No, we're not talking about craps, roulette or poker, either in person or online. Those activities will remain for the foreseeable future.
What we are talking about is the realization by the Federal Government that some of the more "advantageous" and "provocative" Social Security claiming strategies, which appear to benefit the recipient, have to be stopped because they have the potential to cost the "system" an extra ordinary amount of money estimated by some to be as much as $9.5 billon annually.
Strategies such as "claim and suspend" and "claim now, claim more later" are not all that uncommon though most retirees fail to even consider such strategies.
Upon closer examination of the "problem" the real issue might lie in the fact that many of the more provocative strategies are ideal for two wage-earner households with the caveat that the additional benefits earned through accumulating retirement credits that build future payouts even while you're collecting on a smaller one, tend to favor households with higher more balanced earnings records between the spouses, which would of course, tilt the playing field in favor of higher income households.
It should be noted that strategies such as "claim now, claim more later" spread benefits fairly evenly across most income levels yet nearly 50% of the total additional benefits received under this claiming strategy are allocated to the top two quintiles of wealth distribution.
If the President's fiscal-year 2015 budget passes as proposed, many of these strategies would fall by the wayside.
How much does it matter?
This is a key question. On their face, the appeal of these more subtly nuanced strategies lies mostly in the "interest" of the parties to game the system or to be lured by the higher dollar amount of future benefits. Over the course of a recent three month period, our firm looked at differing claiming strategies for a handful of Clients. We concluded that upon closer observation, when measured by the ability of a different claiming strategy to increase real wealth, there was almost no pick up in utility by employing a more subtly nuanced strategy. (Albeit that a case can be made for the fact that increasing levels of "guaranteed" income during retirement does potentially provide for more utility in managing "investment assets" across the retirement time horizon.)
Remember the Roth Conversion?
We witnessed first hand a similar affect during the period when Roth IRA Conversions were all the rage.
While the draw of the conversion was clearly positioned on two pivotal issues [a] taking what would have been taxable Regular IRA income and converting it to "tax free" Roth IRA income and [b] the ability to spread the tax bill over two years on the conversion; the actual pick up in wealth when measured by using Monte Carlo Simulation and looking at retirement with and without the conversion; there was for many, virtually no increased level of estimated retirement success probability. That is to say that Clients who may have scored Monte Carlo Simulation probabilities of 93% with the conversion, still scored 93% without the conversion. This was due mainly to the fact that what got lost in the allure of converting taxable to non-taxable income was the future value of the tax bill that the Client paid on the conversion, which absent the conversion, they'd have still had in their pocket. Like Elvis, those dollars summarily "left the building" never to return. A conversion of let's say $400,000 for a wage earner in the 30% tax bracket resulted in the loss of $120,000 of "other money" that was taken from savings or other investments to pay the tax bill on the conversion.
Surely, pre-retirees should do much more than default to either taking benefits as soon as possible or deferring them till 65. Perhaps a combination strategy as suggested by many research papers that the optimal strategy would be for one spouse to take the benefit at the earliest age and one to take it at the latest age is ideal? We're not sure and we're not sure because every situation is different because every situation is impacted by other factors such as;
- The level of cash assets on hand
- The level of "investment assets" on hand
- Projected tax rates and inflation rates
- The projected level of household spending and;
- Other sources of income such as pension and IRA Required Minimum Distributions
Bottom line is that "all that glitters is not gold" and simply getting a higher benefit amount does not necessarily portend greater probabilities of retirement success.
In golf, there are a lot of golfers that can hit the ball a mile, but can't keep it within the confines of the golf course itself. Yet, if you asked most golfers if they'd like to add another 50 to 75 yards to their drives off the tee, you'd be hard pressed to not find any non-takers. (Just ask club manufacturers like Taylor and Nike who sell millions of new clubs each year based on this very premise.)
But driving the ball is one and only one (yet an important one) component of succsesful rounds of golf. But if you can't hit any other club in your bag or putt, you're long off the tee and still shooting 105.
And, as it relates to the potential to see a closing of the provocative Social Security claiming strategies; having them guaranteed in reality very little.
Unless we can fundamentally change the nature of "retirement" in American, either through sheer will or political change, it's likely better to not add nearly $10 billion in costs that benefit such as small minority of people if in reality, they real ever benefited at all.
Bottom line is that "planning" your Social Security strategy will almost always trump not planning one and even if there's a repeal of the more subtle strategies, there's still strategies to plan for and with.
Best to focus on the options that will make a real difference.