PLANSPONSOR Roadmap: Social Security and Medicare

Social Security payouts are projected to decrease starting in 2034, but the “good news is, Congress knows this,” said Marcia Mantell, president of Mantell Retirement Consulting Inc. According to Mantell, the fund is not “going bankrupt,” and it is not the first time in history this kind of crisis has happened.

During the fourth and final session of PLANSPONSOR’s Roadmap Livestream Series: Retirement Income, “Social Security and Medicare,” Mantell explored what plan sponsors and participants need to know about Social Security and Medicare, including the role the federal programs play in retirement income planning for individuals. She also discussed options for communicating with and educating participants on the topic, and how best to engage with them.

Social Security

Mantell described Social Security as a “law” that can only be changed by Congress. It is meant to pay out insurance benefits in retirement as a social safety net, and it is not a welfare program funded by general tax revenue—it is specifically funded by payroll taxes individuals pay over the course of their working lives.

Social Security risked running dry in 1982, but Congress took action “at the last minute” to make sure retirees were paid their full amounts, Mantell explained. Congress then issued the Social Security Amendments of 1983, which expanded coverage, adjusted benefits, increased tax rates and aimed to ensure the program’s solvency and sustainability for future generations.

It is unclear what, if anything, Congress will do between now and 2034, Mantell said. If Congress fails to take action, all current recipients and those coming into the program would likely see about a 23% reduction in monthly payments. But for now, the most important thing to do is to warn employees who have the perception that if they claim before retirement age, they are “grandfathered in” to receiving full benefits, that it is certainly not the case.

Mantell suggested that employers coach their employees who are still working but want to claim Social Security before the full age of retirement (67) that there are consequences to claiming early. They will not receive the full amount they would be entitled to receive at 65, 67 or even 70.

“Social Security is not meant as an income replacement,” Mantell stated. “It’s an insurance policy against living a long time.”

She explains that the reason it is not an income replacement program is because the amount a recipient gets from the program is determined by a progressive formula in the calculation of the primary insurance amount: based on a person’s average indexed monthly earnings. An employee’s 40 highest-earning quarters of work are used to calculate the PIA, and it is only a fraction of what they once earned.

Mantell also suggested providing employees with information about the benefits of waiting to claim until at least full retirement age. Employers can add a dedicated Social Security section to their company or benefits websites—not one that simply links to government websites, but one that explains what people approaching retirement really need to know. Employers can train someone on their benefits team to provide the information, or they can talk to their retirement plan contact to leverage their expertise.

The Social Security Administration’s website, SSA.gov, educational blog posts and online calculators can be helpful “free” sources of information, she said. The AARP also offers valuable information for free, as well as additional benefits for paid members.

Medicare

Something many may not realize is that Social Security and Medicare are “part of the same program,” Mantell explained. Over the course of their careers, working individuals pay into both.

When to enroll in Medicare depends on a participant’s age and retirement plans, Mantell explained. If an employee is planning on retiring at age 65, the employee should sign up for Medicare three months before turning 65. That’s called the “initial enrollment period.”

Employees age 65 and older can wait until they retire to enroll in Medicare Part B—without a penalty—and they have eight months to do so. But they need to plan ahead.

Mantell said in most cases, the Consolidated Omnibus Budget Reconciliation Act, often known as COBRA—which allows workers and their families to temporarily continue their employer-provided group health benefits after a qualifying event, such as job loss or reduced hours—does not cover individuals ages 65 and over, so employees need to enroll in Part B early in order to ensure their health insurance coverage continues when they leave their employer’s plan.

Mantell suggested that employers help with this by allowing their employees coverage until the last day of the month in which they leave the company, because Medicare coverage begins on the first of the month.

Mantell also suggested that employers offer age-specific information for their employees planning to leave employment at different ages throughout their 60s. Employers can talk to their insurance broker, third-party administrator or plan provider for ideas of how to provide coverage for employees who are leaving after age 65. While employees must sign up for Social Security through SSA.gov when the time comes, Medicare.gov also offers valuable planning tools.