Social Security Disconnects

I have recently been working on a project with colleagues where we compared research-based retirement planning recommendations with what people actually do in real life. My assigned topic was Social Security and below are six things that I discovered during my research literature reviews and online searches:

¨     The Social Security claiming age decision is complex and requires an analysis of unique personal factors including health status and financial need.

 

¨     Many American households have too little wealth accumulated to retire successfully before their full retirement age or FRA (age 66 to 67, depending upon year of birth).

 

¨     To maximize lifetime Social Security benefits, workers should consider delaying their receipt of benefits to at least FRA if they foresee average or better life expectancy and it is affordable to do so.

 

¨     Marital status is a key variable. Recommendations for claiming age vary for single individuals vs. couples. A common recommendation was for men to consider delayed claiming while women claim as early as possible.

 

¨     There is a disconnect between simulation research results and “real world” practices. The most popular Social Security claiming age is 62 and, in 2017, only 4% of men and 6% of women waited to claim benefits at age 70.

 

¨     There are viable strategies to stop working and still postpone Social Security to receive larger benefits later. Options include tapping IRA balances and using reverse mortgages as sources of “stopgap” income.

 

More research is needed to determine exactly why people claim Social Security benefits when they do. Possible explanations include spousal pressure to retire, mistrust of the federal government, financial need, unemployment, uncertainty about future health status and life expectancy, and “take what you can now” attitudes.

Financial Education Advocacy Efforts Are Increasing

During the past six months, a number of states have passed personal finance course mandates for students in middle school (e.g., New Jersey) and/or as a high school graduation requirement. Other states are considering similar legislation and/or establishing or upgrading their personal finance curriculum content standards.

The thinking behind many of these laws is that teaching financial “rules of the road” now can prevent costly problems later. Case in point: almost two-thirds (63%) of American adults could not answer more than 3 of 5 questions correctly on the FINRA National Financial Capability Study knowledge assessment.

There is, perhaps, no better time to be involved with financial education than right now. Stars have been aligning recently with respect to states approving course mandates, new professional development opportunities for teachers, and increased availability of interactive learning activities that engage students and foster retention.

In addition, several national financial education advocacy efforts with BHAGS (big, hairy, audacious goals) are now underway. This can only bode well for future expansion of financial education mandates, strong curriculum content standards, and student outreach nationwide.

Next Gen Personal Finance (NGPF) set a BHAG called Mission 2030: “100% of U.S. high schoolers will have guaranteed access to at least one semester of personal finance instruction before graduation.” Over the past five years, this California-based non-profit has been providing high quality materials and professional development for personal finance teachers.

The Jump$tart Coalition for Personal Financial Literacy advocacy effort, Project Groundswell, has a goal to increase classroom-based financial education and teacher training in personal finance by 25% by the end of 2025. The basic premise of Project Groundswell is to harness the power of Jump$tart partners, parents, and other advocates to “make the case” for financial education. An aligned web site, “Check Your School,” allows users to check if their local school has personal finance courses and to add a school if courses exist but are not listed.

Financial Education: Does It Work?

The best way to gauge the effectiveness of financial education programs is to study how they change the financial practices of participants. The best studies investigate causation, not correlation, using large randomly selected samples and rigorous statistical methods. Below is a summary of three recent research studies:

¨     Mandates Matter- Research by Carly Urban and Christiana Stoddard at Montana State University examined the causal effect of financial education graduation requirements on college borrowing behaviors. Their study found that students in states where financial education is required to graduate from high school make better financial aid decisions as college freshmen; e.g., applying for grants and selecting lower-cost federal loans.

 

¨     Payday Loan Avoidance- A study by Melody Harvey at the University of Wisconsin-Madison found that state financial education mandates were associated with a decreased likelihood of costly payday loan borrowing. Specifically, young adults who were required to take a personal finance course in order to graduate are 4% less likely to take out payday loans than peers who weren’t required to do so.

 

¨     Long-Term Impacts- Research by Jamie Wagner and William Walstad (University of Nebraska) found that financial education appears to have more positive and stronger effects on long-term behaviors (e.g., having an emergency fund, owning investments, and calculating retirement savings) for which the consequences are not fully realized until later in life. Conversely, people often learn about short-term behaviors (e.g., paying monthly bills and paying off credit cards) by experience because there is regular feedback and a greater opportunity to learn through “the school of hard knocks” (e.g., paying interest and fees on late credit card payments).

Robo-Advisory Industry Trends

At a recent Jump$tart Coalition Partner’s Meeting, Chris, Lee, the Connecticut State Coalition leader and a financial advisor, spoke about trends in the robo-advisory industry. “Robo-advisor” is the term used to describe digital platforms that provide automated financial planning and investment advice. The advice is generally driven by algorithms with little or no human interaction. Clients complete an online survey on which advice is based.

Some future predictions for robo-advising are as follows:

¨     Large non-financial firms (think Google and Amazon) will enter the robo-advising field as they have already done in many others (e.g., Amazon’s purchase of Whole Foods supermarkets in 2017).

 

¨     Artificial intelligence will be increasingly integrated into robo-advising platforms so that they will become more “human-like” and appealing to consumers.

 

¨     There will be increased government regulation and “fee compression” and profit margins for advisors will be squeezed. Lower fees will increase access to financial advice for lower net worth and younger investors.

 

¨     There will be new technological advances (e.g., a “real time” analysis of the cost of buying something with minimum payments) and more mobile-friendly platforms.

 

¨     Increased blending of human financial advisors and technology components in a “high-tech and high-touch” combination of services. Human advisors can help people keep their emotions in check and stay on track.

Medicare Fraud: Red Flags to Avoid

I serve on the Advisory Committee of the Senior Medicare Patrol of New Jersey. SMP-NJ receives federal funding to prevent and investigate Medicare fraud. Below are three types of fraud that were discussed at a recent meeting:

¨      Medical Brace Scams- A health care fraud involving $1.2 billion in fraudulent payments for medical braces was recently shut down. Beneficiaries are urged to contact Medicare authorities if they receive unneeded durable medical equipment purportedly ordered by doctors that they have never seen. Call 1-800-MEDICARE as soon as possible to report a scam.

 

¨ Phone Call Scams- The best defense against phone calls by fraudsters is to not answer the telephone if you have caller ID and do not recognize the number. Instead, let your answering machine pick up the call and delete messages that do not come from legitimate callers. Another option is to use call-blocking services such as Nomorobo and Hiya.

 

¨ DNA Testing Scams- “Free DNA testing” is another scam being directed against Medicare recipients. Following the popularity of services that provide DNA testing for people to discover their family background, fraudulent companies are touting DNA tests to Medicare beneficiaries as a “preventative service.” In reality, Medicare will pay for genetic tests only in very limited circumstances.

 

If you see something, say something. Medicare fraud costs taxpayers millions of dollars each year. SMP-NJ director Charles Clarkson noted that, if beneficiaries and/or their caregivers do not report scams such as those noted above, Medicare has less money to pay legitimate claims.

Every American has a stake in fighting Medicare fraud.