well thought out strategy can have on their bottom line, and they seek guidance from experts on how to implement such a strategy. More and more, people have stepped in to try to fill this information vacuum – some more qualified than others. Simply put, Social Security is a complex program. It is perfectly reasonable to expect that an expert on personal finance in general may not have a good understanding of Social Security, which is the main reason why we were able to step in and provide custom analysis to individuals and couples looking to maximize their Social Security benefits.

Recently, the BAM Advisor Network released an article titled ‘Strategies for Optimizing Social Security Benefits.’ The author did a decent job of presenting the basics, but made some key errors on the more complex issues surrounding the Social Security system. First, when discussing spousal benefits, she said:

Consider the case of a couple in which one spouse has not earned enough to qualify for Social Security independently. Under current laws, that spouse may be able to claim 35 to 50 percent of the other spouse’s full benefit when he reaches 62.

Unfortunately, the author left out the important condition that the main beneficiary must file (or file and suspend) for benefits before his spouse can get a benefit on his record. Divorcees are not subject to that condition, and can claim spousal benefits once their ex-spouse turns 62, regardless of whether or not that spouse has filed. This gives them an advantage over married couples in that regard.

However, the major error that the author made came in her discussion of what she called “double dipping” (we usually refer to this as free spousal benefits or a restricted application strategy). She said:

If both spouses worked and had Social Security benefits, couples may be able to take advantage of “double dipping.” Assume a wife is the primary earner, but the husband also earns an income. The wife could claim a spouse’s benefit as early as age 62,  but leave her own (higher) benefit alone until 70, which means she could claim a higher amount because she delayed filing for benefits.

The strategy of a spouse claiming a spousal benefit while delaying his or her own benefit until later is viable, but only once that spouse reaches full retirement age (currently 66). The assertion that this can be done as early as 62 is incorrect, and frankly, could wind up costing a Social Security claimant that attempts to implement that strategy a significant amount of money if the misunderstanding isn’t caught by the SSA. As our married persons’ reports show, the difference between following an optimal strategy and a suboptimal one can be quite large, often exceeding $100,000.

It is absolutely vital that you educate yourself about your Social Security claiming options. In addition to our reports, we offer a great deal of free, easy to understand information on our main website. This article is particularly unfortunate because of its target audience – financial professionals. If you work with a financial advisor, encourage him or her to learn about the intricacies of the Social Security system, or use a resource like SocialSecurityChoices.com, so that misinformation does not get disseminated. After all, the Social Security benefit claiming decision has been described as the most important financial decision one makes, so it’s worth getting it right.

Social Security COLA Watch: June 2012

New data have been released. Check here for more!

The CPI-W for May 2012 was released this morning by the Bureau of Labor Statistics, and the news is not good for Social Security recipients hoping for a raise leading into next year. The CPI-W index fell from 227.012 to 226.600, which is 1.5% higher than the third quarter 2011 average (the baseline for COLA calculations). The decline is due entirely to falling energy prices (food prices were unchanged in May, and all items excluding food and energy increased slightly.

The May decline illustrates the uncertainty in trying to project the Social Security COLA. Nevertheless, we’ll keep a sharp eye on the numbers and update you as new data become available. CPI-W for June will be available in mid-July. Stay tuned!

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.

COLA Watch: May 2012

When we first talked about the Social Security COLA in February, the basis of the COLA, the CPI-W, had not risen considerably since the third quarter of 2011. To recap, the 2012 COLA, if there is one, will be equal to the percentage increase of the third quarter average in 2012 over that in 2011 (the third quarter 2011 average CPI-W was 223.23). Through April, the CPI-W has experienced five straight increases, dating back to December of 2011.

If the third quarter average in 2012 ends up equal to the current value, 227.01, a COLA of 1.7% would take effect in December 2012. Alternatively, if the CPI-W continues to increase at the trajectory of the past 5 months, a COLA of 3.9% would take effect in December 2012 (recall that the December 2011 COLA was 3.6%).

A COLA of 3.9% would lead to a $39 per month increase in benefits for someone currently receiving $1000 per month. However, any increase in Social Security may be partially offset by potential increases in Medicare premiums. Of course, no COLA is possible too, if the third quarter average CPI-W is less than or equal to that from 2011. But, no matter how much the CPI-W were to drop, a negative COLA is not possible under current law.

We can’t know for sure how the CPI-W will change as we get closer to the third quarter of 2012. However, we’ll keep you updated on this blog as the numbers come out.

 

 

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.