Give Away Your Social Security Benefit
By Tom Wall
Some call social security benefits an entitlement. This is actually a politically-charged term, but it’s derived from the notion that one is entitled to it – and they are if they paid into the system. Unlike other social programs, one only receives social security income during retirement if they paid social security wage taxes into the system during their working years. The benefit they receive is in proportion to how much they earned, up to a certain cap. However, these benefits are only paid while the retiree is alive, and dying young means leaving a lot of potential benefits on the table. A surviving spouse may continue to receive a portion of benefits, but only to the extent they exceed what he or she could otherwise collect on their own.
Assume in 2022, you’re single and earning $147,000 (the maximum wage base for social security 2022, after which no social security tax is collected). At a 6.2% social security tax rate, that means you’re paying $9,114. Your employer is also paying the same amount, with a total of$18,228 being contributed on your behalf. If you happen to be self-employed, you’re paying both portions! But let’s assume you’re like most people, employed by someone else, and you’re earning more than the taxable wage base ($147,000 in 2022, which changes with inflation each year). Let’s also assume you’ve done that for 40 years straight – at $9,114 per year, that’s $364,560 you’ve paid over time in today’s dollars. That’s a lot of money, and a good reason why people feel strongly about collecting their benefits they earned.
To be more precise and really make my point, let’s talk about opportunity cost. Social security tax rates and wage bases have shifted slightly over time, but adjusting for 3% inflation and earning at least the full wage base for the last 40 years, that’s about $213,000 that one would have paid in under today’s rules. Had they invested those social security tax dollars in an account that averaged 8% over that time, they could have accumulated over $1,120,000! And while that amount of money is unlikely enough to able to mimic the guarantees of social security (the long-term value of social security benefits is pretty amazing), it will pass to beneficiaries upon death. In the social security system, however, remaining benefits are redirected to other retirees. That’s how insurance works, and this is a social insurance program.
Imagine you’re working with a client of considerable means, perhaps a low-seven-figure total net worth at retirement. Between their home, retirement accounts, and other investments, they’re going to be just fine. They are approaching age 62 and considering whether they should start taking benefits or delay until age 70 as many articles suggest. Delaying until 70 is a great strategy to maximize benefits over time, mitigate longevity risk from the portfolio, preserve surviving spousal benefits, etc. However, in order to break even, one must typically live beyond 80, which only about 60% do. See the chart below.
To take things a bit further, imagine you started taking your social security benefits at age 62 and simply invested the benefits. With modest returns of only 6% it would take until age 88 before, at which point your probability of being alive drops to only about 30%. Fast forward on the chart below to a time in your 90’s when you feel like the advantage is significant enough (say, 95?), and you can see that only about 1 in 15 retirees will make it that far. And do you think they’ll spend even one fleeting second caring about that advantage then? In reality, no retiree is going to take their check and the next day swing it into their investment accounts, but that income will mean they can leave that much invested to keep growing. It’s just semantics.
Here’s a chart of breakeven ages at various assumed rates of return. The more an investor thinks he or she can earn in retirement, the greater the case for taking benefits early:
So, what does this have to do with whole life insurance? Well, what if one could turn their social security payment into an asset that could be passed to their beneficiaries? Through the purchase of whole life insurance, one gets a permanent death benefit that is roughly the present value of expected future social security payments. If the social security beneficiary dies shortly after beginning benefits, the death benefit of the whole life insurance policy delivers a large lump sum to their beneficiaries. Eventually, policy cash values will exceed the cumulative redirected social security payments. Additionally, don’t forget that SSI benefits are inflation-adjusted while whole life premiums are level, so the difference grows each year and provides rising net income for the retiree. Furthermore, if one dies young and leaves that death benefit behind, spousal social security payments will continue, if applicable.
Do you have mass-affluent clients approaching retirement? They’ve paid a lot of money into the system, with expected social security benefits that would take millions to create on one’s own. While waiting to receive benefits is great advice for retirees who are heavily reliant on the system, wealthier clients should weight the options more carefully. By having educated conversations around creating a legacy and remaining more fully invested, the value of taking benefits can be much more attractive. This is an easy way to find $20,000-$30,000 premiums and add a ton of value for your clients. With a long-term care rider, you could even use the social security system to take that risk off the table and unlock the value of savings that otherwise may have been held onto just in case.
