White House budget proposal targets Social Security benefits

President Obama's plan takes aim at strategies used by upper-income claimants to increase their benefits

Mar 7, 2014 @ 12:28 pm

By Darla Mercado

President Barack Obama's 2015 budget proposal has targeted one of the best retirement income planning tools on advisers' shelves: Social Security-claiming strategies.

Buried on the 150th page of the 214 page, $3.9 trillion budget for 2015, which was released on Tuesday, is a sentence spelling out the plan to prevent duplicative or excessive benefit payments through the disability insurance program and Social Security. “In addition, the budget proposes to eliminate aggressive Social Security-claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits,” the budget reads.

The proposal, if it could be passed in the present divided Congress, could throw a monkey wrench at advisers who are crafting retirement income plans for their clients. Essentially, Social Security provides retirees with a guaranteed stream of income for the remainder of their lives without any of the complexity or hassle of an annuity.

(Don't miss Mary Beth Franklin's take on the fate of claiming strategies)

It's also income that can grow if the client is able to delay receipt of those Social Security benefits. If you claim at 62, you get 75% of your benefits. If you wait until the retirement age of 66, you collect full benefits. By delaying until 70, the income stream grows by 8% per year for the four years after 66 — a rate that advisers won't be able to duplicate with any product.

Lo and behold, there's a growing demand for tactics on maximizing those Social Security income streams.

For instance, there's the “claim now and claim more later” strategy: The older spouse takes advantage of the delayed retirement credits that boost his income stream by waiting until 70 to claim Social Security. His wife, who is a few years younger, then claims a spousal benefit for several years until she reaches age 70. At that point, the wife then claims the income stream she is entitled to, which will be based on her own work history.

The Social Security Administration appears to have become hip to these strategies and their growing popularity. The administration already has eliminated a provision that allowed “do-overs,” where someone would claim at 62 and receive the income. At age 70, that person could change their mind, repay the benefits received without interest and take on the higher income stream they would receive at age 70 — as if they hadn't filed the previous claim.

(More: Don't get greedy with Social Security strategies)

The phrasing of the provision in the budget is vague enough that there is no clear procedure by which the Social Security Administration would eliminate these claiming strategies. As a result, policy experts differ on whether the administration could use institute an internal rule change or if it would have to go through Congress.

The administration used an internal rule change to curtail use of “do-over” strategies, and it could do the same for what it deems aggressive claiming strategies, noted Andrew G. Biggs, a resident scholar at the American Enterprise Institute and former principal deputy commissioner at the Social Security Administration.

“I don’t think they need Congress to do this,” he said.

On the other hand, Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University and a former deputy commissioner for Social Security, believes the proposal is specifically targeting spousal claiming strategies. Any change to the formula for spousal benefits would require congressional approval. “I’m inferring they’re going after the spousal benefit, and they can do that through a legislative change,” said Mr. Fichtner.

“I'm sympathetic with the administration's concern that the claiming strategies have become the purview of financial planners,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “The people who use it are high-income people with the flexibility to game the system to their benefit.”

“That thwarts the basic intent of the program,” she added. “We are all in it together, and you put money into it when you work, and you get money when you retire.”

The reaction among financial advisers was mixed. On the one hand, Social Security factors into the income plans they draw up for clients.

“Social Security is something advisers need to be aware of,” said Judson Forner, a senior analyst for investment services at ValMark Securities Inc. “The majority of clients that the planners want are baby boomers who are going into that phase and planning for Social Security.”

On the other hand, others recognize that Social Security is in need of reform. “I'm in favor of strengthening Social Security, even if it involves raising taxes,” said Joseph A. Tomlinson, an actuary and adviser at Tomlinson Financial Planning. He added that, ideally, however, it would be better to combine any tweaks to the program with other steps like raising taxes that would make Social Security stronger overall.

From a planning perspective, it's still up in the air whether this provision becomes a reality or how it'll be executed. But in the meantime, Mr. Tomlinson believes that single-premium immediate annuities can step in if clients become unable to use their claiming strategies.

“It's still a good deal, but not a super deal,” he said. “Social Security is a little bit of a government giveaway — you'd like to take advantage of it for your clients. The annuity is almost priced at a fair-market rate, and the Social Security delay is giving you an above-market rate.”

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