Effective claiming often means overcoming the biggest bar-
Claiming Decision & Retirement Security
rier — clients’ behavioral biases. Common objections include
“it’s my money and I want it now,” “Social Security is going
bankrupt,” or “my mom/dad/grandparent died at 72 so I want
to get some of my money back.”
Advisors can overcome these biases by using an objective
fact-based process which recognizes that Social Security is an
asset and that the goal is to maximize the asset’s value.
Social Security provides not only income, but also crucialprotection against the risk of outliving one’s assets. This isparticularly important today since people are living longerthan ever, and rising health care costs often lead to unexpectedexpenses that can drain savings.
Higher-income workers have made the biggest gains inlongevity in recent decades, so planning horizons for higher-income clients should be longer than for the average American.
An important aspect of Social Security planning is evaluating whether the individual is likely to be alive in their 80s and90s. A question used in the University of Michigan’s Healthand Retirement Study, which asks respondents how likely it isthat they will live beyond age 75, does a reasonable job of predicting actual longevity. A client in poor health, who smokes,is obese or carries another risk factor associated with reducedlongevity, will see less benefit from delayed claiming.
Protection against the erosion of purchasing power is particularly important today as people are living longer than ever beforeand rising health care costs often lead to unexpected expensesthat can drain savings in retirement.
To keep inflation from eroding purchasing power, benefits arepurposefully designed to increase with price inflation and without political interference.
Legislation enacted in 1972 required that beginning in1975, future cost-of-living adjustments to Social Security andSupplemental Security Income (SSI) benefits be tied to theConsumer Price Index. This also ensures that COLAs do notrequire yearly congressional action and are not tied to the direction in which the political winds blow.
How are Social Security COLAs determined?
The Social Security Act specifies that any COLA be basedon the percentage increase in the Consumer Price Index forUrban Wage Earners and Clerical Workers (CPI-W) from thethird quarter of the previous year to the third quarter of thecurrent year.
If a COLA is warranted, it shows up in benefit checks beginning the following January. If there is a decrease in the CPI, ordeflation, no COLA is provided.
Further, no COLA can occur in subsequent years until the CPIexceeds the previous high point. This is why there was no COLAin 2010, 2011 and 2016.
Can Social Security benefits decrease?
Though benefits can increase, it is important to note that SocialSecurity benefits never decrease, even during periods of deflation and a decline in the CPI.
Even though the United States is currently experiencing highunemployment, low economic growth and record high levels ofnational debt because of the pandemic, Social Security benefitsappropriately increase purchasing power for retirees.
In some years, the COLA can be quite large. For example, theCOLA for 2009 was 5.8%, the largest increase since 1982.
However, this larger than normal COLA in 2009 was primarilya result of significant increases in the price of gas and energyduring the spring and summer of 2008, when prices for gasoline reached $4 per gallon.
In other years, the COLA can be low or even 0%. In 2010 and2011, there was no COLA for Social Security beneficiaries aftergas and energy prices declined, resulting in a lower CPI.
If there is a decrease in the CPI (or even deflation), no COLAis provided and no COLA can occur in subsequent years until
Only about 4% of retirees make
the optimal Social Security
claiming decision. This results
in a loss of wealth of roughly
$2.1 trillion for current retirees
that made a suboptimal
Additional United Income
estimates demonstrate that
future retirees could lose an
estimated $3.4 trillion in
potential income that could
be spent in retirement due to
suboptimal claiming decisions.