Unpacking Social Security & Government Pensions

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to the program. Thanks for being with us. I'm Chris Boyd. I'm here with Jeff Perry and Russ Ball. We're of the AMR team at Wealth Enhancement Group and glad to have you with us for another episode of Something More with Chris Boyd.

0:45 We like to talk about not only those important dollar and cents issues, but also those quality of life issues that make the money matters matter. Before we get started, we're going to talk about a variety of things today, pensions a little bit more. We had some follow-up thoughts after our last episode. We started talking about, hey, we should have talked about this. Then we'll talk a little bit about some questions about savings and moving from savings to spending and this transitional time of life when people get to retirement and mindset shifts that to occur.

1:26 One of the things I wanted to remember before we forget, Jeff, is it's a good time to encourage people to take our survey. We've, we set up a survey, and we've gotten a few responses. We'd love to hear from you. Always like hearing from our listeners when it comes to, What do you like? What would you like to hear more of? We want to get your feedback. Additionally, if you have questions you'd like to submit to us, you can do that by an email as well. We're going to have both of those in the show notes, but I'll rattle off the email right now. The email is amr-info at wealthenhancement.com.

2:08 Jeff, did I cover everything you wanted to hit on, on that stuff? Yes. The survey is also in the show notes. There's a link there that you can complete it anonymously, or you can put your name in either way, and you can tell us what you don't like too. Oh, good point. And if you would, we very much appreciate it. It's important for people to do the stars, you know, like and follow and all that kind of stuff. So we get a greater extension of our audience so it can help other people find us. So if you can help us out that way, we always appreciate it. So we wanted to start off with some of the things we thought of after we were talking in our last episode, and some common misperceptions, perhaps, that you were talking about, Jeff.

2:58 Jeff, you had a couple, you had a headline too that you mentioned. Maybe we should start with that. So, oh, it's kind of like putting the punchline before the joke. Oh, sorry. Okay, never mind. I think we should start with Russ telling us about something that he's been researching. Okay. Okay. So this is the conversation that came about after the recent episode. Basically, I have a family member who was a teacher in Texas, and she has since switched jobs. And the question is, you know, what's going to happen? Is she going to get Social Security? Is she not? And then also, similar to what we were talking about last time, she thought once she's done teaching, she has to take the pension as soon as she gets a certain age.

3:44 And obviously, we found out she could wait to take the pension. So, Jeff, I know you had some thoughts right off the bat on that situation. I got excited when you told me because Chris and I, before the previous podcast, had talked about a situation where someone had the same assumption, and maybe I'm mischaracterizing your relative. But the assumption of I have a public pension or I'm working for a public pension, therefore, I don't pay Social Security in some states. Some states you do. Right. That's what I'm talking about. Just wanted to make that distinction that not all states work the same way when you work in the public sector.

4:27 That's right. So, Massachusetts and Texas, apparently, where your relative may be, I'm slowly identifying them, do not pay Social Security because they pay into a state pension. And so many, so many, too many people in that situation say, well, I'm not paying in, and I'm getting a pension, therefore, I won't be able to collect Social Security. That's the premise. And as I said in the last episode opening, it depends. And so it's not really necessarily the case, right? It's not an all or nothing, right? So, if you graduated from high school or graduated from college and your first job was a public employee, and you spent your entire career in a state that doesn't collect Social Security on public employees, and you retired as a public employee, and you never contributed to Social Security, you are not going to collect Social Security.

5:28 Right. Right. But the, and so the opposite side, if you collect a public pension in a state that did not take Social Security, and you had 30 years of financial earnings paying into Social Security. So, for the example of someone who just worked maybe 10 years in the public sector, got a small pension, but most of their life, 30 years in this other extreme example, you were paying into Social Security, you get your full Social Security and the full pension that you're entitled to. In the middle of that, so if you qualified for Social Security, meaning just to say 10 years of, what are the 40 quarters?

6:19 40 quarters, it doesn't have to be 10 consecutive years, but if you qualified. So, part-time wages at the McDonald's when you were a kid, and then maybe some work experience as an adult, and then maybe even in retirement, you had some before you turned on your Social Security, all that kind of stuff. Or after, maybe after your public life, you went back to the public sector. So, if you get your 40 quarters, you are entitled to some Social Security, and people can get their benefits, earnings and benefits statements on the Social Security website. They have these reports they used to send everybody, but now you have to log in and create an account, and you can view whether or not you're entitled.

7:03 And so, once you get the 40 quarters, you're entitled to some Social Security. However, your Social Security will be diminished by something called the windfall provision, right? And so, if you are... Elimination provision, yeah. Thank you. If you are less than 30 years of substantial earnings in Social Security, your Social Security will be reduced by a maximum amount of $558 this year that's indexed for Social Security. So, your Social Security can be reduced by up to $558. So, that's kind of the baseline, but there's a sliding scale in the middle of that.

7:47 So, if you start with the foundational principle that you qualified for Social Security, you get that minimum 40 quarters, and you have some public pension, and you have some Social Security, kind of a mix, maybe a half and half, the amount that your Social Security will be reduced by, the windfall reduction, is based on a sliding scale. So, between 18 years of substantial earnings and 30 years of substantial earnings, the amount is reduced for each year, 18 and above, so forth, till you get to no reduction at 30 years. So, it depends on, in your relative situation is, first of all, did they qualify for Social Security?

8:35 Do they have the minimum 40 quarters? And if they do, how many years of substantial earnings they have will be the formula on how much of a reduction to their Social Security it'll be. Got it. Yeah. Well, I need to figure out. Well, I'll let her know, and that's definitely helpful. I think by the time she's done working completely, when she retires, that'll be the case, where she has at least over 10 years. I don't know the exact amount, but that's definitely good news. Well, it's complicated, right? I mean, that is a little bit complicated. You did a great job explaining it, Jeff, but it's still, I'm sure people listening were going, huh?

9:18 What? Can you say that again? Yeah. So, it is complex. Anyway, certainly Jeff or I can be a resource if you need help in that process. Don't hesitate to reach out. We've got a great team here to be a resource to you. Yeah. And so many people. So, a lot of public employees retire before they would be collecting Social Security, and they have these part-time jobs that might give them enough substantial earnings that those years actually matter to reduce the amount of the reduction in Social Security. So, if you think about it early, like this relative sounds like they might be doing, there might be some planning to do.

10:02 Like, well, you know what? If you work five more years in the public sector after you, you can be collecting your pension, but before you start collecting Social Security, that can make a big difference to the amount of Social Security that you end up with for the rest of your life. So, it's not an all or nothing. It's this formula. It's very complicated to someone who's never dealt with it before, but this is something that we deal with a lot of clients, and it just takes a little bit of discussion about your specific circumstances to give you a better answer.

10:43 All right. So, is it time for the punchline? Yes. So, this is a political issue. This is really something that's hot. I like to use myself as an example. I'm in this, and it's a disclosure, right? So, maybe my opinion is biased. So, I had 26 years of government service, which qualifies me for a pension, but that also means I have like 20 years, 20 something years of public sector work, right? That I actually paid into Social Security. Private sector. Private sector, sorry. I mean, I'm working right now and I'm getting paid and I'm paying Social Security. So, the idea that what I qualify for in Social Security that I paid in, not that I didn't pay in, that my Social Security should be reduced because I also earned another benefit for those people in my situation.

11:39 Nobody's feeling bad for me out there listening, I know. But for the millions of Americans who this affects, that they paid into both, right? The thought of having one reduced because you get the other, which you also paid into, is a political issue, as you can see. So, there's been efforts in Congress for decades now to get rid of the windfall elimination provision, right? And it's been proposed. Every Congress is like hundreds and hundreds, a majority of Congressmen sponsor it, probably because they want to keep their constituents happy who are in the situation.

12:22 And it's never really moved out of committee. It's never passed either of the Senate or the House. But this year, within the last few weeks, the elimination of the windfall elimination provision has passed the House. So, it is in the Senate. I know the date is December, meaning there's not a lot of time. When the next Congress takes the oath at the beginning of January, everything that hasn't completed the legislative process disappears and has to start over. So, whether or not that was a political move by the House to allow House members to say, I voted for it, it's not my fault, call the Senator, or whether the Senator will add, the Senators will add to that and say, let's pass it and send it to the President.

13:16 Let's put it on him. Who knows what's going to happen in the next month, but there is movement on it. So, just to eat up more air, because I'm the only one talking so far, this doesn't come with a cost, without a cost, right? Yeah, exactly. I'll weigh in on this just for what it's worth. Nothing's going to happen. But I'm so hopeful. But here's why I say that. Social Security is already facing problems. We've got a decade before, if we don't do something, benefits would be reduced. We know that's a solvable problem, but there's not the political will to deal with it right now.

14:01 I have a counter. And I don't think it's likely that this will get resolved, unless there's a broader effort to address what's going to happen with the Social Security challenges. That's my take. But go ahead, you counter that. So, Congressman Boyd, here's my counter, Congressman Perry. As part of the deal, how about if we eliminate the penalty on all these innocent people, and moving forward, public employees pay into Social Security? Make that mandatory? Does that infringe on states' rights in any way?

14:43 Arguably, it does. So, when all this started, for history that people may not care about, when this provision passed, states had the choice of whether or not they wanted their public employees to pay into Social Security or not. So, many states who have public employees, the public employee pays into their pension, and they pay into Social Security. So, they're not affected by this, because they have the 30 years easily, right? Right. So, I'm just trying to negotiate with you on this. You're saying if I had the choice, could we finagle this? Could we work this out? Maybe there's a way to work that out. Aren't we more interested in the solvency of Social Security long term?

15:27 So, having public employees contribute into the future would certainly offset. It gives you additional contributors, but it also gives you additional benefactors, doesn't it? In terms of the benefit impact. Absolutely, right? So, it's a math question. Yeah, but either way, I mean, I think this is a solvable issue with both of these kind of scenarios. Both Social Security as a whole is really just arithmetic. More money in or less money out, how are you going to do that? And there's a variety of ways you can do that. And then in this scenario, yeah, maybe that's a viable resolution to the issue.

16:09 And would that also resolve the pension offset provision, which affects the spouses who have this issue? They typically put those two topics together. So, in any case. Kicking the can down the road, as seems to be the posture of Congress on this issue, and presidents of both parties, is not the answer. Well, I think you've got a financial challenge you've got to deal with. And to me, I don't see an appetite to deal with the broader question.

16:51 And if you did this, I think you would ultimately exacerbate, you'd move up that timeline of when this has to be dealt with. Do you know what I mean with the Social Security question, the challenge of 10 years out or whatever it happens to be right now? If you eliminated this provision. Yeah, I think you'd end up with a greater challenge. It'd be eight years, it'd be six years or whatever it is. It would be that much sooner that they'd have to resolve this bigger financial question for Social Security. And is there political will to deal with that? That's fair. Yeah. So, sorry to be a bummer for you.

17:34 No, I agree with your overall premise that we need Social Security reform. And that means some giving on either contribution limits or future retirement ages to people who are younger or the contribution limit itself or all these things. But to the opposite of that analysis of doing something. These testing is another thing that people talk about, yeah. People, not me talk about that. No, I don't think that's another one, yeah. But the sooner that this reform happens, the more solvent Social Security will be. Yeah. And by delaying this discussion, by pretending it's not a problem or to have this kind of rhetoric that says, the other guy wants to take your Social Security away.

18:21 Which is where we are. Is destructive to the longer term effort to actually resolve this. Yeah. This is like a big problem. Social Security underfunding. It's like a big ship passing through the ocean. The closer it gets to shore, the more impossible. Right, right. Maybe a slight turn now would avoid the crash, right? Yeah, exactly right. Exactly right. All right. Well, interesting topic. Again, I feel like we're squeezing two topics into each show the last couple of days. Here's our next topic.

19:03 We want to also move on to that discussion that we mentioned about saving to spending, right? Or do you want to keep on this? No, I think we did a good job at explaining it. And just to put a cap on, I repeat what you said. Don't hesitate to call us or whoever you work with your fiduciary, your financial planner to talk about these things before you're at them, right? Because as we're suggesting to Mr. Ball there, there can be some planning, there can be some strategizing around. And if people have information like, oh, I just need to work two more years in the private sector to get something, they can plan for that and do that and not miss an opportunity to get the most that's available to them.

19:52 Yeah, there's a lot of opportunity and a lot of planning that can really have an impact that if you're not paying attention. And the same with just general social security decision making. It's one of these things that comes up a lot and it's really important. It has a really consequential impact on the way your financial plan will work in retirement. And I think, again, income and money in, money out. And this is a big part of that money in for most people. You know what a common mistake I see down here in Florida with my retired friends that are all around me?

20:38 They collect social security at 62 because they can. And then they go to work because they're bored. And then they pay taxes on the social security. Yeah, so they've permanently reduced their social security going forward in terms of that you take about today. I think it's close to a 30% discount between 25% and 30% when you start early from full retirement age being roughly 67. Maybe a little shy of that at some ages today. I'm not sure where we're at on that, but close to 67. Every month you start sooner than your full retirement age, you're discounting your benefit.

21:22 If you go out essentially five years or somewhere close to that, it's about 30% of a discount that you take. And if you delay to get it after full retirement age to age 70, if you take that, that's an additional 24%. So by starting at 62 instead of at, say, the maximum potential, that's a 50%-ish difference in benefit. I think it's even greater than that. It's 54% or something like that. This enormous change in the monthly benefit that you could get every month for the rest of your life. Now, if you don't live to 80 or something, then maybe then you got a different scenario.

22:07 But if you're going to live into your 80s or longer, you really got to reevaluate that decision if someone's starting at 62. And if you're working in Social Security, which is actually what I'm seeing, then they're paying taxes. So it's like that. Yeah, you end up, if you make more than, what, 19,000 or something. I think it's 20-something right now, but yeah. You end up being, essentially losing your Social Security benefit. Yeah, or a significant part of it. Or a significant part of it. So why would you do that? Because they're bored. No, I mean, I would just start it sooner, is what I'm saying.

22:49 Right, so this all goes into this decision. Like, it's not just, I can have it now, I should take it. What else are you doing? Are you working? How's your lifespan? All these things that we talk about all the time. So get some help, get some good advice. Well, and this goes into this question of saving and spending, right? It does. Do you want to tee up that article, or just talk about the concepts behind it? Sure. Something we see with our clients, and I certainly see with my retired friends again, is that transition to being retired, having, not working in this case, usually, meaning you're not accumulating anymore.

23:32 When you're in your 30s, 40s, 50s, maybe 60s, you're accumulating assets, you're investing, you're thinking about your future, and then you kind of stop that. So you're done accumulating, you've walked away from that, and you have a plan, hopefully, and it's a good plan, and made all these decisions that we talked about with pensions and social security. So now you're into this distribution phase, or spending phase, where you get to hopefully enjoy life and do what you want, and spend all that, or some of that money that you saved. People struggle with spending the money that they saved for the purposes of retiring.

24:13 It really is a change in focus in a lot of ways, right? So this is one, this notion of frugality, if you will, the notion of trying to accumulate. I think at this time of year, I think of the squirrels squirreling away, all their nuts for the season ahead. But at some point, you're in that season, and it's time to reap the benefit of the harvest, or whatever. So it's that time of year when you're in retirement, is the time to enjoy those resources.

24:56 Yeah, you earned it. Yeah. We see this same transition when it comes to risk, and people's appetite for risk, the way they design their portfolio. They start off, they're racing to the finish line, pedal to the metal. Let's grow, grow, grow. You know, they want to get that portfolio maximized. Getting to that number that they want. Get to that number, right? Gotta grow. And then they run through the finish line, if you will, and they've retired. And suddenly, they start thinking, maybe I don't want to be as growth-oriented as I used to be. Maybe I don't want as much risk in my portfolio.

25:38 I really want to draw some money from this. So I want some growth, but I want some income. And gosh, I really don't want it to go away if there's a disruption. I can't go, I don't want to have to go make it again. So they kind of have this transition of where they've got, used to have just sort of like, let's get this thing growing to a mindset of, I want to preserve it. I want some cash flow from it. I want it to be more for my future self and for inflation later in life. You know, I've got all these competing interests, and that's a challenge. So having a game plan around this, this issue of, how am I going to generate that cash flow?

26:27 And the permission that you talk about, Jeff, let's talk about that. The idea that it's okay to spend this money. You've planned for it. You plan for a trip, you know, every year or whatever it is. You plan for your car, you know, you've got a game plan. And if you have that game plan in place, you know that markets will deviate, markets will fluctuate. There's a range of possible outcomes, some better than others, some worse than others, right? But we know there's this range of possibilities. But if we've got a plan that works, we can be confident that we can follow the plan, execute the plan.

27:07 Yeah, absolutely. And this feeling about not wanting to spend your assets, it's a normal thing. It's not just you. It's a part of getting older. It's a part of not having an income anymore. So don't think that you're like having some unusual thoughts. Feeling like a scarcity mindset, that kind of thing, like I don't want to have it go away if I, yeah. That's right. It's very common. So don't, it's normal. And reducing your risk as you get older is also normal. So these are normal things that happen to most people. But that's everything that you said, Chris, is right on. And I'll just emphasize, we have a financial plan for a lot of reasons.

27:50 But one of the reasons, the key reasons, is to give you comfort to know that if you spend according to your financial plan, and in that financial plan, we would, if we were working with you, we would talk about when you're going to buy the next new car. Do you need any home repairs? Are you, any major gifts in retirement? What's your travel budget? You know, what, do you anticipate any long-term care? And if so, if this is something unexpected, what happens? All this is in your financial plan. So that each year as you're spending what is in the financial plan that allows you kind of a permission or a piece to do that.

28:31 And not only that first plan, but coming in every year or more frequently if you need to review the plan and saying, okay, how are we doing? You get a grade, actually. We get a, you get a number grade, like you're back in school. Like you want a hundred. Everybody wants a hundred. But you don't have to get a hundred to still have a plan that works. You don't. But if you get a 25 on the test, you know, we get a, maybe the plan needs some more work, right? You still want a passing grade. Yeah. Right. So you have a plan, you have a good number, you have some priorities in your spending plan. So, you know, like you might say, well, I want to give so much to my grandchildren or pay for their college or pay for a wedding for my daughter or whatever it is.

29:19 And when those things come up, it's in the plan. So you do it and then review it periodically. And that should give you, our hope is that it gives you the peace of mind to be able to live that life that you have earned. Yeah. Go ahead, Ross. I was listening to a podcast from Morningstar and they were talking about this exact topic. And a lot of people, you know, have that discipline mindset for 40 years of save, save, save. And they have that retirement nest egg. And the idea of tapping into that and taking from that is like a psychological hurdle to get over. It's like, we built this up. Like, I don't want to start taking from it. It feels strange, but.