Social Security Clawback Nightmare Hints at Far Bigger Problems: Kotlikoff

What You Need to Know

The SSA is demanding the return of benefits from retirees who, at no fault of their own, received payments they weren’t entitled to, economist Laurence Kotlikoff says.
He also says that while more advisors are talking to client about Social Security claiming, few are doing so effectively.
Social Security is not just broke but broken and needs to be replaced, he says.

More and more financial advisors may be speaking with their clients about Social Security claiming and the overall effort to organize retirement income, but relatively few are doing so in an effective manner.

Meanwhile, a stream of “horror stories” of the Social Security Administration demanding clawbacks from retirees who were mistakenly paid benefits they weren’t entitled to is indicative of deep, possibly irreparable dysfunction in the system.

So suggested Laurence Kotlikoff, a Boston University economics professor who is well-known in the retirement industry for advocating an “economics-first” approach to financial planning and for his at-times scathing analysis of the Social Security program, in a new interview with ThinkAdvisor.

During a frank and wide-ranging discussion, Kotlikoff did not pull any punches when asked about the performance of the financial advisor industry when it comes to helping Americans navigate the transition from wealth accumulation to “decumulation.”

Kotlikoff — who was a senior economist for President Ronald Regan’s Council of Economic Advisers and has consulted for the World Bank and the International Monetary Fund, among others — also called once again for the full-scale scrapping of Social Security, to be replaced by government-managed individual investment accounts.

While advisors do a relatively good job helping their clients accumulate wealth by taking (potentially excessive) risk in the equity markets, the level of planning for the income phase remains “woefully inadequate,” according to Kotlikoff.

“You have to take what I say with a grain of salt, because I offer my own investment and income planning solutions to the industry, but I think the industry would get an F on the income planning front,” Kotlikoff said. “So much of the industry is geared towards making product recommendations, in general, and the income planning question is so much bigger than that.”

Kotlikoff suggested more advisors need to “put the economics first” in both the wealth generation and spending effort. If they continue to fail to do so, he argued, they will continue to fail to meet the needs of their clients, especially when it comes to the retirement phase.

Kotlikoff also spoke at length about the continued emergence of Social Security “horror stories,” wherein the underfunded and understaffed Social Security Agency mistakenly pays out benefits to retirees (at no fault of their own) and then seeks to claw the money back years in the future, often to the tune of tens or even hundreds of thousands of dollars.

“This is a terrible situation, and its coming on top of the fact that the Social Security program itself is beyond broke,” Kotlikoff said. “When you put all this together, our retirement system as a whole is clearly broken.”

From his point of view, Kotlikoff sees all these problems as intertwined, and he warns that America has a serious retirement readiness problem on its hands — one that is set to get a lot worse before it gets any better.

An ‘F’ in Income Planning

Kotlikoff admitted that his point of view may sound harsh, but he said he has good reason for being skeptical of the “planning work” many advisors are doing on behalf of their retirement-focused clients. Lest anyone think he is merely trying to drum up business for his own planning solutions to line his own pockets, Kotlikoff emphasized that he doesn’t take a salary from the company.

“I recently took a call from a financial advisor at a prominent firm who is considering changing the software they are using to do this planning, and this person stepped me through their process and platform,” he said. “Because of the licensing protections on the platform, this was actually the first time in some years that I had seen the planning program up close, and I was shocked by some of the inadequacies.”

According to Kotlikoff, the program in question fails to incorporate what he called “some of the most basic economic principles that should underlie true financial planning,” including foundational discounting principles. He said there were also clear issues with the treatment and integration of survival probabilities and assumptions made about interest rates and inflation.

While these shortcomings are concerning enough, Kotlikoff said, they are just one part of a bigger planning problem that he sees across the advisor industry.

“Look, if you are an economist like me, you don’t come at planning from the assets under management and sales perspective,” he suggested. “The industry today is just obsessed with running Monte Carlo simulations and using these to encourage people to take more investment risk and keep money in the portfolio, because the projections show they aren’t currently saving enough to meet their projected income needs.

“The typical advisor will just simulate that the client who has an income shortfall can just put a higher percentage of their wealth in stocks and presto, the success probability shoots up to 90%,” Kotlikoff continued. “The client sees this increase and thinks they are all set for retirement.”