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Effective claiming often means overcoming the biggest bar-
rier — clients’ behavioral biases. Common objections include Only about 4% of retirees make
“it’s my money and I want it now,” “Social Security is going
bankrupt,” or “my mom/dad/grandparent died at 72 so I want the optimal Social Security
to get some of my money back.”
Advisors can overcome these biases by using an objective claiming decision. This results
fact-based process which recognizes that Social Security is an in a loss of wealth of roughly
asset and that the goal is to maximize the asset’s value.
$2.1 trillion for current retirees
Claiming Decision & Retirement Security
Social Security provides not only income, but also crucial that made a suboptimal
protection against the risk of outliving one’s assets. This is
particularly important today since people are living longer claiming decision.
than ever, and rising health care costs often lead to unexpected Additional United Income
expenses that can drain savings.
Higher-income workers have made the biggest gains in estimates demonstrate that
longevity in recent decades, so planning horizons for higher-
income clients should be longer than for the average American. future retirees could lose an
An important aspect of Social Security planning is evaluat-
ing whether the individual is likely to be alive in their 80s and estimated $3.4 trillion in
90s. A question used in the University of Michigan’s Health potential income that could
and Retirement Study, which asks respondents how likely it is
that they will live beyond age 75, does a reasonable job of pre- be spent in retirement due to
dicting actual longevity. A client in poor health, who smokes,
is obese or carries another risk factor associated with reduced suboptimal claiming decisions.
longevity, will see less benefit from delayed claiming.

Protection against the erosion of purchasing power is particu- Further, no COLA can occur in subsequent years until the CPI
larly important today as people are living longer than ever before exceeds the previous high point. This is why there was no COLA
and rising health care costs often lead to unexpected expenses in 2010, 2011 and 2016.
that can drain savings in retirement.
To keep inflation from eroding purchasing power, benefits are Can Social Security benefits decrease?
purposefully designed to increase with price inflation and with- Though benefits can increase, it is important to note that Social
out political interference. Security benefits never decrease, even during periods of defla-
Legislation enacted in 1972 required that beginning in tion and a decline in the CPI.
1975, future cost-of-living adjustments to Social Security and Even though the United States is currently experiencing high
Supplemental Security Income (SSI) benefits be tied to the unemployment, low economic growth and record high levels of
Consumer Price Index.This also ensures that COLAs do not national debt because of the pandemic, Social Security benefits
require yearly congressional action and are not tied to the direc- appropriately increase purchasing power for retirees.
tion in which the political winds blow. In some years, the COLA can be quite large. For example, the
COLA for 2009 was 5.8%, the largest increase since 1982.
How are Social Security COLAs determined? However, this larger than normal COLA in 2009 was primarily
The Social Security Act specifies that any COLA be based a result of significant increases in the price of gas and energy
on the percentage increase in the Consumer Price Index for during the spring and summer of 2008, when prices for gaso-
Urban Wage Earners and Clerical Workers (CPI-W) from the line reached $4 per gallon.
third quarter of the previous year to the third quarter of the In other years, the COLA can be low or even 0%. In 2010 and
current year. 2011, there was no COLA for Social Security beneficiaries after
If a COLA is warranted, it shows up in benefit checks begin- gas and energy prices declined, resulting in a lower CPI.
ning the following January. If there is a decrease in the CPI, or If there is a decrease in the CPI (or even deflation), no COLA
deflation, no COLA is provided. is provided and no COLA can occur in subsequent years until

MARCH 2021 INVESTMENT ADVISOR 29