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CFPB Report Shows Many Consumers Base Critical Claiming Decision on Limited Information

Recently the Consumer Financial Protection Bureau (CFPB) released “Planning for Retirement,” an interactive, online tool designed to help older Americans decide when is the optimum time to claim Social Security retirement benefits. According to a report released by the CFPB, greater numbers of individuals are relying on Social Security for more of their income for longer periods of time, but end up receiving lower monthly benefits by claiming early. Often, the claiming-age decision is based on limited information about the financial impact of that choice. The new CFPB tool allows consumers to estimate how much money they can expect to receive at different ages and provides tips to help consumers evaluate the trade-offs.
“Millions of Americans are likely to face financial insecurity in their retirement years,” said CFPB Director Richard Cordray. “Deciding when to start claiming Social Security benefits is one of the most important financial choices a consumer will make. The CFPB’s ‘Planning for Retirement’ tool can help consumers clearly see their options.”

The “Planning for Retirement” Tool
Americans are eligible to claim Social Security retirement benefits without any reduction at their “full retirement age (FRA),” according to the Social Security Administration (SSA). For people born after 1942, full retirement age ranges from 66 to 67, depending on the year the person was born. Consumers can also claim their benefits several years before, agreeing to take less money each month. Or they can claim several years after, and get bigger monthly checks. Generally, the amount a consumer receives from Social Security is a one-time choice. This means if a worker claims the reduced or increased benefit, they receive that amount for the rest of their life, with annual cost-of-living adjustments (COLA). This decision also impacts the benefits an older consumer’s surviving spouse will receive after their death.

The “Planning for Retirement” Tool can be found at: http://www.consumerfinance.gov/retirement/

CFPB Report Shows Many Consumers Base Critical Claiming Decision on Limited Information
Today, the CFPB released a report indicating that many consumers may not be taking advantage of their option to receive higher Social Security income and a more secure retirement. Specifically, the report highlights:
1. Many Americans collect early despite living longer: Studies show that many retirees start collecting their benefits at their earliest eligibility age. In 2013, nearly 46 percent of claims were submitted at age 62. But, on average, Americans reaching age 65 today will live to age 85. This means consumers will likely need sufficient income and savings to cover 20 years or more in retirement.
2. Millions of Americans face financial insecurity in retirement: Many consumers at and near retirement are unprepared financially. For example, four in 10 late boomers – currently ages 51-59 – are reaching retirement with limited or no savings, and are projected to face a savings shortfall.
3. Retirees rely on Social Security for income: With the decline in coverage from traditional pension plans, Social Security is the only guaranteed monthly income for a majority of older consumers. Approximately two thirds of the nearly 40 million Americans aged 65 and older who receive Social Security benefits depend on it for 50 percent or more of their retirement income. Social Security is particularly important for the growing number of beneficiaries aged 80 and older for whom it accounts for 70 percent or more of their income.
4. Consumers lack awareness and information about the claiming-age choice: Studies have shown that people claiming Social Security before their full retirement age have less knowledge about their benefits than those who claim at or after their full retirement age. Several recent surveys show that a significant portion of pre-retirees are confused about or lack basic knowledge of information about Social Security benefits. For example, one study found that only 22 percent of pre-retirees surveyed knew their full retirement age. Only 12 percent knew how their benefits would change if they claimed before, at, or after their full retirement age. And only about 5 percent of those surveyed said that they knew how their benefits are calculated.

The CFPB report about Social Security can be found at: http://files.consumerfinance.gov/f/201511_cfpb_issue-brief-social-security-claiming-age-and-retirement-security.pdf

The Bipartisan Budget Act of 2015 will Reduce Benefits for Millions of Americans

There are two popular Social Security maximization strategies that many Americans have used to make the most of Social Security retirement benefits. The file and suspend approach will be eliminated around May 1, 2016 and the Restricted Application Method will be crammed down at the end of 2015 due to the Bipartisan Budget Act of 2015 which was passed last week without any public hearings.

File and Suspend

The File and Suspend Strategy allows the Full Retirement Aged (FRA) spouse to file for Social Security retirement benefits and immediately “suspend” his or her application. This allows the 62 year-old spouse to claim spousal benefits (usually half of the FRA wage earners benefit) while the wage earner continues to work (or delays claiming benefits) to gain 8 percent per year in Delayed Retirement Credits (DRCs).

The Bipartisan Act of 2015 will become effective in about six-months. This means that folks getting benefits now can continue using the File and Suspend Strategy will continue to receive benefits. Others must be at least age 66 to use this approach, and the window of opportunity will close around May 1, 2016.

Currently, single individuals and married couples can use the File and Suspend approach to collect benefits retroactively. For example, if you File and Suspend then continue to work you can collect benefits retroactively to the date you suspended your benefits. For example, let’s say that you you are single and file and suspend when you are age 66. You work until you become ill at age 69. You can retroactively claim three-years of past Social Security benefits and forfeit the Delayed Retirement Credits (DRCs) you have earned. The new Budget Deal will eliminate this option for most future claimants.

Restricted Applications

Many working couples will be affected by the Budget Bill. In the past, an individual who was eligible for a spousal benefit and a benefit based on their own work record could choose which Social Security benefit they wanted to claim. If a working spouse claimed a “restricted” spousal only benefit he or she could accumulate Delayed Retirement Credits (DRCs) of 8 percent per year until age 70.

The New Budget Deal eliminates this option for individuals born before January 2, 1954. However, anyone age 62 or older at the end of 2015 can continue to have this option and at age 66 they can restrict an application to spousal benefits only.

Therefore a couple could use the following method to claim Social Security benefits. For example, Jane’s FRA benefit is $500 a month, her husband John’s FRA benefit is $2,000 per month. Both are FRA and 66 years old.

1. Currently Jane could use the Restricted Application approach and claim $1,000 per month in spousal only benefits (half of John’s monthly benefit) and earn DRCs on her own work record.

2. John could claim spousal only benefits on Jane’s work record of $250 per month and earn DRCs until he is 70 years old.

3. If the couple are equal earners they may want to delay claiming Social Security benefits so they can both claim DRCs.

The New Budget Deal does not affect the ability of widow’s to file for spousal only benefits and to later switch to other Social Security benefits.