Commissioner O'Malley -- You Can Rescue the Retirements of Tens of Millions. Just Rewrite Social Security's Dec COLA Letter, Truthfully, as Described Here.
Social Security is about to mail its annual COLA letter. It will falsely tell tens of millions of early beneficiaries that they will lose most/all benefits from earning too much.
Dear Commissioner O’Malley,
I am currently Vice President of the Social Security Commissioner, Martin O’Malley, Tough Love Fan Club. My co-author, Terry Savage, of Social Security Horror Stories, is currently President. We rotate positions weekly.
Our fan club honors your decisive moves to limit Social Security’s abusive clawbacks, which were so vividly exposed a year back on 60 Minutes. Thanks to you, clawbacks of eligible beneficiaries are limited to 10 percent of their benefit.
This, unfortunately, does absolutely nothing for tens of millions of clawback victims who are not eligible to receive benefits. Most of this number are disabled or impoverished workers — the most vulnerable of American citizens who Social Security continues to financially abuse due to the system’s own mistakes or expectations of compliance behavior that is physically impossible, due to mental impairments, for many of these victims.
These helpless Americans comprise roughly two thirds of all Social Security clawback victims. Hopefully, the next Congress will enact a clawback statute of limitations that you and we passionately advocate. Surely draft legislation to that effect has already been provided by your legal staff to relevant Congressional committees. If not, such draft legislation should be immediately transmitted.
Given the change in Administration, you may have only two months left to fix ongoing problems at the Social Security Administration (SSA). Fortunately, there is extremely important, very low hanging fruit you can pick in minutes.
Tell the Truth about the Earnings Test — a Confiscatory Tax on Work that Isn’t
If this December’s SSA letter announcing the 2025 Cost-of-Living Adjustment — a letter being sent to 70 million plus beneficiaries — is like last year’s, it will state the following:
Working and Getting Social Security at the Same Time
You can work and still get Social Security benefits. If you are at full retirement age or older, you may keep all your benefits no matter how much you earn ... If you are younger than full retirement age at any time in 2023, there is a limit to how much you can earn before we reduce your benefits ...
The 2025 earnings limit for people under full retirement age all year is $23,400. We deduct $1 from your benefits in 2023 for each $2 you earn over $23,400.
The 2025 earnings limit for people reaching full retirement age in $62,160. We deduct $1 from your benefits in 2023 for each $3 you earn over $62,160 until the month you reach full retirement age.
No Mention Whatsoever of the Adjustment of the Reduction Factor
Note the absence of any mention whatsoever of the fact that the specific benefits lost to the Earnings Test (ET) are returned at full retirement age (FRA) based on an actuarially calculated, permanent increase in the specific benefit whose early payments were confiscated.
As you know, Commissioner, the provision mandating the ET’s rebate at FRA is called the Adjustment of the Reduction Factor (ARF). This rebate is meant to leave those hit by the ET whole, on average. Actually, the ARF overcompensates for the ET. Why? Because households value Social Security benefits for their longevity insurance value, not their average/actuarial value.
Indeed, the ET represents a major subsidy to work. But Social Security continues, as it has for decades, to mislead workers into viewing the ET as a confiscatory tax on work.
In short, Commissioner O’Malley, your Agency has been pro-actively telling millions of older Americans the following falsehood:
Feel free to work. But as soon as you start earning more than the typical McDonald’s worker, we’re going to penalize you big time. For every dollar you earn above $23,400, say goodbye to 50 cents of benefits (33 cents above $62,160 in the year you turn FRA earned through the month FRA occurs).
Take a laid-off, age 63 Alabama resident named George who is in the 22 percent federal income-tax bracket, the 5 percent Alabama state-income tax bracket, and takes the standard deduction. George’s boss, Sandra, just asked him to return to work at his $50,000 per year job.
Let’s add together George’s marginal taxes on working, starting with the 50 percent incorrectly perceived ET. George’s total perceived marginal tax rate is the 50% ET, plus the 22% marginal federal income tax, plus my assumed 11% extra federal income tax on George’s receipt of Social Security benefits, plus the 15.3% FICA tax (slight overstatement as the so-called employer half is not subject to federal income tax), plus Alabama’s 5% state-income tax, and, finally, plus Alabama’s 4% state sales tax, which Alabamians face when they spend their paychecks. That’s a total marginal tax rate of 107%!
George’s response to Sandra, “I’d love to return to work. I’m bored-to-death bowling every day with my equally bored-to-death bowling buddies. Plus, I’m starving living off Social Security and what’s left of my assets. But now that I’ve taken Social Security, it makes no sense. After I earn above $23,400 next year, I’d be working exclusively for the Social Security Administration, Uncle Sam’s income tax, and the State of Alabama! In fact, I’d have to dig into my savings to fully pay the extra taxes.”
Obviously, neither George nor Sandra know a thing about the Adjustment of the Reduction Factor. Nor, for that matter, do the vast majority of early retirees let alone our nation’s hundreds of thousands of personal financial advisors. But most surely know about the Earnings Test. It’s impossible to miss, Commissioner O’Malley. It’s front and center in your Agency’s COLA letter.
Telling the Truth About the Earnings Test
Here are two additional bullets that need to be added to this December’s COLA letter’s description of the ET.
The Earnings Test does not, for almost all workers, comprise a tax on earning money above its thresholds. Every dollar of the specific benefit lost to the Earnings Test will be reimbursed, on an actuarial basis, in the form on a higher, permanent benefit paid to you after you reach Full Retirement Age. This applies to retirement benefits as well as other benefits whose amounts were reduced due to early receipt.
Hence, the vast majority of early beneficiaries subject to the Earnings Test should view the Earnings Test as affecting their cash flow, not the lifetime benefits they can expect, on average, to receive. Only those who will collect a different, higher benefit after FRA, such as a widows benefit, face a real work disincentive from the Earnings Test.
Why Adding these Bullets Is Vital
As you know, Commissioner, America is facing a retirement crisis. Workers, having saved far too little inside and outside retirement accounts, are retiring or being forced to retire far too early. Indeed, the vast majority of workers take Social Security before age 65. This is a massive financial mistake, which is dramatically compounded by Social Security’s Earnings Test deception.
As shown in this paper, the typical retiree is leaving $182,000 in lifetime present-value benefits on the table by a) taking the right benefits at the wrong time (typically years too early), b) taking the wrong benefits at the wrong time, and c) not taking benefits to which they are eligible. Handling Social Security properly is an ongoing issue of major public concern. Peter Coy just wrote about the problem three days ago in the NY Times.
The study I’m referencing uses Federal Reserve data and was conducted using a research tool, The Fiscal Analyzer (TFA), which the Federal Reserve Bank of Atlanta and the Sloan Foundation have funded over many years. The TFA’s underlying Social Security lifetime benefit maximization software is that used in my company’s Maximize My Social Security (MMSS) and MaxiFi Planner economics-based personal financial planning software tools.
The financial industry adds insult to injury by persuading early retirees to take Social Security far earlier than is almost always best. They do this to keep early retirees from taking early retirement account withdrawals. Translation? The financial industry ends up with more money to both “manage” and on which to charge fees.
Assisting early beneficiaries to earn far above the ET threshold will rescue untold numbers of retirements. Hence, fixing this year’s COLA letter is the most important thing you can do in your remaining time in office.
Eliminate All Life Expectancy and Actuarial References on SSA.gov
Commissioner O’Malley, you are running the world’s largest insurance company. No insurance company tells its clients to compare insurance premium with expected insurance payouts. If they did, no one would buy insurance of any kind.
Take homeowners insurance sold by XYZ, Inc. Suppose XYZ told all their customers, on their website:
Compare the average payout you’ll receive from fire and other losses and with the premium.
This type of “marketing” would drive XYZ out of business. Premiums always exceed expected payouts due to loads — the costs insurance companies face in running their businesses.
Homeowners have only one house, not 10,000 that can burn to the ground. They can’t play the averages. This is why they are willing to pay insurance company loads — to have protection against catastrophic risk. The catastrophic risk insurance SSA sells is against living to 100. I.e., you are selling excessive longevity risk insurance. None of your current and future customers is going to die on time, i.e., at their life expectancy.
In what way are you “selling” longevity insurance? By letting people postpone collecting their real annuities in exchange for a higher real annuity in the future. The money SSA saves in the short run is the premium people pay for the additional real annuity they’ll receive later.
Commission O’Mally. Please click on this link and confirm that the following is, indeed, the first sentence you see:
Choosing the claiming age that maximizes the expected present value of lifetime Social Security retirement benefits requires, among other criteria, the specification of a rate to use when discounting the future benefit payments for each claiming age.
Or go here and find SSA’s life expectancy calculator. Do you think a homeowners insurance company would have a fire loss expectancy calculator on its site? Absolutely not. It would focus on the small, but critical problem of your house burning to the ground.
SSA’s focus on life expectancy is beyond awful. Frankly, it reflects an agency that has been dominated, from the start, by actuaries with no training in the economics of insurance or longevity.
Expected present value is an actuarial calculation. Economics says to value benefits based on present, not expected present value, and to do so through the beneficiary’s maximum age of life. This was shown 50 years ago in a seminal article by Israeli economist, Menachim Yaari. Yaari’s paper laid out the economics of life insurance, annuities, and how to properly value income streams like Social Security. Every claims rep at SSA should be taught the essence, if not the mathematics of the Yaari article.
PLEASE have someone search every webpage on your site and all your communications for the words expected, actuarial, life expectancy, and any other term that suggests to the public that they can play the averages when it comes to what is possibly the largest financial risk facing the elderly — excessive longevity. And then eliminate all such statements and replace them with proper economic discussions.
Encourage the Public to Use Private Tools to Properly Maximize their Lifetime Social Security Benefits and Understand both the ET and the ARF
Commissioner, please consider recommending households use reliable private tools in optimizing their Social Security decisions. My company’s Maximize My Social Security tool is light years more accurate than ssa.gov’s calculators.
To begin, it doesn’t make crazy baseline assumptions, specifically assuming zero future inflation (Prices rose by one quarter over the past five years.) and zero future average wage growth (The National Average Wage Index rose at a compound 4.4 percent per year rate over the last 73 years.) It also handles all family benefits, which your calculators can’t do because of privacy restrictions.
Those using MMSS who have yet to file for Social Security would immediately see the generally huge dollar gains from maximizing their properly valued lifetime benefits. And virtually all early beneficiaries would see that losing benefits to the Earnings Test will raise, not lower their lifetime benefits. How so? MMSS incorporates the Adjustment of the Reduction Factor. Hence, early beneficiaries running MMSS see from its reports that earning “too much” prior to FRA reduces their annual benefits before FRA, but, unless they hop onto a higher benefit, raises their benefits after FRA.
Final Thoughts
Commissioner O’Malley, You have done miraculous things at Social Security that will redound to the benefit of the American public for years to come. Congratulations and, please, fix your COLA letter!