Over the past 77 years since Social Security was passed into law, it has paid out more than $11 trillion in benefits to well over 100 million people-the elderly, the disabled and surviving children of deceased parents.
And despite rumors of its demise, it will continue to be a portion of many people's retirement income. And it's not just for the 75% of the country that has less than $30,000 in retirement savings. It will be a factor for the middle class as well, as Social Security benefits could represent a retirement benefit of $20,000 to $30,000 a year.
Still, many financial advisors know precious little about the program and how it operates. Or how to maximize benefits for their clients. Many pay scant attention to Social Security in analyzing clients' full financial pictures.
For the last four years, Rob Kron has been working to change that. Director of advisor and client education at investment manager BlackRock, Kron has been attending conferences of financial advisors where he offers presentations explaining Social Security's ins and outs. He points out that there are features like "file and suspend," that can allow people to improve their benefits at no cost.
Say a married couple, both 66, have a primary earner who doesn't want to retire. That person has the option of filing for Social Security, but suspending collection of any benefits. If the person continues to work and starts collecting benefits at 70, he or she still gets the maximum benefit amount, just as if he or she had filed at age 70. However, because they filed at 66, the lower-earning spouse became eligible immediately to start collecting one-half of the benefit amount of the spouse who filed.
Part of the problem, for advisors and their clients, is that there is a lot of misinformation circulating about the national retirement program, particularly as many of its critics, including some politicians, have spread false information, say market observers.
Some say the program is going bankrupt, but in fact it is fully funded through at least 2033, and could be viable even longer with some minor fixes. Others say that people could do better investing their money privately, although the market's whipsaw performance in recent years may suggest otherwise.
There are also the Internet rumors, like the frequent email chain claiming that members of Congress have no stake as they don't pay into the program (they do, since 1984); or the ominous notion that the Social Security numbering system contains secret codes identifying people by race or by other characteristics (not true).
Another problem is that while the number of retirees and workers paying into the system has soared, staffing at the Social Security Administration has not grown, making it hard to obtain accurate information.
Thus many people continue to believe that a married couple cannot both collect full benefits (they can); or that it is better to retire early to ensure receiving benefits before the program is changed or cut.
Nobody is proposing making changes in benefits that would affect those already 55 or older, and with so many current and potential beneficiaries, the likelihood of the program being killed is close to zero.
For years, some financial advisors have either gone along with these sentiments-or even actively encouraged clients to take Social Security benefits early, either at 62, the earliest age one can collect, or 66, the current age for full benefits. The argument has typically been that the money can be put to better use in a private investment fund.
What they often do not explain is that by waiting until age 70 to collect Social Security, people can have their benefits increase stepwise by a total of 76% over the amount they'd get retiring at age 62. That gain is over a period of eight years, which would be no easy feat to match for an investor in today's market.
Moreover, in the case of a couple, where one spouse earned much less over his or her work life, that higher benefit shifts over to the surviving spouse, in full for life if the primary beneficiary dies. (Married couples currently have a 50/50 chance of one spouse living to 90).
Teresa Ghilarducci, a professor of economics specializing in retirement issues at the New School for Social Research, did a survey a few years ago of pamphlets and ads put out by mutual fund companies and other retirement funds and brokerages.
"They almost all said, in one way or another, 'Don't count on Social Security. It may not be there when you need it,'" she says. "A lot of the time, this was designed to instill fear and to make people turn to their advisors for help."
Alicia Munnell, director of Boston College's Center for Retirement Research, agrees that advisors need to stress the importance of Social Security benefits.
"One of the biggest single things an ordinary person can do to improve their retirement outlook is to delay collecting Social Security until 66, or better, until 70.
Instead of focusing on allocation decisions for a client with $100,000 or $200,000 in retirement savings, advisors should be talking about having them delay collecting Social Security," she says.
65 Years Old And Still Waiting
Munnell argues that for most people, if they are so financially strapped that delaying collecting benefits is difficult, "it would be better to draw on their savings in order to push off filing for Social Security."
For example, say a couple had $100,000 in an IRA at 62. Further assume they felt that the unemployed husband-usually the higher earner-should take early retirement and collect the typical benefit of $1,000 per month.
Actually, instead of turning to Social Security and locking in a $12,000-per-year benefit for life, it might be better if they took that $12,000 each year from savings and deferred filing for Social Security. By 66, his benefit would reach $16,000 per year, and by 70, it would hit $21,120 per year (not counting annual cost-of-living adjustments).
Granted, it would 10.5 years to earn back the $96,000 withdrawn from savings over those eight years, but if the husband filed for retirement at 66 and then suspended collecting checks, the spouse could start collecting half that $16,000 amount, or $8,000 a year, meaning the savings would be earned back in about seven years.
Furthermore if the husband were to die during that time, his wife would be entitled to collect that $21,120 per year for life.
"Anybody who's dealing with individuals' finances should be knowledgeable about Social Security and should be talking about how to use Social Security most intelligently," says Munnell, "but the reality is that for many financial advisors, it's still all about investing and asset allocation."
Shannon Reid, director of retirement solutions at Raymond James, notes that while it is true that "a couple of years ago financial advisors weren't thinking about Social Security as an asset," that situation is changing.
Noting that 76% of retirees currently opt to start collecting benefits at 62, she says that Raymond James is now urging its advisors to put a focus on these issues for clients who are age 55 to 62, before they make that irrevocable decision.
She explains, "If a client can afford not to do it, everyone should wait. The benefits Social Security provides are pretty impressive-especially the special benefits" like death benefits for children and the disabled, or spousal benefits.
As for clients who may think they should grab their benefits while they can, fearing that Social Security could be cut back, she says, "Social Security is not going to go away. People who are 10 years from retirement or 20 years from retirement have nothing to worry about. We tell our advisors they should be reassuring people, and telling them not to collect Social Security early."
Part of the reason advisors have avoided discussing Social Security, Kron suggests, is that they didn't know enough about it themselves-a problem he and BlackRock are trying to rectify.
"Advisors hate being asked a question and not knowing the answer," he explains. "So we have developed a Social Security calculator, and also a Q&A service for advisors who need answers about the ins and outs of the program."
For those advisors who are still not talking about Social Security, Kron suggests they start learning about the program in detail. When they look at what the program can do for their clients, he says, "they may be pleasantly surprised."