Many American workers fear that the Social Security trust could be depleted in the not-so-distant future, which may lead some individuals to collect their benefits early – a decision that can significantly reduce their earned benefit. In this episode of Plan Talk, Retirement Director Ben Rizzuto explains research-based techniques that can be used to help ensure people more fully consider their options and make better decisions regarding when to claim this important earned benefit.
Ben Rizzuto: Welcome to Plan Talk from Janus Henderson Investors, I’m Ben Rizzuto.
In the past, we’ve devoted most of our time on the Plan Talk podcast to retirement plans and the defined contribution space, but we’re going to expand our view going forward to not only talk about retirement plans but retirement planning. My hope is that this provides ideas that more of our listeners can use with the folks that they work with on a daily basis.
So, let’s start with something that serves as the basis for many people’s retirements: their Social Security benefits. While many of you may think, “Oh no, not Social Security, that’s so boring,” hear me out. Today I want to go over some research I found that may be helpful when you discuss or think about when to take your Social Security benefits.
During every presidential election, the topic of Social Security is part of the conversation. Candidates talk about how they are going to save it and their opponent is going to defund it, but this year we had another bit of news that brought Social Security into the conversation: The payroll tax. The reason I bring up the payroll tax is because President Trump issued an executive order in September that suspended the collection of the payroll tax for workers making less than $4,000 for any biweekly pay period (that's $2,000 per week, or $104,000 per year) from September first until the end of the year.
What this means for many everyday Americans is that the 7.65% of your wages that is usually subtracted from your paycheck to fund Social Security and Medicare won’t be, which means that folks could see somewhere between $450 and $1,100 more in their paycheck total over the three-month period.1
President Trump has also made comments previously about how he would like to get rid of the payroll tax altogether, even though there is strong bipartisan opposition to a cut or deferral of this tax. The reason for much of the opposition is because the payroll tax helps to fund the Social Security system and if another revenue source is not used, this could lead to the Social Security trust running out sooner rather than later.
The question is, when might it run out? Based on the Social Security Administration’s most recent trust report, 100% of benefits will be able to be paid through 2034. After that, if reforms aren’t made, the trust will only be able to pay 77% of promised benefits. But this brings us back to the payroll tax. Remember it helps fund the Social Security trust, and if that tax goes away, without another revenue source being used, that timeline could get compressed. In fact, many of you may have seen a letter that the chief actuary at the Social Security Administration, Stephen Goss, wrote regarding what would happen. This letter and analysis of the system lays out in stark detail what would happen if the payroll tax was eliminated and no alternative source of revenue was used. Mr. Goss estimates that Trust Fund reserves would become permanently depleted by the middle of calendar year 2023, with no ability to pay benefits thereafter. Based on that, it’s important to note that getting rid of the payroll tax would require Congressional action, and based on the bipartisan opposition, I don’t see it happening soon.
Even though that is the case, I feel that these sorts of stories may lead many folks to feel that they should take Social Security sooner rather than later because it may not be there for them. This fear may lead people to take their Social Security early, which will lead to a permanent decrease of up to 25% of their earned benefit. So how can we help people make better choices when it comes to taking Social Security?
In many cases, we will simply point to the numbers by saying that if your Full Retirement Age is 65 and you start taking your benefit at age 62, your $1,000 monthly benefit drops to $750 per month. If you wait until age 70, your benefit will grow to $1,320 per month. That is of course more money and in strictly financial and economic terms would make sense, but those cold facts don’t consider health risks, life expectancy, other financial resources or the simple fact that people are scared that they won’t get their benefit.
How to Help Based on Research
So, what are some other ways we can help people more fully consider their options and make good decisions with regards to Social Security claiming?
A paper by Adam Greenberg and Hal Hershfield entitled “What Motivates Social Security Claiming Age Intentions?” provides us with some ideas of ways we can helps coach our clients or coach ourselves through this decision-making process. The researchers tested “the effectiveness of a variety of different interventions meant to help consumers better reason about Social Security claiming age.2 The study was set up so participants would first read brief notes on Social Security retirement benefits, then be shown a table of benefits for a typical retiree, and then be countered with one of 13 interventions or the control scenario. They were then asked to give their intended claiming age. It’s important to note that this looks as “intended” claiming age, not actual claiming age. But I think the more we have these conversations or think about these issues, the more likely intentions are to become actual outcomes.
In the control group, participants read about the importance of Social Security, the fact that retirement benefits vary with claiming age, and a table showing monthly benefits for each claiming age from 62 (early retirement) to 70 (delayed retirement) for a typical retiree.
The other 13 interventions fell into five categories. These categories changed the way information was presented, the norms that were conveyed, how participants were asked to view themselves, and the amount of self-reflection they were asked to do.
More specifically, in the framing variations, information was framed as annual amounts, amounts that would be gained or amounts that would be lost depending on when someone chose to start taking benefits.
Normative messaging was used in order to give people an idea of what others did or what people ought to do. Participants were also asked on consider their future selves when thinking about when they would take benefits. For example, in one intervention researchers included phrases like “By delaying claiming to age 70, your future self will have $931 more per month to satisfy your needs, wants, and desires.”
So, what worked best? What led people to say, “Yeah, I’ll delay taking Social Security”? It turns out the two self-reflection treatments created the largest effect relative to the control, leading to 10-month and six-month intended delays, respectively. Along with those, four other treatments proved helpful. They were the gain frame, the commonality of regret condition, the injunctive norm intervention and the future benefits conditions. These all led to increases of five or six months, respectively.
How Can We Implement these Ideas?
Obviously, these scientific-sounding terms and interventions aren’t very helpful, so let’s dig into them and see how we can best utilize them in practice.
Let’s start with the self-reflection interventions, which I think are incredibly important in many respects since we want and need people to think more deeply when making decisions. People tend to be biased towards the present. We see this in several different areas of life, not just in Social Security claiming. Through the two interventions that researchers used, their main goal was to give more weight to the future rather than the present and have participants reflect on their own thoughts.
The first is the query theory. This theory (Weber et al., 2007) suggests that people make decisions by considering one option at a time, beginning with the one that is most salient or prominent and, in doing so, people tend to come up with more reasons in favor of the first option they consider and fewer reasons in favor of options they consider later.
People tend to think about why they want to claim benefits early before they think about why they want to claim benefits later; this leads them to have more reasons in favor of claiming early, which, in turn, leads them to choose to claim benefits early. Query theory predicts that if people instead consider a different option first, their preference for the most salient or prominent option will weaken or even be reversed (Weber et al., 2007). Considering the future first applies this to the claiming decision: Asking people to consider later claiming before considering early claiming reduces the prominence of the early-claiming option and encourages people to delay claiming.
More simply, I think the way to utilize this idea in practice is when you are discussing Social Security with someone, ask them first and foremost to think about and list off all the reasons they would want to delay taking Social Security.
The second intervention dealt with longevity and focused on the risk of living too long. Further participants were encouraged to consider at what age they would recommend someone who was going to live to an old age should claim benefits, and then to consider someone they knew personally who lived to an old age in retirement. This intervention was designed to emphasize the later years of retirement.
While I didn’t know it at the time, I have used this idea when I’ve talked about Social Security during presentations. I do this by asking folks what they are afraid of – public speaking, spiders, etc. In the context of retirement and getting old, many folks may be afraid of dying. But if we think about that idea from the standpoint of Social Security, the biggest fear that people should have isn’t dying, but it’s actually living, since the danger is that people may outlive their savings. This is how I hope to help people focus on why Social Security is important and why they need to understand how the program works.
The third intervention that led people to consider delaying benefits dealt with injunctive norms. These refer to how people ought to behave, and I think this really gets to the value that working with a financial professional can have for people. By sitting down with someone and hearing ideas like, “Delaying your claiming age is a good idea for your financial well-being” and “Delaying claiming Social Security benefits is a wise choice,” I think these types of statements really speak to the value these relationships can have for people and how important guidance is. This intervention led to a five-month delay for participants, so it wasn’t as successful as others, but it was helpful. I think this really shows us that this should be part of the conversation. It probably can’t be the only intervention or advice we provide, but it may be a good way to start the conversation.
Next let’s discuss how we frame benefits. The “gains” framing intervention is probably one that many of us use and researchers used this as well. They did so by providing participants with a table of what their monthly retirement benefits would be, but also saw the difference between the monthly benefits earned by claiming at a given age and the monthly benefits earned by claiming at age 62. By showing people in black and white terms what their decisions will mean, [this] is again something that many of us probably do already, but remember that this led a significant number of participants to say they would delay another five or six months. So, it may not be as common as we think, and it highlights how providing a personalized view of this is something we need to do. Don’t just use the same example, use the exact numbers that people can expect to receive.
Another idea that comes up when discussing benefits is how decisions will affect not only one’s personal benefits but also benefits for spouses and survivors. Researchers looked at this in the benefits to the future self-intervention. Here, participants saw the same table of numbers that we just discussed, but with one additional sentence: “By delaying claiming to age 70, your future self will have $931 more per month to satisfy your needs, wants, and desires.” Thus, this condition explicitly made the connection between the future self and how the claiming age decision will affect that future self.
What’s most interesting about this intervention was how it really seems to highlight the role one’s ego plays. By asking someone to think about their future self, their future needs and wants and the idea that they would have this much more money to meet those needs and wants, we really allow them to get involved with the processes or reactions in which I, me, or mine figure prominently. Thinking about Social Security benefits in this way was more impactful than just picturing one’s future self and their future needs and wants, which makes sense. But it was also more impactful than imaging their family, rather than just themselves, in the future, and considering the impact of the claiming age decision on future benefits as in the benefits to future self-condition. Now, I don’t think that we’ll stop discussing spousal and survivor benefits with folks, but I think it is very interesting how those ideas may not be as important to people when you get right down to it.
The final intervention was the commonality of regret treatment. It informed participants about the regret that current retirees felt about having claimed too early. Here the focus was on others’ assessments of the impact of their claiming decisions – for example, using the stat that 4 out of 10 retirees say they wish they would have waited to collect Social Security benefits (Nationwide 2014).
Here I think we can highlight the experience of others and, those who hear this type of idea might say to themselves, “I don’t want to be like them.” This is a great area for advisors to use the experiences they have with other clients to provide real life examples of how folks have made and possibly later regretted their decisions.
So there are six different interventions or ways that we can talk about Social Security benefits that all helped people think more deeply about when to start taking benefits. How we use these ideas certainly depends on the people we are talking to. Therefore, we need to think about the personalities of these people. Are they analytical, are they drivers, or more extroverted? Thinking about this can help us figure out the best intervention to use. How do people like to have information presented to them, and how is it best to interact with them? These are ideas that are important to understand as you think about these ideas and how you use them. If you’d like to learn more about this, Janus Henderson has a program called Science of Negotiations, which helps you better understand people and help you communicate in ways that are mutually beneficial.
Overall, we want to make sure people are making the best decisions possible as it relates to their retirement and this very important earned benefit. As retirement lasts longer and longer, it is important to make sure this stream of income is as large as possible. So hopefully you’ve gotten a couple ideas today that help you think about Social Security and how to think about when you’ll start taking it.
Remember that, going forward, we’ll be covering more of these financial planning topics, so remember that you can subscribe to this podcast and others from Janus Henderson via iTunes or Spotify. And if you’d like to continue the conversation, feel free to reach out to me. I’d love to hear what you think or about your experiences when it comes to retirement planning. So, until next time, I’m Ben Rizzuto and you’ve been listening to Plan Talk from Janus Henderson Investors.
1Kiplinger, “What Trump's Payroll Tax Cut Will Mean for You,” September 2020.
2“What Motivates Social Security Claiming Age Intentions?”, 2018
The example provided is hypothetical and used for illustrative purposes only.