Social security is arguably among the richest and robust pension programs ever created. In it's current structure, social security provides federally guaranteed lifetime benefits for individuals, spouses, divorced spouses, widows/widowers, disabled individuals, minor children as well as child-in-care benefits. Furthermore, since social security also provides cost of living adjustments, all these benefits are also protected from the ravages of inflation which may otherwise potentially cripple the purchasing power of retirees during what could amount to a 20-30 year retirement period.
So where does this enormously valuable "financial asset" fit in the analysis of one's investment portfolio? Well that is a much debated topic indeed among financial planners. Some simply exclude social security entirely, treating it as an outside source of income and adopting asset allocation strategies that do not take it into account at all.
Others, however, treat social security like a bond investment given the fact that it provides regular (not to mention federally guaranteed) income the same way that fixed income securities do. Likewise, social security is also unaffected by the vagaries of the stock market.
In fact, you may be surprised to learn that none other than Vanguard Group founder Jack Bogle, who's company has $3 Trillion in assets under management, has argued in favor of treating social security like a bond investment for purposes of allocating the rest of your portfolio. He argues that you can take on more risk in buying stocks with the remainder of your savings if you know that social security will offer you the monthly income that you would otherwise need to get from bonds.
Some, if not many, would consider that to be an aggressive view and would likely be unwilling to give up their other fixed income assets to rely entirely on social security. However, for those who desire an increase in the expected return from their investment portfolio, having social security benefits as a backstop may give them the confidence to be more aggressive in their investing strategy.
So what's the answer? What does your own investment professional recommend or has he/she even addressed this issue with you in the past?
Well, like most things regarding social security, the "best" solution depends on a number of factors and there is no easy answer. The key for all financial advisors to consider is that social security is often the largest single retirement asset in most people's portfolios. It typically accounts for 30-60% of an individual's retirement income.
Today, there is a growing number of financial advisors who are becoming experts in integrating social security into retirement planning. Rather than treating social security as a stock or a bond, these specialists treat it as it's own "asset class", one that's similar to a fixed income asset, and develop sophisticated social security integration strategies. Since it has it's own unique risk, income and taxation characteristics you would be wise to consult your team of financial professionals and ask if they have experience with these strategies. It would also be important to consult with a social security income maximization specialist in order to determine the optimal social security filing strategy for your individual situation.
By utilizing all this information, in conjunction with the expertise of financial professionals, you can more confidently approach retirement knowing you have a comprehensive retirement plan
Having trouble keeping track of the numerous Republican candidates and their positions on the major issues of the day? Well, you are not alone. Since everything appears to be about Donald Trump and what he says, or doesn't say, the various candidates positions on many issues appears to be getting lost in the shuffle even as more and more TV time is being dedicated to hearing them speak. A three hour debate...really?
In an effort to simplify the candidates positions regarding what should be done about social security, if anything, here's a short "cheat sheet" which you may find helpful until the candidates refine and finalize their positions on this matter:
DONALD TRUMP: Keep social security as is.
CARLY FIORINA: Increase FRA (to what exactly is unclear).
BEN CARSON: Requests that you should "voluntarily" opt out of social security if you don't need the money.
MARCO RUBIO: Increase FRA by one year and grow benefits more slowly.
JEB BUSH: Increase Full Retirement Age (FRA) possibly up to age 70.
TED CRUZ: Increase FRA, cut cost of living adjustments and partially privatize social security (i.e. allow workers to control their own retirement funds through personal investment accounts).
MIKE HUCKABEE: Keep social security as is.
RAND PAUL: Increase FRA to age 70 and means test benefits.
CHRIS CHRISTIE: Increase FRA to 69 and means-test benefits.
JOHN KASICH: Partially privatize social security.
LINDSEY GRAHAM: Increase FRA to age 70 and cut benefits for some.
BOBBY JINDAL: Partially privatize social security.
GEORGE PATAKI: Increase FRA.
JIM GILMORE: Cap benefits; possibly privatize social security.
RICK SANTORUM: Privatize social security, increase FRA and means test benefits.
SCOTT WALKER: Increase FRA.
To briefly sum up, it appears that all these candidates, except for Trump, Hukabee and Carson, favors either raising the FRA or partially privatizing social security. Ironically, these positions are not desired by rank and file Republicans. Recent polling shows 62% of Republicans favor "increasing" social security benefits and 74% are willing to preserve social security even if it means raising taxes. In fact, only 26% of Republicans favor increasing the FRA to age 70.
Clearly, whether you are a Republican or Democrat, any proposed changes to social security will come with much heated debate, especially for those voters who are nearing retirement. Change is slow and difficult to come by in Washington. But as millions of Americans grow older and face the challenges of financing what could amount to a 20-30 year retirement period, any reduction to social security benefits could have a material if not devastating effect on one's retirement. Perhaps creativity and compromise could provide the foundation for the continuation of this much valued and desired entitlement program.
As a social security retirement income specialist, one of the areas I end up having to address on a surprisingly regular basis is social security disability income (SSDI) benefits. I have blogged on this topic previously but with this October being "National Disability Employment Awareness Month" I thought it would be worthwhile to highlight some of the little known programs and benefits available through the social security disability system.
Before I begin I think it's important to state that the social security disability program is probably the most misunderstood program in the social security system. There is often a perception that SSDI recipients have never worked and are taking advantage of the system for minor impairments, if not by outright fraud. Certainly there have been issues regarding fraudulent benefits, similar to those experienced by commercial disability insurance carriers, but for the most part SSDI claims are being paid to worthy and eligible beneficiaries.
In order to even apply for SSDI benefits an applicant must have worked enough to have paid into the system and to be considered "insured" under the SSDI definition. If you have no work history then you will not qualify for any benefits.
In addition, social security has some of the strictest requirements in the world in order to qualify for benefits. These requirements are typically much more demanding as compared to commercial disability insurance programs. In general, to qualify for SSDI you must have an impairment that will last one year or more, or result in death, and you must also be unable to perform any substantial work.
As a result, approved recipients of SSDI are among the most severely impaired individuals in the country and greatly depend on their benefits. In many cases, their SSDI checks are a lifeline preventing them from slipping into poverty.
However, not all disabled recipients will remain on SSDI nor do they wish to do so. They would often prefer to recover enough to get back to work and perhaps earn more money doing meaningful and enjoyable work. As such, social security offers incentive programs to give those SSDI recipients who are able an opportunity to return to work. Some of these incentives include continued cash benefits for a period of time while they work, continued Medicare and Medicaid coverage, and assistance with education, training and rehabilitation to start a new line of work.
Through a program called "Ticket to Work", social security gives participants a "ticket" to go back to work while continuing to receive SSDI benefits. This program is both free and voluntary and gives access to an employment network, which offers assistance with job searches and placement, and vocational rehabilitation and training.
"Ticket to Work" has been a valuable and effective program at social security. It has provided a mechanism for recipients of SSDI to exit the SSDI program and return to meaningful work which not only provides for a higher income but also the dignity and emotional benefits derived from being employed and making a contribution to society.
SSDI is not simply just another entitlement program. It's sophisticated design and structure also provides for affordable and manageable exit strategies even after benefits commence. Although it is extremely difficult to qualify for benefits, once approved SSDI also offers mechanisms to leave the program and return to a more normal and productive life.
As the federal election rhetoric heats up, changes to social security benefits will most certainly be a part of the dialogue. It is likely not a matter of "will changes to social security happen" but rather "what will the changes be and when".
To be clear, most all of the potential changes to social security being proposed are likely to have a profound affect on retirement benefits for millions of Americans. Therefore, it is extremely important to fully understand the effects of any of the proposed changes before you dismiss them as having little impact on your personal retirement picture.
One of the proposed changes to "fix" social security is to (once again) raise the age at which they kick in. For most American's approaching retirement now, their social security "full retirement age (FRA)" is age 66. If you were born in 1960 or later, however, the FRA is 67. But some political candidates are now proposing to push out the FRA to age 69 or even 70.
So what's the big deal about raising the retirement age anyway? Well, while raising the FRA may appear to be a small or subtle change, it will likely result in a material reduction in ones total lifetime retirement benefits. Because the monthly payments a person receives grows larger the later in life one retires, raising the FRA reduces the total amount of money paid out.
For example, if your FRA is age 66, each year that you delay the start of your benefits, your benefit payment is guaranteed to increase by 8% per year (plus any increases due to cost of living adjustments) up to age 70. That four year delay in the start of your benefits represents a 32% guaranteed increase in your benefits plus cost of living adjustments (COLA). In fact, by delaying the start of your benefits from age 62 (the earliest possible filing date) to age 70, your benefit amount will approximately double!
If the FRA is increased to say age 70, future retirees will get smaller payouts than previous ones did after starting to receive benefits at the very same age. For example, if your projected benefit at age 66 was $1,000/mo. and at age 70 it was $1,320/mo. then these benefits under an FRA of age 70 would be only $760/mo. at age 66 and $1,000/mo. at age 70. This effective reduction in benefits could significantly effect ones retirement income on both an annual basis as well as on a cumulative lifetime benefits basis. In addition, it's important to note that the effect of all future COLA's would also be reduced since the COLA's will be applied to lower benefit amounts.
Would changing the FRA be the best approach to tackling the financial challenges affecting social security? What if the FRA was only increased to age 68 instead of age 69 or 70? What effect would that have in closing the budget gap? Apparently, increasing the FRA from age 67 to age 68 would only erase 12% of the deficit that social security is expected to face 75 years from now. Nevertheless, this type of change would still have a significant affect on the financial circumstances of lower and middle income earners in retirement.
What if instead changes were made to the way social security taxes work? Currently, social security taxes are only applied to earnings up to $118,500. This is in contrast to Medicare taxes which apply to all earnings. What if social security taxes were also applied to all earned income as well? If that were to happen it is projected that it would reduce the expected deficit 75 years from now by 70%! This approach would also spare the lower and middle income earners from sharp reductions to their retirement benefits.
Clearly, there are numerous alternatives available to addressing the financial challenges facing social security. The "best" approach will undoubtedly be hotly debated. Perhaps it will require a combination of changes in order to reach a political compromise. As the banter surrounding changes to social security benefits increases be sure to ask and get answers to exactly how these changes would affect your own benefits as these changes could have a significant affect on your retirement income for perhaps decades to come.
Ash Ahluwalia, NSSA, CCSCA, MBA