Social Security Secrets
MARTHA SHEDDEN
Can you talk about why you decided to become a journalist and what that journey looked like?
MARY BETH FRANKLIN
When I was a kid, I always knew what I wanted to be when I grew up. I knew I wanted to be a writer. Then when I was in high school, I thought I wanted to be a television anchor. So, I went to journalism school in Washington, D.C. After graduation I fell into writing for a wire service there. In the early 1980s I was a young reporter on Capitol Hill for United Press International where I covered the Social Security Reform Commission in 1983. That sparked my interest in the program.
Several decades later, I was primarily writing about money for consumers, including retirement planning, at Kiplinger's Personal Finance Magazine. There I discovered four secret ways to maximize your Social Security benefits in 2008. The consumer response was so overwhelming. This was before email, and I would get bags full of mail every week filled with letters from people asking Social Security questions. I knew I had found my niche, and I’ve been doing it ever since.
MARTHA SHEDDEN
You have written about regrets people have over their Social Security. Are those regrets centered around certain claiming decisions? Tell me more about that.
MARY BETH FRANKLIN
Many people who claim benefits as early as possible, 62, often regret they hadn’t waited for a bigger monthly check. The longer people wait, which can be up to 70, the bigger their monthly benefit will be for the rest of their lives. Some people must claim at 62 due to poor health, being laid off, or they’re forced to retire earlier than planned. If that is the case, I encourage people to take it. That’s what it’s there for. I tell my clients they must be wealthy enough and healthy enough to delay benefits.
MARTHA SHEDDEN
Do you know of people who take advantage of suspending benefits at their full retirement age and then restarting later? Do many people do that?
MARY BETH FRANKLIN
Financial advisors will reach out to me after getting a new client who has started their benefits and they don’t need the money right now. They ask what their client can do to reverse this decision and hold out for a bigger benefit. There are two separate options. First, anyone has the right to change their mind within 12 months of first claiming Social Security. At that point they can withdraw their application for benefits by filing Form 521. Unfortunately, if they have received any benefits, they must repay them. If anyone else is collecting on their record, like a spouse or a minor dependent child, those benefits must be repaid as well. It tends to be the less popular option.
The second option is to wait until you reach your full retirement age, which may be anywhere between 66 and 67. At that point, if someone claimed reduced benefits early and waited until their full retirement age, they can then suspend their benefits. The good news is they don't have to pay anything back. The bad news is those benefits they’ve been getting each month stop. The incentive to suspend their benefits is the fact that those benefits will start growing by 8% a year, earning delayed retirement credits up until age 70.
For example, let's say we have a married couple, and the husband is the breadwinner with the bigger Social Security benefit. He decides to claim his benefits early at 62 and his full retirement age is 66. By claiming four years early, he's taking a 25% cut on his benefits every month for the rest of his life. Maybe he was okay with that, but it didn't occur to him that if he dies first, he's leaving his widow with a smaller survivor benefit, because a survivor benefit is worth up to 100% of what that deceased worker collected at time of death or was entitled to collect at time of death. If he collects a smaller benefit early, it means his widow is going to get a smaller benefit. When the husband reaches full retirement age, he may want to suspend his benefit. His checks will stop coming but they’ll grow 8% a year.
If his benefit at his full retirement age, 66, was $2,000 a month, but he claimed it at 62, he would only get 75% of that, so about $1,500 a month. If he suspends at 66, those checks stop, but now they're growing by 8% a year for four years. That's 32% more. If I multiply that 75% benefit that he started with by 1.32, I come out with 99%. He will have effectively restored his full retirement age benefit when he resumes his benefits at
70. If he dies first, that's the benefit his widow will get.
MARTHA SHEDDEN
The survivor benefit is such an important topic for couples because historically women have more to lose due to being the lower earner. Can you talk about that?
MARY BETH FRANKLIN
Social Security is crucial for women. Women represent more than half of the beneficiaries over 62 and more than three quarters of the beneficiaries over 85 because women tend to live longer, and they tend to have lower lifetime earnings because they often have sporadic careers with time out for childcare or elder care. Consequently, their average lifetime earnings are lower, which means their Social Security benefits tend to be lower because they're in and out of the workforce and have lower salaries. They tend to save less for retirement and end up with a smaller retirement nest egg, a smaller Social Security benefit, and yet they live longer. They must stretch those smaller resources over a longer retirement.
When it comes to married couples, I tell them they need to think of this as a household decision rather than two individual Social Security claiming decisions. The prime motivation for most married couples should be how to maximize the survivor benefit. I do that by having one spouse, preferably the one with the bigger Social Security benefit, wait until age 70 to maximize that benefit. I often tell those couples that given one is planning to wait till 70, it often makes sense for the other spouse, who's often the wife with the smaller benefit, to go ahead and claim reduced retirement benefits at 62, especially if she's not working. If she is still working, she may want to wait until her full retirement age to claim benefits when earnings restrictions disappear. It brings some cash flow into the household and takes away a bit of the sting waiting until 70.
One of the great secrets of Social Security is even if that wife claims her retirement benefits early and those retirement benefits are permanently reduced, it will have no impact on her survivor benefit if she's at least full retirement age when she claims them. In this scenario, she could claim reduced retirement benefits, and if she is widowed, she could still step up to full survivor benefits later.
MARTHA SHEDDEN
Most people used to claim their Social Security at 62. Are more people today claiming later than that?
MARY BETH FRANKLIN
Over the last several decades, the claiming age has been increasing, which is great news for retirement security. A few decades ago, 60% of women were claiming as soon as possible at age 62. That's dropped to less than a third now. There's new research from the Center for Retirement Research that indicates the incidence of people claiming as soon as possible is even smaller than Social Security data would indicate because there are so many more people in the baby boom generation who are turning 62.
They said, we should look not at the number of people who are claiming at age 62, but the percentage of people who are turning 62 and who are claiming early. There is virtually double the number of people who are turning 62 now than a few decades ago. The good news is only about a quarter of people are claiming as soon as possible. The question is, will the COVID-19 pandemic have any impact on those long-term trends? We certainly did see some people being forced out of the workforce due to the pandemic, either their jobs disappeared because of the recession that followed the pandemic, or because they were older and in poor health, even though they had a job, they were afraid to go to that job and they voluntarily retired. There may be a temporary blip of people claiming as soon as possible but we’ll have to wait and see if it has a long-term impact.
MARTHA SHEDDEN
What are your takeaways from the pandemic?
MARY BETH FRANKLIN
One of the common phrases we heard during the pandemic is we're all in the same storm, but we're not all in the same boat. Some people were in rowboats and some people were in yachts. Some people, primarily white-collar workers who were able to work remotely, are doing great. They got to stay home, they were spending less money, they weren't traveling, they weren't going out to restaurants or sporting events, and they kept getting a paycheck. These were the people who were doing home improvements and racking up bigger balances in 401(k) accounts.
Unfortunately, there were a lot of people, particularly those in lower-income jobs with lower educations, who either lost their job or because they were essential workers, were forced to work. They didn't get any savings out of this. Maybe they were restaurant workers, and instead of working a 40-hour week, they were working a 20-hour week, but they still had commuting expenses. A lot of those people were seriously hurt by the pandemic. It could have a long-term impact on their lifetime average earnings, which in turn could affect their average Social Security benefits. Some have been forced out of the workforce and had to claim early.
The sad fact is for the people who can wait and maximize their Social Security benefits by waiting until age 70, they're often people that have higher-income jobs and are in better health and have the luxury of waiting. It's the people who really rely on those Social Security benefits for the bulk, if not all of their retirement income, who are the least likely to be able to delay because many of those people, particularly in physically taxing jobs, can't work much beyond the earliest claiming age of 62.
MARTHA SHEDDEN
If you had the power to extend the Social Security program for the indefinite future, what changes would you make?
MARY BETH FRANKLIN
It would have to be a two-pronged attack because it's not just a mathematical equation, it's a political equation. I say this going back to my days of covering the 1983 Social Security reform. When you look back, they really made some brilliant compromises. Traditionally, Republicans hate to raise taxes and Democrats hate to cut benefits. Consequently, the Bipartisan Commission chose to do a little bit of both. Basically, everyone must be equally unhappy to get a successful compromise. I think that will apply going forward.
The problem is the longer we wait to create a solution, the more drastic that solution might have to be. At this point, you often hear we should raise the maximum amount of wages each year that should be subject to payroll taxes. Right now, it's $147,000 a year. That means if you make that or less, you pay FICA taxes on your entire earnings. If you make more than that, maybe $500,000 a year, you only pay FICA taxes to fund Social Security up to the taxable wage based on $147,000 in 2022.
Back in 1983 during the Social Security reform, one of the statements they made was if 90% of U.S. wages were being taxed for FICA purposes, Social Security would be good in perpetuity. It was fine for the foreseeable future. The problem is, because of growing wage inequality, so many people make so much more than that taxable wage base and are not paying FICA taxes on that excess. Currently only about 83% of U.S. wages are being taxed for FICA purposes. If we were to gradually raise the taxable wage base to bring it in line with 90% of U.S. wages, we’re probably talking $250,000 a year being subject to FICA taxes. We couldn't do that all at once. It might be phased in over a 20 or 30-year period, but that would go a long way to improving funding.
You always hear complaints from small businesses that they can't afford to do this because they must pay as the employer and the employee. My rebuttal to many of those small businesses is, how many employees do they have that make over $147,000 a year unless it’s a law practice, a medical practice, or some startup company? On the other side, we must look at our increasing longevity. When Social Security was founded in 1935, more than 85 years ago, the full retirement age was set at 65. Now, more than 85 years later, our full retirement age has only increased by one year, despite enormous gains in longevity. It will eventually increase by a total of two years to 67.
The other brilliant thing they did in the 80s was the final piece of the Social Security puzzle. Raising the full retirement age to 67 will not occur until 2027, more than 40 years after that legislation became law. I think that's a great example of how to take a major critical economic and social program like Social Security and implement changes over decades so everyone can adapt. I don't think it was great public policy back about seven years ago when there were some changes to the claiming strategies. One took effect in six months and the other was phased in over four years. That changed the rules for a lot of people who had planned to use those claiming strategies. The longer we can phase in changes, the better off we’ll be.
We may see a further increase of the full retirement age, maybe to 69 or 70. I know that's very controversial based on what we just discussed, but we may be talking about today's two-year old’s waiting until 70. They have six decades plus to get used to that. It's important to keep the earliest eligibility age at 62, because so many people in physically demanding jobs may not be able to go beyond that.
MARTHA SHEDDEN
There are many parts of the Social Security program that can be tweaked like raising the FICA rate, which has been at 6.2 for decades. There are other aspects that can be changed as well.
MARY BETH FRANKLIN
While Social Security benefits are progressive in that long- term low-income workers receive a larger percentage of their pre-retirement earnings, it's a smaller dollar amount compared to high income workers who only might get 25% of their pre- retirement earnings rather than 40% of a lower income worker’s earnings. The tax itself is regressive. In other words, it affects lower income people harder because it goes on that first dollar of earnings up to the cap where now, very high- income workers stop paying that FICA tax, at least the Social Security portion once they get to the current taxable wage base. There's an argument that maybe by raising the earning subject to the tax is a fairer way of doing it rather than raising the actual tax rate that would apply to everybody.
All these proposals are very controversial. That's the hard part. Some people think we should tweak the way the inflation index is applied. Some economists say the current COLA is too generous and we should use the chain-weighted CPI. Then there are advocates for retirees who say the current COLA is inadequate, it should be more generous. There's a lot of talk of increasing benefits for certain populations, like people who stay home to be caregivers. They should be getting some Social Security credit, or there should be a bigger minimum benefit for people who are basically living in poverty. There's a lot of push to figure out how to make Social Security more generous for people who are reliant on it. At the other end people say the tax burden for the workers can be enormous, so we have to be sure there is something for future generations as well.
MARTHA SHEDDEN
Based on what you have experienced and what you know, what do you think are the top two or three most important takeaways for individuals who are approaching retirement, doing retirement planning, and about to claim their Social Security?
MARY BETH FRANKLIN
For so many Americans, particularly in this era of disappearing pensions, Social Security may be the only form of guaranteed income they will receive every month for the rest of their lives no matter how long they live. Unlike private pensions, Social Security is adjusted for inflation almost every year. If there's measurable inflation, then Social Security benefits go up. That alone is a critical benefit. It was never meant to be the sole source of your retirement income, however. It's a piece of the retirement income puzzle. It's important for people to look at their other sources of income and see if they can afford to rely on them. For example, tapping your IRA or your 401(k) earlier so you can afford to delay Social Security and benefit from those 8% per year in delayed retirement credits between your full retirement age and age 70.
That's critical because we have been living in a virtually zero interest rate environment for more than a decade. Even though there's talk of interest rates generally increasing in the future, there's no place else you can get 8% a year guaranteed in a "risk free investment." For those people who are worried Social Security is going broke and want their benefit as soon as they hit 62, I tell them it doesn’t make sense to claim a reduced benefit early out of fear.
It's like selling your stock portfolio when the market takes a dip. All you guaranteed is a locked-in loss. You need to have a good reason to claim early, like poor health or losing your job. Being scared it might not be there is not a good reason to claim Social Security. Instead, look at how to maximize your benefits because the historical precedent is that Congress seldom changes benefits for existing or near retirees. They tend to give it a long runway for future retirees who are decades away from claiming benefits.
MARTHA SHEDDEN
You’ve shared a lot of valuable information. Thank you!