Podcast

Plan For 100℠ Podcast logo image

With Tom Clark

Part 1

00:00 -00:00

Part 2

00:00 -00:00

On this episode of the Plan for 100 Podcast, Tom Clark, a nationally recognized Social Security expert, talks about the future of Social Security, common mistakes to avoid and how retirees can maximize their benefits.

Transcript

Voice Over: [00:00:07] Thanks to medical advances and healthier choices, Americans are living longer, more active lives well into their 80s, 90s and beyond. Welcome to "Plan for 100," a new podcast from AIG. This podcast series is devoted to educating and empowering Americans to prepare for longer lives and retirements that could last four decades or more. Our podcast aims to help you "plan for 100," no matter what age you are today.

Mike Treske: [00:00:37] Hello and welcome to the AIG podcast, Plan for 100. I'm your host, Mike Treske, executive vice president and chief distribution officer for AIG annuities and mutual funds. It is my pleasure to be joined today by Tom Clark. Tom is a nationally recognized Social Security expert and worked for the Social Security Administration for 33 years. During that time, he gave more than 6,000 presentations on Social Security. Tom has appeared on more than 200 TV shows about this topic, and written columns for numerous publications. He also helped us at AIG, creating one of our most popular programs ever, "Social Security Savvy," and a benefits calculator that matches that program. Tom, welcome to "Plan for 100."

Tom Clark: [00:01:28] Thanks Mike, I'm glad to be here.

Mike Treske: [00:01:30] Tom, for many people, Social Security is their only source of guaranteed lifetime income in retirement, so there are obviously concerns when we hear that Social Security could become insolvent, or that benefits will have to be reduced in the years ahead. What are your thoughts on the future of Social Security?

Tom Clark: [00:01:49] Well, Social Security is not an optional program. It really can't go away, for so many reasons. One is just the effect on the economy. I live in the Dallas-Fort Worth area, and just in the Dallas-Fort Worth area, Social Security now pays over a billion dollars a month in benefits, over a billion a month, which is more than the payrolls of the top 10 employers all put together in this area. We've got some big employers here. And the interesting thing is, that money gets paid out, gets spent, regardless of how the economy doing here in Texas, what the price of oil is, what the price of cattle or cotton is. That money still gets spent, because, if a person is 80 years old, they're no longer saving for retirement. Recessions don't really affect them. They spend that money. As a matter of fact, a lot of economists actually feel that Social Security possibly prevented another Great Depression ten years ago, when our last recession happened, because, when recessions hit, of course, working people get scared and quit spending, which makes the recession even worse. But that billion a month in this area was still getting spent, keeping all those stores and restaurants open. It's also interesting that, before 1940, depressions were a pretty regular feature in this country. And I pick 1940 because that's the year Social Security started paying monthly benefits. And since 1940, this country has had zero depressions, and there may be a lot of reasons for that, but I really do think that the Social Security benefits being paid out and spent is one of the factors that helped us avoid those depressions. Plus, you know, I can't imagine a Congressman ever letting Social Security stop. The human cost would just be tremendous. Without Social Security, to use my own area again, in Dallas-Fort Worth, there'd be an additional 250,000 people without any money to pay rent, to buy food, to pay the electric bill, to pay the water bill, because there's how many people have no other source of income except Social Security. The reality, though, is they wouldn't become homeless, or going away, because they move in with their family. They'd move in with us and without Medicare would have to pay all their hospital and doctor bills too. No Congressman is going to let that happen. It's just not going to happen. I tell people all the time that we do three things. We, as middle-class individuals, we manage to do almost always do three things. And Social Security is what makes it possible do all three. Social Security and Medicare. We send our kids to college keep our parents healthy as long as possible, that's what Medicare does, and we retire ourselves. Without Social Security and Medicare, we can we can only do one out of those three things. We have to pick. Are we going to send our kids to college? Are we going to keep our mother alive when she gets sick? Are we going to retire ourselves? Because we couldn't do all three. I talk to people all the time, that Medicare pays one or two million dollars in one year for one person. Without Medicare, we'd have to make that decision, are we going to try to do that, to keep our parent alive or not? So, the programs simply aren't optional, and so people shouldn't make a decision on where to take their benefits based on thinking Social Security's going to go away. It's not.

Mike Treske: [00:03:55] Well that's obviously comforting. But, with that being said, it is often suggested, or there are statistics that are out there that suggests that Social Security really replaces about 40 percent of, effectively, somebody's pre-retirement income. Have you found that to be accurate, and at what point at what point would Social Security also become taxed?

Tom Clark: [00:04:17] Well, 40 percent is pretty much for a middle-income worker, it replaces about 40 percent of the earnings. For a low income worker, it replaces a higher percentage. For a high-income worker, it replaces less than that. This is, this is social insurance. So, the the benefit structure is progressive. 40 percent, pretty close for a middle-class worker, middle income worker. And of course, you know, who can live on 40 percent? So, you do have to, you should have the other income. Social Security was never meant to be somebody's full income at retirement. Now I tell people all the time when I do seminars, and we ask about taxes, I tell them all the time that I hope everybody in this room pays taxes on Social Security benefits. Because that means they have, you know, fairly good retirement income. Unfortunately, the great majority of people on Social Security never pay income tax on it, and that's really a tragedy, because they're not living on very much income. If somebody has income above $25,000 for an individual, or $32,000 for a couple, then at least part of benefits will be subject to income tax. The part that's taxable, they'll pay whatever percentage of the tax bracket they're in on that taxable amount. Now there's two things different about this income tax than other income tax. The first is where the money goes. Any income tax paid on Social Security goes back to the Social Security and Medicare trust funds. That Social Security trust fund ran a huge surplus for over 30 years, saving up for the baby boomers. Income tax paid on Social Security was about 20 percent of the surplus it was running all those years. And the other difference is, no matter how much your income is, at least 15 percent will be tax free. One-five. At least 15 percent will be tax free, maybe more tax free, depending on your income. But, you know, no matter how much income is, at least 15 percent will be tax free. And that's so there is no double taxation. For the average worker who lives the average lifespan, the amount of total benefits they receive based on their own contributions, their own taxes, is about 15 percent of the total. We pay tax on that when we're working, so there's no double taxation.

Mike Treske: [00:06:24] Tom, I know that Social Security, there are a lot of strategies and therefore tactics that can go into play when you're ready. What are the biggest mistakes you see people make, and how would one maximize their Social Security benefit?

Tom Clark: [00:06:40] Well, I really think the biggest mistake people make these days is they take a benefit too early. These days, as people are living longer I think we have to plan to be retired for a long, long time, and many people just think they're supposed to take the benefit, if they retire at 62, just take it then. But the average person, the longer they wait, the more total benefits they'll receive. For a couple of reasons, but one reason is when people start living longer, insurance companies that sell life insurance, they can just change their tables anytime they choose, which they've done. That's why life insurance costs less now than it used to. We're living longer. Social Security's tables are based in law. It actually takes an act of Congress to change them, which, other than raising our full retirement age from 65 to 67, they haven't really touched it. We're living longer now than they thought we were going to when they raised the retirement age. What that means is basically, the reduction for taking a benefit early is based on how long people lived in 1935, when the Social Security Act was passed. Of course, you're living a lot longer now. That's why it pays most people to wait as long as possible. And if I'm speaking to a couple, let's say you have a couple, well, they both work, you know, pretty much their whole lives. I often encourage the one with the higher benefit, the one who made more money in their lifetime, to wait as long as possible, possibly up to 70. Because your own retirement benefits will continue grow if you wait till 70. If you wait till 70, and maybe the other member of the couple can go ahead and take theirs as early as possible, because I see a lot of sense of maximizing the higher check, because when you do that, once one of the members of the couple passes away, the survivors are drawing that higher benefit amount. So, I see a lot of sense in the higher wage-earner maximizing their check. I don't see a lot of sense of maximizing both checks because as I said, once one person passes away, the survivor's going to draw that one higher check anyway. They don't get both checks. So, I kind of counsel a lot of couples, for the lower income worker to take theirs as soon as possible, the higher income worker to wait as long as possible.

Mike Treske: [00:08:53] And I know that, speaking of waiting until 70, once your maximum retirement age is obtained, then there is a very strong growth component by waiting, right?

Tom Clark: [00:09:05] Yeah. Once somebody reaches their full retirement age, which for probably anybody listening to this is going to be somewhere between 66 and 67, once somebody reaches that age, there's no limit on their earnings. For example, this is 2019. If somebody turns 66 today, that's their full retirement age. They can keep on working full time and draw their full Social Security, no limit on their earnings. When somebody is younger than full retirement age, there is a limit on how much they can make from work. But even though there's no limit on their earnings once they reach full retirement age, some people still don't take the benefits then. That's because of something called delayed retirement credits. For each month from your full retirement age till age 70 that you don't take a retirement benefit from Social Security, when you do take that check, they'll add something extra called a delayed retirement credit. Now they add it for each month you wait. But over 12 months, it totals 8 percent. So, if your full retirement age is 66 and you don't take those benefits until 70, four years later your check would be 32 percent higher for the rest of your life. Eight percent for each of those four years. But don't wait past 70, they add no more extra credits past 70. And also, those delayed retirement credits are only applied to retirement benefits, which are the benefits we see based on our own work. Delaying a spouse's or widow's benefit past a full retirement age would not increase those.

Mike Treske: [00:11:23] Obviously a lot to consider, but some great benefit by waiting as you indicated.

Tom Clark: [00:11:27] Oh yeah. You know, where else are you going to get a guaranteed 8 percent return on investment, right? It then goes up with inflation with cost living raises the rest of your life. So...

Mike Treske: [00:10:51] Tom I'm sure that we could probably go on for hours and hours but unfortunately we're out of time on this podcast. But I want to thank you for joining us and ask you, would you come back?

Tom Clark: [00:11:01] Any time. Be glad to do it.

Mike Treske: [00:11:03] Fantastic. Well again, thank you for being our guest on the “Plan for 100” podcast. We appreciate your time and hope you'll see us again. Take care, everybody.

Voice Over: [00:11:12] Thank you for joining us for AIG's "Plan for 100" podcast. For more information, please visit our website, planfor100.com.

Part 2

Voice Over: [00:00:07] Thanks to medical advances and healthier choices, Americans are living longer, more active lives well into their 80s, 90s and beyond. Welcome to "Plan for 100," a new podcast from AIG. This podcast series is devoted to educating and empowering Americans to prepare for longer lives and retirements that could last four decades or more. Our podcast aims to help you "plan for 100," no matter what age you are today.

Mike Treske: [00:00:37] Hello and welcome to the AIG podcast, Plan for 100. I'm your host, Mike Treske, executive vice president and chief distribution officer for AIG annuities and mutual funds. It is my pleasure to be joined today by Tom Clark. Tom is a nationally recognized Social Security expert and worked for the Social Security Administration for 33 years. During that time, he gave more than 6,000 presentations on Social Security. Tom has appeared on more than 200 TV shows about this topic, and written columns for numerous publications. He also helped us at AIG, creating one of our most popular programs ever, "Social Security Savvy," and a benefits calculator that matches that program. Tom, welcome.

Tom Clark: [00:01:23] Thanks, glad to be back.

Mike Treske: [00:01:24] So I know there's a lot of moving parts, and there are some more complex things that enter into Social Security. I wonder if you could tell us a little bit about the Windfall Elimination Provision and the government pension offset law.

Tom Clark: [00:01:38] OK, and to make it clear right from the start so we don't confuse anybody, these only apply to people who receive a pension based on work that was not covered by Social Security. If you've always paid into Social Security, if you get a pension, that won't affect your Social Security at all. This is only pensions based on work where a person did not pay into Social Security. And there's two laws that can affect the benefits, one called the Windfall Elimination Provision. That addresses how receiving that kind of pension, a pension based on work not covered by Social Security, can affect the person's Social Security benefits on their own work, if they've got their 40 credits. The other law the government pension offset, addresses how that kind of pension can affect any Social Security spousal benefits they receive. Just talking about the Windfall Elimination provision first, if somebody has their 40 Social Security credits, but also receives a pension based on work not covered by Social Security, they may have their benefits computed definitely and probably will. The exceptions I'll talk about in a minute, but they probably will. And the reason they compute their benefits differently is because they're receiving a pension based on work not covered by Social Security, goes back to the [brave] (unintelligible) way they computed benefits ever since Social Security started. While it's true the more you make and the more you earn under Social Security, the higher your check is. That is true. This is social insurance. So, the low-income worker gets a better deal in the computation than somebody who made more money. So, the lower income worker's check is not as big as somebody who made more money, but they get a higher percentage of their earnings replaced with Social Security. Somebody who works outside of Social Security for most of their life, they look like a low-income worker to Social Security because Social Security just looks at those Social Security-covered earnings in the computation of that benefit amount. And those earnings over a lifetime for most of those people were so much lower than genuine low-income workers have, those people got a bigger advantage before the windfall law was passed than real low-income workers got. They got such an advantage that before the windfall provision was passed, I saw a lot of people in that situation that got back every dime they paid in Social Security taxes in their whole lifetime. They got it all back in their first five checks. Where somebody paid in Social Security their whole working lifetime, it takes them about five years drawing their checks to get back all their taxes. So what the windfall law does is, it takes away that advantage low income workers have from people who are not really low income workers. It's a very fair law. They still actually get their money back faster when they're affected by windfall than somebody paid in a whole lifetime. But with a windfall they don't get all the money back in the first five checks any longer. Now somebody who has 30 years of full-time work under Social Security, they don't look like a low-income worker. And that windfall won't apply to them if they have between 21 and 30 years of work under Social Security, of a certain amount of full-time work would meet that, then they're affected less by the windfall as they get closer to 30, the credit phases out. But if somebody does have their 40 social credits, and also received a pension based on work not covered by Social Security, they will receive their own Social Security and they will receive a fair amount based what they paid in. And you know, that's a very quick overview, because it's very complex, of course. Now the other law, called government pension offset, that applies to benefits on their spouse's record, and once again, the purpose of this law is to treat people who don't pay into Social Security equally with those who do. Because people who pay into Social Security on all their jobs, they have an offset, their own Social Security offsets what they can draw on their spouse's record. If they're due, entitled to more, based on their own work than they can receive on a spouse's record, that's what they get, is at their own higher benefit, they can't receive anything on the spouse's record. When somebody gets a pension based on work not covered by Social Security, that pension replaces two things. Part of that pension replaces Social Security. The other part replaces a private pension. Those pensions replace both. That's why they're all much bigger than people get who pay into Social Security. Matter of fact, not many people have pensions any longer, but of those that do, the ones that are based on work outside of Social Security are generally more than twice as big as the pensions where people do pay the Social Security. They're supposed to be bigger because once again they're replacing Social Security plus a private company's pension, and that's why they're bigger. So, it's part of those pensions based on work not covered by Social Security, replace Social Security, then part of them offset what they can draw on their spouse's record, just like somebody that's on Social Security does. The government pension offset just gives the people who don't pay the Social Security, gives them the same offset people have who do pay the Social Security. And once again, that's kind of a quick overview of a law, of a complex law, but that's why the pension offset is in there, to give them the same offset people have that paid into Social Security. Because before these laws were passed, people who didn't pay into Social Security most of our life got a better deal out of Social Security than people who did. And these laws were passed just so we would be treated equally.

Mike Treske: [00:06:20] So to help simplify the understanding and maybe recognize benefits and things of that nature, I want again to thank you for helping us create our "Social Security Savvy" program at AIG and the related benefits calculator. So, why is it important for people to use a tool like that to calibrate their benefits, and, as a rule of thumb, how many years before retirement should people really start to be thinking about this?

Tom Clark: [00:06:47] I really think they should probably start looking about 10 years before, because using a calculator like this, kind of helps them decide when to retire. You know, I think a lot of planners kind of hope that when you use a calculator like this that somebody decides, I might need to work a little longer, when they realize how long they actually may live, and how much money they may need. Maybe they're thinking they should work longer than retire when they first planned, and it's so important to know how much you were going to have. You know, if you're going to carry a little bit of debt into retirement, are you have enough income to service that debt? Things like that. Is your house paid for or not? Do you need what your house is paid for before you retire? This calculator and the "Savvy" program can help somebody kind of make those decisions. And AIG's calculator, I'm very proud of it. As you said, I helped develop it. I'm very proud of it, because it does a couple of things that most don't. And then maybe no other calculator out there does. One is, AIG's calculator will actually compute what I just talked about, those complex laws, the windfall benefit provision and government pension offset for people that are outside of Social Security. It actually will help them compute that and see what the effect of the actual effect in dollar amounts it is on their, on their Social Security. And that's very important. And I don't know of another one that does that. Also, widows and widowers have some options that do not apply if somebody's spouse is living. If your spouse is living, almost always you have to take your own Social Security first. And that offsets what you can draw on your spouse's record, but a widow or a widower can take whatever benefit they want whenever they choose. For example, let's say that their own is higher than the widow's benefits. They could take the widow's benefits when they retired or at full retirement age, once you're at least 60, and draw that lower benefit, don't touch their own yet, let it keep growing,in that case, it'll grow to like age 70 when it comes to late retirement, because they can draw the widow's early and let theirs keep growing to 70 and switch over to their own maximized benefit at that point. Or if the widows were higher. Say the widow's were higher and they retired at 62, they could take their own lower benefit at 62 and they let the widows keep growing. Switch over to that maximized check for retirement age. So, it's very helpful to have a benefit calculator that will actually show them all their options, if they took the lower benefit first. How much more they get on the higher benefit by waiting and taking it later, and then based on how long are they going to live, how much more money they would receive if they did that. And once again, I don't know of any other calculator that does that. That's very helpful for widows and widowers.

Mike Treske: [00:09:34] Tom, again on behalf of all of us at AIG, thank you for sharing your knowledge. We hope you'll come back.

Tom Clark: [00:09:40] Yeah, thanks. Thanks for having me back. Be glad to come back anytime.

Voice Over: [00:09:43] Thank you for joining us for AIG's "Plan for 100" podcast. For more information, please visit our website, planfor100.com.