Budget deal reveals differing views on Social Security

Three things are true about Social Security.

The entitlement program provides critical financial support for tens of millions of Americans and remains a vital piece of baby boomers' retirement planning.

The system's long-term fiscal health is in jeopardy, threatening future recipients' benefits unless changes are made.

The differences in how we think and talk about Social Security, from what the goals are to what's "fair," make it difficult to reach public consensus and political agreement on needed changes.

In addition to funding the government for the next two years, the recent budget deal eliminated two so-called Social Security loopholes and spawned a bitter back-and-forth among retirement policy wonks, starkly illustrating the divide in how we think about Social Security.

Financial planners urge clients to delay receiving Social Security benefits as long as possible, because one's payout increases 8 percent for every year an individual waits up to age 70 when benefits max out. But Social Security is designed to be "actuarially neutral" meaning that it should make no difference in the overall lifetime benefits one receives by filing early or delaying.

The recent changes affect a complex set of rules about who can receive retirement benefits and when. The budget bill closed aggressive filing strategies that allowed people to collect Social Security benefits on the earnings history of their spouse while letting their own future benefits grow, boosting potential lifetime benefits by tens of thousands of dollars.

The most vocal critic of the changes is Boston University economics professor Laurence Kotlikoff who said the budget bill's changes to Social Security are akin to "pulling the rug out from under people."

Kotlikoff, president of a financial planning software firm, Economic Security Planning, Inc., and co-author of a bestselling book "Get What's Yours: The Secrets to Maxing Out Your Social Security," strongly opposes closing the filing strategies and the way in which the changes were made.

He says cutting some boomers off while grandfathering others in is unfair and resists the notion that only wealthy retirees benefit from these strategies, saying they give needed flexibility to lower income couples as well.

He predicts several negative consequences from closing the loophole, arguing that millions of baby boomers may be forced to take retirement benefits earlier than they otherwise would have, sacrificing that 8 percent growth and potentially leaving tens of thousands of dollars on the table. Outraged that the senior group AARP publicly supported the cuts, Kotlikoff urged in online posts that boomers boycott the organization, a call which some have repeated in AARP's own public comment section. He also predicted that Congressional supporters will face the wrath of millions of angry seniors "they've just stolen money from."

More ominously, he asserts that the loophole closings were made as part of a hastily crafted budget deal without public hearings or discussion, a signal of Washington's willingness to cut into Social Security out of public view. "If they [Congress] do this today, what are they going to do tomorrow?"

Closing the filing loopholes was not a legislative priority for AARP, according to Cristina Martin Firvida, director of financial security for the organization. But they supported the overall budget package that included closing the loopholes, she said, because the bill made technical fixes avoiding Medicare premium hikes and Social Security disability benefit cuts affecting 26 million recipients. By contrast, she estimates that fewer than 100,000 individuals have adopted the rarely used filing strategies, and those people are grandfathered in. "It's a matter of scale," she said.

Martin Firvida also finds it hopeful that legislators, facing the budget deadline "were able to sit across the table and reach agreement (on Medicare and disability insurance) far, far ahead" of when those two also became a crisis.

Finally, the controversy raises the question: Is Social Security like an investment fund one has paid in to and should max out or is it insurance against running out of income in old age? Martin Firvida sums up the dilemma. "We all meet people every day who hold both viewpoints at the same time. I don't know that they're mutually exclusive."