SOCIAL SECURITY IS MORE IMPORTANT for low- and
moderate-income (LMI) earners’ retirement than it is for higher-income workers
because the benefit is expected to replace a greater share of their lifetime
earnings, according to Rich Johnson, senior fellow and director of the Program
on Retirement Policy at the Urban Institute, a Washington, D.C.-based
think-tank for economic and social policy research.
“It’s not that their benefits are higher than [they are] for
higher-income workers,” he says. “It’s that Social Security will replace a
larger share of lifetime earnings for lower-income people than for
higher-income people. Because higher-income people tend to invest more in
retirement plans outside of Social Security, they have other sources of income
from investments and those other sources are more important, while Social
Security is a smaller share of their total income at older ages.”
Changes the Social Security Administration has made—to
gradually push the age for collecting full Social Security benefits to 67 from
65—could reduce the benefit’s importance for all workers, Johnson explains.
“Going forward though, it’s not clear that Social Security is
going to be more important than it is today and, in fact, there’s some
indication that it might be less important for workers at all levels,” he says.
Beneficiaries that retire at age 62 will receive 70% of full
benefits, whereas “it used to be the case that if you retired at 62 you would
get 80% of your full benefits,” Johnson says.
Social Security Communications
Retirement plan sponsors and advisers have many options when
deciding how to include information about Social Security in communications to
LMI participants to help them with their retirement readiness, but there are
also challenges that come with those efforts, according to sources.
LMI participants could benefit from education that places
more emphasis on understanding how the system works and where the benefit comes
from, says Chuck Williams, CEO at Finspire, a Chicago-based corporate
retirement planning consultant. In other words, information provided to LMI
retirement plan participants on how to maximize the benefit could be improved,
he says.
“People sometimes know maybe what [their benefit] is, but
those are really estimates and can be very far off on what the actual case is,”
he says. “[They need] a more specific formula and guidance on not just where
the estimate comes from in Social Security, but how do I maximize it?”
Beneficiaries can begin to claim Social Security benefits
starting at age 62. However, an individual is entitled to full benefits at the
full retirement age of 67. Claimants that begin Social Security early will
receive reduced amounts by a small percent for each month before the full
retirement age is reached.
“One of the bigger mistakes people make is starting Social
Security early,” Williams says. Participants need assistance to make the
optimal choice for when to begin claiming benefits, with education that
highlights the benefits of delaying, he adds.
“[It’s] really educating them on that benefit of waiting and
improving Social Security, improving their fixed income in retirement, and also
incenting them to save more so that they can delay Social Security until later
on,” Williams says. “Tying that in to understanding of ‘How do I maximize that
Social Security’ versus just giving them a rough guideline of what it is and
then maximizing the impact of that is really key. That is not really getting
conveyed enough.”
Williams adds that most existing education is general advice
and not tailored to LMI participants’ needs.
Boosting LMI Savings
Because LMI workers will have to rely on Social Security to
replace larger portions of their income than other workers, plan sponsors and
advisers can also encourage them to boost their retirement readiness by saving
in an employer-sponsored retirement plan.
“The best thing an employer can do is to offer financial
planning for these employees,” says Warren Cormier, executive director of the
Defined Contribution Institutional Investment Association (DCIIA) Retirement
Research Center (RRC).
Personalized financial advice for LMI workers, automatic
enrollment that is paired with auto-escalation, and financial wellness
programming tailored to challenges for these participants are impactful
approaches, Williams adds.
“If you can eliminate those obstacles and get them education
to improve their overall financial health [by] paying down debt and building an
emergency savings, you can get on that path to retirement,” he says.
LMI workers can be helped by reaffirming the critical
importance of contributing to an employer-sponsored retirement plan with
ongoing financial education, says Greg Adams, consultant at Fiducient Advisors.
“Doing some financial education just once isn’t going to get
it done,” he says. “You get a little bit of a decreasing return every time you
do one of these, but each time you might hit on something a little bit
different for somebody else.”
Adams suggests holding annual financial wellness campaigns
for participants. “This can be done a whole bunch of different ways: in-person,
virtual webinars, seminars, recordings, information posted on a company
intranet site—[there are] a lot of different ways you can try to reach
participants,” he says.
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