In part 2 of a 2-part series, Sean Fullerton, senior DC (defined contribution) investment strategist at Allspring Global Investments, and Philip Chao, founder and chief investment officer at Experiential Wealth, take a deep dive into the topic of social security and its history, its challenges, and its opportunities.
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Sean Fullerton: I’m Sean Fullerton, senior DC (defined contribution) investment strategist at Allspring Global Investments, and you’re listening to On the Trading Desk®. Coming up is part 2 of a 2-part discussion I had with Philip Chao, founder and chief investment officer at Experiential Wealth. Philip and I take a deep dive into the topic of social security and its history, its challenges, and its opportunities.
Sean: So, let’s start with Social Security. So how do you talk to plans about Social Security? How should participants think about it?
Philip Chao: So, Social Security is probably the single most important, universally available lifetime income. And that when we are getting closer to retirement, we start looking at that Social Security income statement and say, wow, I’m going to get this for the rest of my life. Oh, I’m going to get that for the rest of my life. Social Security, I think, is a very important part of the average American workers’ retirement income. And the lower your income, the more it replaces, of course, and the higher income, the smaller amount that it replaces. So how do we talk about it? We talk about that being one of the, it used to be a three-legged stool and now it’s sort of a two-legged stool. The problem with a two-legged stool is there’s no stool. You just lay down. And that you need to be more responsible for that one leg that you are responsible for. Actually, you’re responsible for all of it. You’re responsible for the Social Security piece because you will earn and put your 7% in and then your leg is you’re responsible. So, it’s really you’re self-funding the entire thing. And when you are, you are fully responsible with the outcome. And people are not thinking about it that way, either. And so, it’s that if you have to think about it, you want to construct your portfolio that you can think of Social Security as a bond, right? It’s a bond investment that will spread out income over the rest of your life. If it replaces your desired income by 60% or 70%, depending on your income, then the remaining amount you are fully responsible to make up.
Sean: Let’s talk a little bit about why Social Security is good. And even saying that, that’s, I guess, a controversial statement. There’s politics that get involved with this topic. But some things that I think are pretty great about Social Security are that it’s inflation-indexed, which is absolutely huge in the current environment. I think the adjustment to Social Security income is rising to what, is it like a 9% or 8% increase. That is not something you can get from an annuity currently. You can get a cost of living adjustment, but you can’t get inflation indexing. So that’s huge. And two, your counterparty risk. If the U.S. government is defaulting on Social Security, we probably have bigger problems going on. What are some of the things, Philip, that you would say are good and also maybe things that aren’t so good about Social Security?
Philip: I think Social Security, if you go back in history, if I understand correctly, when it was first floated, there were a lot of people’s pushback as another income redistribution, all the standard things that talk about when government comes in to try to do something for the masses. Without going into politics, without saying spending is good or bad, I think that today, if you tell people that the government is going to take away Social Security, they’ll be even more pushback for taking it away. And that is sort of evidence to suggest that Social Security, regardless, if we like it, we don’t like it, we’re not giving it up. So overall, I think Social Security, with all its flaws potentially and the cost and so on, becomes now the bedrock that nobody has the political courage to really try to challenge that. So, with that reality, we need to build onto the goodness that Social Security does provide, which is a predictable stream of income that replaces a specific percentage of your income plus cost of living adjustment. There is nothing that comes close. Even if we have annuities, it’s not going to do it. It may have some adjustment, but nothing like dollar-for-dollar adjustment. So, it is a bedrock of folks’ lifetime income at post-retirement. The question is how big of that rock? Is it big enough for you to stand on, sleep on, and rest on? Or is this a piece of your overall foundation and you need to be responsible for the remaining piece?
Sean: But I do want to address this idea that Social Security is going away entirely. Folks who are in a younger demographic, it’s very common to hear people say, oh, Social Security is not going to be there for me. Now, based on the research I’ve done, reading from Social Security experts, my impression is that saying Social Security is going to fully go away is a fairly extreme thing to say because certain relatively small tweaks either to get a little bit more money into the Social Security system or to reduce benefits like by raising the retirement age, etc., could put Social Security kind of back on a fairly responsible financial path. But it’s just one of these things that no politician wants to do until they have to and that’ll probably be maybe in 2035 or whenever it is that we hit that tipping point. Do you have any thoughts about the viability of Social Security? Is that something you hear? How do you address that question?
Philip: At the end of the day, it’s about trust. This Social Security insecurity or distrust in Social Security is a very complex phenomenon because Social Security was set up at a time when people’s average life expectancy was 63 and they said Social Security would pay is 65. Never thought about people live to age eighties and nineties and beyond and that this is a real phenomenon. And so, we have underfunded all along. We have under-saved, under all that. But it’s always been kind of a wobbly. A bit wobbly, right. And it doesn’t help by showing how underfunded or not funded we are and when it’s going to go bankrupt. We keep talking about bankrupt. So, I think the messaging is terrible. It’s just about trust and about messaging and about understanding why the young folks are saying this is bad. When I was young, I never thought that my knees would hurt. No, it never happened to me. No, no, no. Knee surgery? No. Wait until you get your knee hurting and they say, oh. So that’s a human trait. We cannot feel something if we don’t experience it. So, I totally understand. And that’s why, again, messaging and understanding and educating the importance of some safety net. This is really a safety net. This is not going to make you rich. And I’m going to get you to drive a fancy sports car in retirement. This is a safety net. And thank goodness at least they have something that they can rely on.
Sean: So typically for every year that you delay taking Social Security, the income that you get then for the rest of your life is 8% higher. The difference between retiring at 62 versus retiring at 70, it’s almost an 80% increase in your lifetime benefits that kind of go on for your life. And talking about break-evens is something that has been done in the past. My sense is that that’s not the right way to talk about it because to your point about young people haven’t experienced it, even people who are 60 have not experienced being 80. So, assuming if I’m 60 and I’m thinking about Social Security, how should I address that?
Philip: I think that we do need a fiduciary advisor or FAs (financial advisors) to walk through those choices with people who are near retirement. They should be educated. They should be communicated to. They should have the information, but in a user-friendly way through some kind of experience, on a real one-on-one basis, or some kind of experience through seminars. Employers can give seminars. They give seminars all the time. It’s really a framework. Let’s give them a framework. And what are the pros and cons on taking it early or taking it late?
Sean: Yes. So, you talked about the need for advice and I think that’s true. There’s one study that I read that the average American household misses out on $100,000 worth of Social Security income by claiming at the wrong time. And typically what we see is that many households claim at 62 when in an ideal world, they would claim at age 70. And we as an industry need to be talking about bridge strategies and having people spend down their savings rather than claim Social Security. But I also want to talk about a couple of the other things that that advice is helpful on, which should be deciding when each of you are going to retire, if you have a partner. That can be advantageous for one person to retire earlier than the other. And then also for folks who do claim at 62, they need to be aware that if they then work part time in retirement, if they make more than somewhere right around $19,000, then they’re actually going to see a decrease in their Social Security benefits until they reach age 65. So, all of these are reasons why this simple question can become a bit complex. What would you say, Philip, if you were to give one piece of advice to a plan sponsor or to a participant about Social Security? What would it be?
Philip: If we can use basic sense in explaining Social Security rather than very technical, well, at 62, if you make this and not that, and all of that is great, but what is the premise behind it? Why do we suggest that if you can at all afford to wait, you should because of the following three reasons: bang, bang, and bang. Forget numbers, right? So I would say that a plan sponsor who understands what is the purpose of the plan, what is the objective of the plan, if it is to drive outcome, if it is to help individuals, to have a some semblance of a reality, to provide a lifetime income post-retirement, then I think it makes sense to bring in folks, bring in a platform that can provide an experience for an individual to either do it yourself or to feed it to you in an understandable, simplistic manner that people walk out of that meeting, walk out of that experience, and say, for the first time, I understand and I know what the choices are. Two choices. Wait or not wait.
Sean: Philip, thank you again for being on all of these episodes of our podcast. We really appreciate you being here with us.
Philip: Thank you again for inviting me and giving me this opportunity.
Sean: That wraps up this episode of On the Trading Desk®. If you haven’t listened yet, please check out part 1 of my discussion with Philip as we analyze what success looks like for retirement plans and if “success” is even the word we should be using. If you’d like to read more market insights and investment perspectives from Allspring Global Investments, you can find them at our firm’s website, allspringglobal.com. To stay connected to On the Trading Desk® and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, Amazon Music, or wherever you get your podcasts. Until next time, I’m Sean Fullerton and thanks for listening.