Our consumer financial watchdog misses the mark on Social Security

The Consumer Financial Protection Bureau (CFPB) released a new report on Social Security and reverse mortgages that is filled with inaccuracies and misleading information, completely missing the mark in helping Americans better understand how to achieve a financially secure retirement. The report takes issue with using home equity, through a reverse mortgage, to support the deferral of Social Security benefits.

The CFPB examined this strategy because the agency was concerned that “broad promotion of this strategy could result in an increased number of homeowners borrowing a reverse mortgage for this purpose.” The CFPB’s analysis fails to provide a helpful review. Instead, the flawed report drives more Americans away from effective strategies that can increase their retirement security by properly utilizing home equity to defer Social Security benefits.

{mosads}While the CFPB is correct that consumers should understand the risks and costs of using reverse mortgages, the report itself fails to paint an accurate picture. First, the report disregards the reasons why deferring Social Security is beneficial to Americans. Second, the analysis selects a Social Security deferral strategy that provides very little benefit to the individual. Third, the analysis of reverse mortgages disingenuously increases the costs of the product by ignoring lender credits. Fourth, the report compares the present value of increased Social Security benefits to the future value of the reverse mortgage costs.

Let’s examine the first two issues. The report states that if a single woman (with a full retirement age of 67 and a primary insurance amount of $1,300) would delay benefits from age 62 until age 67 and lives to an average age, she would receive a present value increase in her benefits of $29,640. The report stops at the most critical moment with regard to Social Security deferral. The key is that by deferring, one protects herself from longevity risk. When you wait to collect benefits, one has to live beyond an average life expectancy for the higher benefit level to have a significant impact.

By design there is limited benefit from deferring Social Security, if you are single and live to an average life expectancy. The CFPB analysis also ignores the benefit of inflation-protected increases for Social Security, again undervaluing the benefits of deferring. After selecting a suspect Social Security deferral strategy with limited benefits to the consumer — roughly a $30,000 present value increase — it is not surprising to find that borrowing to defer the benefit might not be advantageous.

For comparison’s sake, if you selected a person who lives to age 95, defers until 70 and experiences average inflation over the course of their retirement, the deferral strategy, according to Michael Kitces, could add more than $300,000 in present value increase for the individual. It seems the CFPB selected about the lowest possible increase imaginable for a deferral strategy without arguing that it’s a losing proposition. In essence, they selected a hurdle they could easily step over.

Next, the CFPB examined reverse mortgages and made a number of inaccurate statements by using inflated costs to make the product seem more expensive. The report states that a reverse mortgage’s “increasing loan balance will slowly reduce the available home equity to homeowners.” That is not how a reverse mortgage works. Can a reverse mortgage’s increasing loan balance reduce the available home equity? Sometimes, but often, it does not. If you borrow $30,000 with a reverse mortgage, and the debt grows by 6 percent each year but your $500,000 home grows at 4 percent a year, your home equity does not shrink. The CFPB statement is blatantly false and harmful to consumers reading the report with its incorrect connotation about how debt works.

Let’s focus on the fees the CFPB assumes in determining the costs of a reverse mortgage. The analysis starts off well, citing correct interest rates and citing the possible fees. Then the report stops short where the rubber hits the road: lender and broker credits. The report fails to include the benefits of these credits, which save consumers thousands of dollars on closing costs and origination fees. Lender credits are the norm, the standard in the real world of banks and mortgages. Furthermore, the report adds $35 a month in servicing fees, which have been mostly extinct for years. Such major omissions leads this author to believe the CFPB was trying to skew the analysis by over-inflating the costs of reverse mortgages.

The most glaring error of all is the report’s comparison of the future value of all reverse mortgage costs to the present value increase in deferring Social Security benefits. The fundamental rule of financial analysis is that you simply cannot compare future value dollars to present value dollars. This leads me to assume either the CFPB does not understand the difference between present and future values (which is highly unlikely), it was careless with its work, or it deliberately did so to support the original hypothesis that reverse mortgages are costly and should not be used more frequently. One should be reminded that is why the CFPB claimed they wrote this report — to make sure more people do not use the strategy.

The real kicker is that if you use the age 95 life expectancy projection for Social Security deferral, using a reverse mortgage to defer Social Security benefits works in every single scenario the CFPB tested. With so many seniors relying on Social Security in retirement, and far too many claiming early, it is disappointing that the CFPB chose to publish a poorly conceived report that discourages retirees from taking the most efficient step to achieving retirement income security by using a low cost method to draw from home equity in order to increase their secure, inflation-adjusted, lifetime income through Social Security deferral. The goal should be to encourage Americans to take proper steps, not scare people into inaction with faulty reports.

Jamie Hopkins is a professor and director of the retirement income certified professional program at the American College of Financial Services, where he is also co-director of the New York Life Center for Retirement Income. He was chosen by the American Bar Association as one of the top 40 young attorneys of 2017 and by Investment News as one of the top 40 financial service professionals under the age of 40.

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