Do You Know What You Need to Know About Social Security?
Social Security is a significant part of most retirees retirement income. Knowing how it works is an important component to your retirement income plan. How well does the average American understand the basic rules of the system? A newly released survey by the nationwide retirement center provide some surprising insights.
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Full Transcript Below:
Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald at Roc Vox Recording and production in our studios in Bushnell's Basin. Joining me from Focused Wealth Advisors, Mr. Stephen Wershing.
Speaker 2 (00:22):
Mr. Fitzgerald, how are you? C
Speaker 1 (00:23):
F P? You got all the cool digits behind your name
Speaker 2 (00:27):
There and the registered trademark symbol. Yes. Certified financial planner.
Speaker 1 (00:31):
Don't try to be Steven Sing or you will get sued. That's right. So today we are going to talk about, well, I actually was just talking about this the other day about social security and someone said, oh, that's going to be gone in a couple years anyway, so don't worry about it. Exactly. So this is an interesting topic. I'm definitely interested in learning more.
Speaker 2 (00:49):
Yeah. Well, and we're going to get right at that comment that was being made because what we're going to talk about is the Nationwide Retirement Institute puts out a social security survey every year. And so I know that our listeners like nothing more than to hear me say a bunch of numbers while they're driving in the car. But that's what we're going to do today. So this is the 10th annual edition of the Social Security Survey and it's really, it's interesting what we find out about people's perceptions about Social security, and it's also interesting about the trends about what people understand over time about Social security. And since social security is such an important component of most people's retirement income plan, I thought it worth talking a little bit about what public perceptions are and what kinds of things people might need to know a little bit better about.
Speaker 1 (01:42):
Yeah, there's so much, there's just so much to understand about this and the big fear is real, and they'd been saying this for probably the last 20 years that I could remember, maybe even longer. But since I started paying attention, which was about 20 years ago, which was Social security's gone, it's going to be all used up, dried up like a dried Gulch.
Speaker 2 (02:07):
You can see the tumbleweeds rolling through the Social Security Administration. Actually, it's funny because when I was a young financial planner, I thought the same thing. I thought, I'm going to write my plan without any social security in it. It's never going to be around when I'm my age now.
Speaker 1 (02:25):
Interesting.
Speaker 2 (02:26):
But here we are, but it's still, I think at the root, the thing that people really need to understand more than anything else is that social security is a government program and being a government program, there are all kinds of complications and twists and turns, and it's really anything but simple. And so understanding how it works can be really important to make the most of it when you actually get to be a retirement age. So to get at the comment that you made before, what the survey found this year was that 75% of adults over 50 worry that social security will run out of funding in their lifetime, which is actually up from 66%. So in 20 14, 2 thirds of the people thought that it was going to run out of money while they were still alive and probably collecting it. Now three quarters of people are worried that it's going to run out of money during their lifetimes, and frankly, it's a real possibility because of how the government has been mismanaging all of their finances.
(03:29):
And also I think relevant is something to keep in mind because we're going into an election year, is that candidate Biden said that one of his priorities, one of his significant projects was going to be doing something to sort of shore up Social Security and the things he was proposing would've added another five years to before we really ran into significant problems. But we now have the 2024 federal budget, nothing in there yet. So I would encourage people to look at what actually is going on as opposed to what people promise, because as we know, people promise all kinds of things. And what we're going to have to deal with is the reality of it. But what's really more important is what would likely happen if it does run short on money or if it runs out of money.
(04:29):
And it's not that there will be no benefits, but that the benefits will be adjusted. So one of the things that it says in the Social Security Act, the law that empowers it is that if the trust fund runs out of money, then they will have to adjust benefits to make sure that they're not paying out more than they're taking in. And what that means is that that could be a significant 20 or 25% decline in the benefits that people would be receiving all of a sudden. So if social security is a significant part of your retirement income, that's really important to know. If you don't have another resource you can draw on more, then you should know that we should keep up on that and have some kind of a projection around it. And it's going to
Speaker 1 (05:12):
Be like one day or one month you get this and then the next month it could be 25%
Speaker 2 (05:18):
Lower. Exactly, or half. Yeah, exactly. Exactly. And the thing that really concerns me is one of the things that we found out through this survey is that 21% of people have no source of retirement income other than social security. Now, that's a shocking figure in and of itself, but it's also shocking that it is up from 2014 when 13% of people had no other source. So back in 2014, 13% of people had no significant source besides Social Security. Now it's up to 21. That's not a good trend. That's a really bad trend. Part of that too is because among the things that have happened over the past bunch of years is that pensions are getting to be less and less common. So 10 years ago, 48% of people in the survey had some kind of a pension, even if it was small, now it's 31% and it's going to be continuing to go in that direction.
(06:15):
So fewer and fewer people will have a pension that they can rely on. And the other thing that shocks me a little bit is that in this survey, 49% of people have some kind of a retirement account. They have an interest in a 4 0 1 K or an IRA or a 4 0 3 B or something like that, which to me sounds shockingly low that only half of people have some other kind of retirement account with money in it. And that too is down back in 20 14, 50 6% of people had some other kind of retirement account. Could that
Speaker 1 (06:51):
Be due to the rise in sort of the gig work thing that's going on, a lot of people working gigs and not necessarily full-time jobs with benefits,
Speaker 2 (06:59):
That kind of thing? Yeah, it certainly could be. I mean, if you go to work for a bigger company and in your orientation they say, well, we have this thing called a 4 0 1 K, it's, there's a pretty good chance you may sign up for it. But like you're saying, if you're an independent business person or doing gig work or something like that, you've got to actually think, oh, I should probably think about putting a retirement plan in. It's not one of those things that you think about when you start a business. You've got to
Speaker 1 (07:24):
Take that extra step. It's not just thrown at your face exactly. Here, sign this and you get
Speaker 2 (07:28):
This. You're not reminded of it when you start a business or when you're working gigs. It is all about how am I going to get customers? How am I going to make all this work? A lot of people don't think about, oh, I got to think about taking some of these profits and putting 'em away for the future. So that may very well be, it may very well be one of those things that's contributing to it. So let's talk about how social security works. One of the things that I find interesting and not surprising is that about half of people, half of adults surveyed say that they know how to maximize social security and then when nationwide ask them specific questions about how Social security works, 8% correctly identified the ways to maximize it. So everybody thinks they know how to do it. I
Speaker 1 (08:16):
Know nothing about Social Security, nothing.
Speaker 2 (08:19):
So that's a huge red flag that it doesn't matter what you think, you should probably check into it because 50% of the people think they know it. 8% of the people actually do. For example, when they asked survey respondents a, what's the full retirement age? What would be your full retirement age based on the year you were born, what proportion do you think actually correctly guessed the right age? Oh, I'm sure it's low. It's really, it's 13%, right? So if you don't even know what age is the full retirement age, which is important because if you collect money before that, there's a pretty significant discount. But even more importantly, if you continue to work and you make over something like $21,000 in change, then you start losing that benefit. And so knowing above the full retirement age, you can work as much as you want and it won't be decreased, you won't lose the benefit.
(09:26):
That's really important to know. So it's really important to know what age you would be when you get to that full retirement age. The other interesting thing was the age at which you can start collecting social security. And so people who are fairly close to it probably know pretty well, but they also ask Gen Z and they ask millennials that same question and they said, so what age can you start collecting your social security? What do you suppose? They said It's somewhere in the fifties. Exactly right. Because these days it's a lot more common to retire in your fifties. And so people think, well, I'm retired, so I, I'll just get social security. Well, no, gen Z said 54, the millennials said 55. You can't start collecting it until 62 and at 62 even then it's heavily discounted if you start collecting it. Then even something as basic as that, they didn't get right.
(10:27):
Now. So one of the things, of course, predictably enough, but I'm going to encourage people to do, is to go to a professional who understands social security so that you can work with this and really understand how it applies to you so that you know how to make the most of it. Interestingly enough, 43% of people over 50 who have a financial professional expect that financial professional to provide social security advice. And I will add to that, I will editorialize here, if you're working with a financial professional about retirement income, you deserve to have someone who understands how to do that. It is a significant part of your retirement income. Part of your retirement income plan should be an optimization calculation on that social security. So if you're working with somebody, which of course I'm going to recommend, you should pick somebody who understands social security and can do that analysis of, well, what's best? Is it best to get it at 65 or 66 or 68 or 70? What's the optimal point to take it out? And they should also know all those ins and outs. So I mean, if you go to your financial professional and say, I really don't want to work here anymore, but I'm only 63, should I file for social security, you should expect that that person is going to have a way of analyzing that and understand what they're looking at so that they can give you a good answer about whether or not it's a good time to file. And that would be pretty tricky to go in. What's a
Speaker 1 (11:52):
Question? Is there a question that you could ask like a trick question that you could ask someone? And if they answer it this way, then walk out the door.
Speaker 2 (12:00):
Well, sneaky rather than play. Gotcha. Right. What I would encourage people to do is ask a calculation question as opposed to just a yes or no question. So rather than saying, do you think it's a good idea to apply for Social Security 64, ask a question, if I applied today, how much less would I make than if I applied at 66? All
Speaker 1 (12:25):
Right, good
Speaker 2 (12:25):
Question. So ask for something that would sort of reveal to you if there's actually something going on in the background, if they're actually doing work and they're not just giving you an opinion that may or may not have any calculations behind it. You could also ask if you could see different projections. So show me my retirement income if I retired at 64 and show me my retirement projection if I filed at 68. And if they can show you the different bar charts or the different calculations, well now you know that they're actually doing work in the background, and I think that gives you a pretty good indication that they've got some knowledge about what they're talking about.
(13:08):
So let's talk a little bit about how the government might fix some of these problems, because that's always on everybody's mind about, well, if the trust fund is supposed to be running out of money in the next 10 years, what could they do about it? And I thought some of this was pretty interesting. 49% think that the way Social Security needs to change is to increase taxes on higher earners. And I'm not sure exactly which side they're talking about. It could be one of two things. I think what they mean is if you make more than something in the neighborhood of $128,000, you no longer pay into Social security, it stops. So you actually only pay fica. You only pay Social Security taxes up to a certain point, and that's the equivalent of the maximum benefit in Social security. And above that you no longer pay Social security tax. Really? Yeah,
Speaker 1 (13:59):
I did not know that. I would've thought that the more people made them, well, I guess if they're not going to need, they're probably with that kind of salary, I guess it's assumed that they're not going to need social security when they
Speaker 2 (14:10):
Retire. It's not so much what they need. It's more of an equity kind of a thing. The feeling is if you're not going to collect any benefit above this level than it's unfair to ask you to pay above this level. And that's one way of looking at it perfectly legit. But if you're worried about income inequality, if you're worried about a lot of that kind of stuff, one of the things that would seem to make a lot of sense is just to take that cap off. 7.65% of everything you make on your W two should go into social security. I'm not advocating that, but that would be one way of addressing it because it's a relatively small part of the population, but it's relatively a lot of dollars that if you just took that cap away. And so about 49% of the people I think surveyed feel that way about stuff. And what
Speaker 1 (14:58):
About the camp that says privatizing social security is the way to go? That's essentially turning it into a 4 0 1 K type of thing that's managed by a private company, right?
Speaker 2 (15:08):
Yeah. Well, that's a complicated thorny question. If you just turn it off and give people a way of putting money away for retirement and just leave it to their own devices as devoted a libertarian and a capitalist as I am, I think that would be a bad idea because again, what was the statistic? 49% have a retirement account apart from social security. So I think if you just privatized it to the point of you just made it voluntary, I think that 20 years from now we'd have a really bad situation where people are going into retirement with no assets because we wouldn't have that forced savings. If you take it from the standpoint of saying you have to put 7.65% of your salary away, but you can do it into your own account, I feel a little better about that. We have a couple of implications there.
(16:06):
One is, and I was listening to a really interesting interview yesterday about defined benefit pensions versus defined contribution retirement plans like 4 0 1 Ks, and they were really sort of bad mouthing the defined benefit ones. On the other hand, the argument for those pension things is that the money is placed in the hands of people who are expected to know what they're doing, and they're held to a fiduciary standard to make sure that they do a good job if people put it in their 4 0 1 k. Of all the people in that situation, the employer, the trustee, the government, the worker, it's the worker who has the least knowledge. And like I said, I'm big on free choice and letting people do what they want, but at the same time, I think there's a lot of merit to having somebody else who's responsible for running it for you because they can be held to that standard and they have a significant information advantage over individuals. So I'm really kind of, I feel a little squeamish about the whole idea of privatizing social security. Yeah,
Speaker 1 (17:12):
I'm with you. You know me in my knowledge of this stuff. So I definitely want someone like you taking care of it, not
Speaker 2 (17:18):
Me. But even if you had the opportunity to work with somebody like me, I think taking a little bit of your income and putting it into a system where, so some of your retirement income is managed by somebody else versus you, I am kind of okay, as much a libertarian as I am, I'm kind of okay with that just because we see what happens if we take all the guardrails off. One of the big trends now kind of off topic here, but one of the big trends now is to make retirement. When you work for a company that has a retirement plan to have automatic enrollment, that's the new thing. And more and more common, it's probably going to be all over. It's probably going to be everybody in the next few years, and I'm okay with that. You can opt out, but right now, if you go to work for a company and you don't sign up for the 4 0 1 K, then none of your salary gets deferred into it. You have to choose to opt into it to put away some of your salary. What it's moving to is if you don't tell the company anything, they will automatically take some of your salary and put it into your 4 0 1 k. I think that's a good idea. I think it's a great idea. I
Speaker 1 (18:25):
Think some people, they don't think about it or they're not paying attention or whatever, and then suddenly 20 years later they're like, oh, hey,
Speaker 2 (18:32):
Cool. It gets to be. Yeah, and that's actually, I'm really glad you brought that up. That's a really important point that I've seen this. I've seen this for almost my whole career, is that when you get somebody who's young and you get them to start putting money away for the first few years, it looks like, what am I accomplishing here? And it's like, I'd rather get a pizza. I know, but typically when you get somewhere between years seven and 10, you start earning more on the money than you're putting in. And then when people look at it and they're like, whoa, where did all this money come from? So if you can get 'em over that first seven years hump, you can accomplish a lot.
(19:17):
And then the last thing that I think is really interesting is that only 29% of survey respondents knew that if you regret your filing decision, if you file and start collecting social security and then say, I don't think this is the right decision, you can actually reverse it for the first year. For the first year you collect, you can actually change your mind and you can go back. That's rare. Yeah, because some of these things are irrevocable, right? If you take a pension election from work, that's it. You can't change that social. And a lot of people think that social security is like that, but for the first 12 months, actually, you have to pay back what you got, but you can change your mind. And so if I meet somebody who's 63 and they filed at 63 and we go through the numbers and they're like, oh, that was a really bad decision.
(20:08):
We may find the money to pay it back because if they wait until their full retirement age, it's a huge difference. So a lot of people don't even realize you can do that, and that's really important. So some of the takeaways from what I got from this survey, one is that we really need to highlight the importance of having multiple retirement income sources. Social security, it will not provide you a living income and retirement. It will not help you, not enable you to maintain your standard of living, but if the trust fund runs out of money, that income is going to decrease. So it's really to be diversified in your income sources and you have something else that you can draw from. So that's really important corollary to that. People need to provide those resources themselves because things like pensions are going away, so it's really important to save.
(21:05):
That's not news to a lot of people, but I think it's worth reinforcing. It's really important to either know how Social Security works or to work with somebody who knows how Social Security works, because there are a lot of rules, not just the rules that we talked about, about how much you can get at what age and whether or not you might lose that benefit if you started to work, but things like getting a spousal benefit or getting a widow's benefit or all those kinds of things. They're all different sets of rules and there are a lot of different strategies that can help you get a lot more out of social Security. So if you don't know it, it's really important to work with somebody who does. And if you work with a financial advisor and you're working on your retirement income, it's really important that they know all the rules and most financial planners understand how to what these rules are. But there are a lot of financial people who really just focus on the portfolio. They don't necessarily know all the ins and outs of social security. So it's really important that if you're working with that person on generating a retirement income, it's worth digging into making sure that they understand the rules of social security.
(22:15):
And part of that is that that person ought to be able to do a social security optimization analysis. Like if you're thinking about filing in the next few years, they should be able to do an analysis and give you an idea of what the optimal age would be for you to file if you work with somebody on your retirement income. If you're paying that professional, you deserve to have that kind of an analysis. And so you should expect it.
Speaker 3 (22:42):
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Speaker 1 (24:07):
Social Security, the big topic of today, what's your 30 minute action item?
Speaker 2 (24:11):
30 minute action item, go to the Social Security website and download your Benefits estimator. That's where all of this begins you. You can start an account@mysocialsecurity.gov and you download the benefits estimates based on the most recent information.
Speaker 1 (24:30):
Alright, great advice. Remember, you can find us at three zero minute Money. Thanks to Steve Wershing from Focused Wealth Advisors. I'm Scott Fitzgerald from Roc Vox Recording and Production. We'll catch you next time on 30 Minute Money.