Compliance

It Is Difficult to Factor Social Security into Retirement Planning

By Rebecca Moore editors@plansponsor.com | August 01, 2014
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August 1, 2014 (PLANSPONSOR.com) – The complexity of Social Security benefit formulas and insecurity about the program’s solvency make it difficult for individuals to factor it into their retirement income planning.

In testimony for a House Ways and Means Subcommittee on Social Security hearing titled “What Workers Need to Know About Social Security as They Plan for Their Retirement,” Laurence J. Kotlikoff, Ph.D., William Fairfield Warren Professor at Boston University in Boston, Massachusetts, pointed out that Social Security’s Handbook has 2,728 rules and its Program Operating Manual has tens of thousands of rules to explain these rules. “The rules and the rules to explain the rules are written in a language that no one can remotely understand unless they have spent years immersed in the system’s provisions,” he said.

What most people are doing is relying on Social Security’s calculators and staff in making their collection decisions, Kotlikoff contends, but Social Security’s calculators do not inform individuals about  the benefits they can collect based on their current, former, or deceased spouse. He adds that Social Security’s benefit calculators are used by Social Security’s telephone and local office staff, and he contends they produce benefit estimates that are generally incorrect. “This is thanks to the calculators’ default assumptions that the economy will experience no future wage growth or inflation,” he says.

According to Kotlikoff, “The most common question workers appear to ask is no question. Instead, they figure out when is the earliest date they can take their retirement benefit and apply at that date. They appear to have little or no idea about their eligibility for spousal, widow(er), divorcee spousal, and divorced widow(er) benefits, little or no idea about deeming provisions, little or no idea about Delayed Retirement Credits, file and suspend options, start-stop-start strategies, family benefit maximums, the Adjustment of the Reduction Factor that can mitigate the Earnings Test, and the list goes on.”

Andrew G. Biggs, Ph.D., Resident Scholar at the American Enterprise Institute, noted that in a 2010 study, he compared the benefits that near-retirees predicted they would receive to the benefits they actually received just a year or two later. He found significant numbers of near-retirees either over- or underestimated their actual benefits by a significant amount. One-quarter of respondents underestimated their benefits by more than 22%, and one-tenth underestimated them by more than 50%. One-quarter overestimated their benefits by more than 21% and one-tenth overestimated them by more than 100%.