Prepared Remarks of CFPB Director Richard Cordray on Retirement Planning at the Brookings Institution
This year marks the 80th anniversary of the Social Security Act. As Franklin Roosevelt said in 1934, “Old age is at once the most certain, and for many people the most tragic of all hazards. There is no tragedy in growing old, but there is tragedy in growing old without means of support.” Actually, at the time he wrote, there was not much certainty in attaining a ripe old age. Probably many hard-working people who began making their first contributions to Social Security out of their paychecks in that era were not at all sure that they would survive to reach the age threshold for receiving benefits later in life. But times have changed, as most notably have the expected life spans of the vast majority of Americans. And these changes have made Social Security all the more central to the financial lives of older Americans.
It is an honor for me to be here today alongside my colleagues, who are stalwart champions of our seniors and who do so much to make sure they get the support they need to manage the ways and means of their lives. As we all are well aware, we have recently come through the worst financial crisis since the Great Depression. Many Americans were shaken in their deeply held belief that if they work hard and act responsibly, they can get ahead and retire securely. Millions of Americans lost their jobs, millions lost their homes, and almost all of us lost a substantial chunk of our life savings.
In the aftermath of the crisis, this country had to make a new beginning. The new Consumer Financial Protection Bureau is part of that fresh start. And just like when FDR championed the Social Security Administration after the Great Depression, the Consumer Bureau is here to help make financial life more sound and more secure for vast numbers of Americans. We are very busy addressing key problems in consumer financial markets, and we are working to create a sustainable marketplace where consumers are treated fairly, are better informed, and can find value in responsible and sustainable business practices.
The financial reform law that created our new agency specifically recognized the need to protect older Americans against financial exploitation and promote economic security later in life. With the rapid aging of the current baby boomer generation, that mission is now more important than ever before.
We are experiencing the greying of America, with 45 million people in this country who already are age 65 or older and with 10,000 more turning 65 each day. They are our grandparents, our parents, our neighbors, our friends. And they are living longer, healthier lives than ever before. The average American is now spending about twenty years in retirement. During these years, they remain active consumers. They are still taking out and making payments on mortgages; they are still borrowing to buy cars and trucks; they are still accumulating credit card debt; some are even taking out student loans on behalf of their children and grandchildren. These heavier debt loads, which previous generations did not have, can threaten their economic security.
Our Office for Older Americans has done much great work around retirement security. Our team has traveled the country listening to seniors. Based on what we heard, we have issued studies, guides, and advisories to arm older Americans and their caregivers with the information and tools they need to protect themselves and their precious retirement savings. The work that is focused on older Americans is in addition to the tools and resources we are developing for all consumers. For example, for those who feel disempowered by the confusing explanations offered by many financial products, we have created our “Ask CFPB” tool. This interactive database has over one thousand answers to questions most commonly asked by consumers. When you encounter a particular issue, you can go to Ask CFPB to learn more about it and understand your rights.
Today we are adding to this set of tools and resources with “Planning for Retirement,” which is an interactive, online tool designed to help people as they decide when to claim their Social Security benefits. The tool, built in collaboration with the Social Security Administration, gives consumers the information and confidence they need to make a well-informed choice when it comes to deciding at what age they should elect to begin taking their payments. Millions of Americans are likely to face some amount of financial insecurity in their lengthening retirement years. To a consumer, when to start claiming Social Security payments is one of the key decisions they can make about their retirement. Because this is a one-time choice, it is imperative that consumers can properly weigh their options with all the relevant information and factors in mind.
Americans are eligible to claim Social Security retirement benefits without any reduction when they reach what the Social Security Administration calls the “full retirement age.” For people born after 1942, their full retirement age ranges from 66 to 67, depending on the year the person was born. But consumers can begin to claim their benefits at other points as well, starting either several years before or several years after their full retirement age. The outcome is not the same, however, depending on when you opt to claim your benefits. The earlier you claim your benefits, the less money you will receive each month. If instead you wait to claim your benefits later, you actually get more money per month. Because this is a one-time choice, the amount of each payment you will receive generally does not change later on (aside from cost-of-living increases). So if a consumer claims the reduced benefit now, then generally they will receive that reduced amount for the rest of their lives.
Today, we are releasing a report which shows that many consumers are not taking advantage of the choices they have to get a higher lifetime income to secure their retirements. This is true in spite of the great importance of the choices that consumers can make about the timing of claiming their Social Security benefits. The report highlights the fact that many Americans are collecting early despite living longer lives. Indeed, studies show that nearly half of all retirees start collecting their benefits at their earliest eligibility age, which is 62 years old. In 2013, nearly three quarters of Americans claimed benefits before their full retirement age, and 46 percent claimed them at the first possible moment, when they turned 62. Yet many Americans must now stretch those benefits payments over a longer period, since those reaching the age of 65 today will live, on average, to age 85 and perhaps even longer if the current trends continue. This means consumers who are retiring today will likely need sufficient income and savings to cover 20 years or more that they will be spending in retirement.
The report also highlights the well-known problem that many of the people who are at and near retirement age are unprepared financially. For example, four in 10 of the “late boomers,” who are people like myself who currently fall into the 51 to 59 age range, are reaching retirement with limited or no savings and are projected to face a savings shortfall. And with declining coverage from traditional pension plans that pay a regular monthly payment, Social Security is the only guaranteed monthly income for a majority of older consumers, which means retirees are coming to rely on it more and more.
In fact, approximately two-thirds of the nearly 40 million Americans age 65 and older who receive Social Security benefits depend on those benefits for half or more of their retirement income. Social Security is particularly important for the growing number of beneficiaries who are age 80 and older, since it accounts for about 70 percent or more of their income.
Studies have shown that the people who claim their Social Security benefits before their full retirement age typically have more limited knowledge of their benefits and available claiming options than those who claim at their full retirement age or after. Indeed, several recent surveys show that many non-retirees are either confused or lack basic knowledge about Social Security. For example, one study found that only 22 percent of pre-retirees knew their full retirement age. Only 12 percent knew how their benefits would change if they claimed before, at, or after that age. And only about 5 percent of those surveyed knew how their benefits are calculated. This tells us that misunderstanding and confusion about the facts are hindering many Americans as they try to make informed decisions about this key element of their retirement futures.
We are now undertaking novel efforts to help older Americans cope with these problems. The Consumer Bureau has worked closely with the Social Security Administration to offer the new “Planning for Retirement” tool that we are unveiling today.
As we developed this tool, we found ourselves thinking about consumers in their fifties, who are starting to become more aware of their Social Security benefits. They are beginning to consider the timing of their possible decisions around retirement, such as when to stop working, when to downsize their home, and when to tap into any 401(k) or IRA benefits they may have built up over the years. Because many of these decisions are harder and more expensive to reverse once they have been made, we found that it would be important to engage people who were in their early fifties, when they still have the flexibility to plan ahead in targeting their claiming age.
The bottom line is that retirement is an increasingly complex process with multiple decision points. As a result, our new tool is interactive and allows people to make their own estimates based on their own circumstances. The decision they must make about when to claim Social Security requires estimates of longevity, inflation, current savings, and interest rates, and it requires calculations about planning and budgeting. With our new tool, consumers can also plug in their date of birth and their highest annual work income to see their estimated Social Security benefits.
By simply plugging in their information, people can more easily see the trade-offs they could make in weighing key decisions like when to start claiming their benefits against other decisions they might make about working longer or cashing out other available assets. Thus the tool enables people to consider alternative scenarios. They can assess the long-range effects of this one-time decision because the tool shows how their estimated benefits will accumulate over time depending on when they first began to claim those benefits.
They can also see the effects of other life factors. The tool provides tips on claiming options depending on marital status, other expected sources of income, plans for working longer, and general expectations of longevity. For example, because surviving spouses receive the higher of the two spouses’ benefits, it may make sense for the higher-earning spouse to claim at their full retirement age or after in order to get the highest possible benefit and minimize the reduction in income that a surviving spouse is likely to experience.
When we designed this tool, we looked at changing trends and how different consumers access information. We developed a tool that is optimized for mobile use. We also created a Spanish version of the tool, because Spanish speakers are expected to be one of the fastest-growing segments of the population that will be making the claiming decision by 2050. For this group, our tool will offer an additional resource to their limited sources of information on this issue.
It also matters enormously that this new tool comes from the Consumer Financial Protection Bureau, which is increasingly known as a source that offers people neutral and unbiased information. Our only goal with this tool is to inform, educate, and empower Americans to make the best decisions they can for themselves and their loved ones.
We want consumers who use our tool to know and understand what it means to claim at their full retirement age versus several years before or several years after. Most people will see that even allowing their benefits to grow for one more year can make a big difference, as they usually will get 5 to 8 percent more in benefits each year they wait to claim after age 62. A higher monthly benefit may matter more when they are older, other sources of income and savings may be depleted, and Social Security plays a more central role in their retirement income.
In general, consumers should engage in basic budget planning; they should be aware of how much money comes in and goes out each month. As they near retirement, they should consider both their actual income and expenses before retirement and their expected income and expenses after retirement. This can help them see how a lesser or greater level of benefits will affect their ability to meet their needs when they are no longer working. In addition, this kind of budgeting can help them decide if they need to reduce their expenses and pay off any debts before retiring.
Consumers may find that it pays to keep working, if they can. Staying in the workforce – full or part time – even for one or two more years can increase Social Security benefits by replacing prior years with low or no earnings. It also allows more time to save for retirement.
Alongside the Social Security Administration, we want to make life better for older consumers. Both agencies were born out of financial crises, and together we are both driven to help people put themselves in position to make the most of their financial circumstances.
As the American economy continues to recover, we want consumers of all ages to be able to look ahead with hope and resilience. We want to remind them that they still have the formidable Social Security Administration working to support their economic security, but now they also have the new Consumer Bureau standing on their side and looking out for their interests, as we work to help restore confidence and trust in the consumer financial marketplace. As we can see here today, this partnership makes for a great combination. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.