34 Social
Security 'Secrets' All Baby Boomers and Millions of Current Recipients Need to
Know
By
Laurence Kotlikoff
The
Social Security Handbook has 2,728 separate rules governing its benefits. And
it has thousands upon thousands of explanations of those rules in its Program
Operating Manual System, called the POMS, which provides guidance on
implementing the 2,728 rules. Talk about a user's nightmare!
As
a young economist, I did a fair amount of academic research on saving and
insurance adequacy. At the time, I thought I had a very good handle on the
rules. Then I started a financial planning software company, which makes
suggestions about what benefits to take from Social Security and when to take
them to get the best overall deal. (See, in this regard,
www.maximizemysocialsecurity.com and www.esplanner.com.)
At
that point, I realized I needed to quadruple check my understanding of Social
Security's provisions. To do this, I established contacts with experts at
Social Security's Office of the Actuary. I also hired a specialist whose only
job is to audit my company's Social Security, Medicare premium, and federal and
state income tax code.
The
problem with this strategy is you can only check on things you know about. Over
the years, I discovered things I had never heard of. I would then check with
the Social Security actuaries who would say, "Oh yes, that's covered in the
POMS section GN 03101.073!"
Mind
you, a large share of the rules in the Social Security Handbook are
indecipherable to mortal men, and the POMS is often worse. But thanks to
patience on the part of the actuaries, I've learned things that almost no current
or prospective Social Security recipient knows, but which almost all should
know.
The
reason is that taking the right Social Security benefits at the right time can
make a huge difference to a retiree's living standard.
Unfortunately,
Social Security has some very nasty "gottcha" provisions, so if you
take the wrong benefits at the wrong time, you can end up getting the wrong, as
in smaller, benefits forever.
Also,
the folks at the local Social Security offices routinely tell people things
that aren't correct, including about what benefits they can and can't receive
and when they can receive them. Taking Social Security benefits -- the right
ones at the right time -- is one of the biggest financial decisions you'll ever
make, so you need to get it right.
Getting
it right on your own, however, is neigh impossible. One of my engineers and I
calculated that for an age-62 couple there are over 100 million combinations of
months for each of the two spouses to take retirement benefits, spousal
benefits and decided whether or not to file and suspend one's retirement
benefits. There are also start-stop-start strategies to consider. Each
combination needs to be considered to figure out what choices will produce the
highest benefits when valued in the present (measured in present value). For
some couples who are very different in age, survivor benefits also come into
play. In that case, the number of combinations can exceed 10 billion!
Fortunately,
www.maximizemysocialsecurity.com can help you find the right answer generally
within a matter of seconds. It does exhaustive searches of all combinations of
months in which you can take actions, but thanks to modern computing power and
careful programming, our Maximize My Social Security program can run through
millions upon millions of combinations of decisions incredibly fast.
Whether
or not you use our software, it's important to have as full a handle on Social
Security's provisions as possible. Listed below are 34 things I've learned over
the years that you may not fully know. (The list started at 25, but I've been
learning some new secrets and recalling some others.)
1.
If
you are already collecting your retirement benefit and are at or over full
retirement age, you can tell Social Security you want to suspend further
benefits and then ask them to restart your benefits at a later date, say age
70. Social Security will then apply its Delayed Retirement Credit to your
existing benefit once you start collecting again. Hence, this is a means by
which current Social Security recipients who aren't yet 70 can collect higher
benefits, albeit at the cost of giving up their check for a while. But this
trade off will, on net, often be very advantageous. For example, if you started
collecting at 62 and are now at your full retirement age, i.e., 66, you can
suspend benefits until 70 and then start collecting 32 percent higher benefits
for the rest of your life. This benefit collection strategy can be called Start
Stop Start. We are in the process of rolling out a new update of
www.maximizemysocialsecurity.com, which incorporates Start Stop Start.
2.
If
you aren't now collecting and wait until 70 to collect your retirement benefit,
your retirement benefit starting at 70 can be as much as 76 percent higher than
your age-62 retirement benefit, adjusted for inflation. The reason is that your
benefit is not reduced due to Social Security's Early Retirement Reduction;
moreover, it's increased due to Social Security's Delayed Retirement Credit.
For many people, the increase in the retirement benefit can be even higher if
they continue to earn money after age 62 thanks to Social Security's
Re-computation of Benefits.
3.
But
if you are married or divorced, waiting to collect your retirement benefit may
be the wrong move. If you are the low-earning spouse, it may be better to take
your retirement benefit starting at age 62 and then switch to the spousal
benefit you can collect on your current or ex-spouse's account starting at your
full retirement age. But beware of the Gottcha in item 5.
4.
If
you're married, you or your spouse, but not both, can receive spousal benefits
after reaching full retirement age while deferring taking your retirement
benefits and, thereby, letting them grow. This may require having one spouse
file for retirement benefits, but suspend their collection. This is called the
File and Suspend strategy.
5.
Be
careful! If you take your own retirement benefit early and are below full
retirement age, you will be forced to take your spousal benefit early and at a
permanently reduced level if your spouse collects his/her his/her retirement
benefit before or in the month in which you apply to collect your retirement
benefit. If your spouse is not collecting a retirement benefit when you apply
for an early retirement benefit, you will not be deemed to be applying for your
spousal benefit. Hence, you can start collecting your spousal benefit later.
(See item 33)
6.
Start
Stop Start may also make sense for married workers who aren't already
collecting and whose age differences are such they they can't take advantage of
File and Suspend. Take, for example, a 62 year-old high earner, named Sally,
with a 66-year old low earner spouse, named Joe. By starting retirement
benefits early, Sally permits Joe to start collecting a spousal benefit
immediately. The reason is that spouses aren't eligible to collect spousal
benefits unless the worker is either collecting a retirement benefit or has
filed for a retirement benefit, but suspended its collection. If Sally starts
her retirement benefit at 62, Joe can apply just for his spousal benefit at 66
and then wait until 70 to collect his own retirement benefit, which will be at
its highest possible value thanks to Social Security's Delayed Retirement
Credit. As for Sally, she can suspend her retirement benefit at 66, when she
reaches full retirement, and then restart it at 70, at which point her benefits
will be 32 percent higher than what she was collecting. Even singles workers
may opt for Start Stop Start to help with their cash flow problems.
7.
If
your primary insurance amount (your retirement benefit available if you wait
until full retirement) is less than half that of your spouse and you take your
own retirement benefit early, but are able to wait until full retirement age to
collect your spousal benefit, your total check, for the rest of your life, will
be less than one half of your spouse's primary insurance amount. Nonetheless,
this may still be the best strategy. This reflects another Gotcha explained in
8.
8.
On
its website, Social Security states, "your spouse can receive a benefit
equal to one-half of your full retirement benefit amount if they start
receiving benefits at their full retirement age." This is true only if
your spouse isn't collecting his/her own retirement benefit. If your spouse is
collecting her own retirement benefit, his/her spousal benefit is calculated
differently. Rather than equaling one half of your full retirement benefit,
it's calculated as half of your full retirement benefit less your spouse's full
retirement benefit. This difference is called the excess spousal benefit. The
total benefit your spouse will receive is her retirement benefit, inclusive of
any reduction, due to taking benefits early, or increment, due to taking
benefits late, plus the excess spousal benefit. The excess spousal benefit
can't be negative; i.e., its smallest value is zero.
Take Sue and Sam. Suppose they are both
62 and a) Sue opts to take her retirement benefit early and b) Sam opts to file
and suspend at full retirement and take his retirement benefit at 70. Between
ages 62 and 66 (their full retirement age), Sue collects a reduced retirement
benefit, but is not forced to take her spousal benefit (which would be reduced)
because Sam isn't collecting a retirement benefit during the years that Sue is
62 to 66. Now when Sue reaches age 66, she starts to collect an unreduced spousal
benefit because Sam has qualified her to do so by filing and suspending for his
retirement benefit. OK, but her unreduced spousal benefit is calculated as 1/2
x Sam's full retirement benefit less Sue's full retirement benefit. Sue ends up
getting a total benefit equal to her own reduced retirement benefit plus her
unreduced excess spousal benefit. This total is less than half of Sam's full
retirement benefit. To see this note that the total equals half of Sam's full
retirement benefit plus Sue's reduced retirement benefit minus Sue's full
retirement benefit. The last two terms add to something negative.
9.
Are
there are two different formulas for spousal benefits depending on whether the
spouse is collecting his/her own retirement benefit? It sure seems that way
because when the spouse is collecting a retirement benefit, the excess spousal
benefit (potentially reduced for taking spousal benefits early) comes into
play. And when the spouse isn't collecting a retirement benefit, the spousal
benefit equals half of the worker's full retirement benefit. (Note, the spouse
has to collect a retirement benefit before full retirement age if she applies
for her spousal benefit.) The answer, in fact, is no. There is only one
formula. The formula for the spousal benefit is always the excess benefit
formula. But here's what happens to the application of that formula if the
spouse is not collecting a retirement benefit. In that case, the spouse's full
retirement benefit (also called the Primary Insurance Amount) is set to zero in
calculating the excess spousal benefit. The reason, according to Social
Security, is that a worker's Primary Insurance does not exist (i.e., equals
zero) if the worker has not applied for a retirement benefit (and either
suspended its collection or started to receive it). In other words, your
Primary Insurance Amount is viewed as non-existant until you apply for a
retirement benefit. This construct - the primary insurance amount doesn't exist
until it's triggered by a retirement benefit application -- lets Social
Security claim to have one formula for spousal benefits. But there are, in
effect, two spousal benefit formulas and which one you -- the person who will
collect a spousal benefit -- faces will depend on whether or not you take your
retirement benefit early.
10.
If
you are divorced, both you and your ex can collect spousal benefits (on each
others work histories) after full retirement age while still postponing taking
your own retirement benefits until, say, age 70, when they are as high as can
be. This is an advantage for divorcees. But there's also a disadvantage. A
divorcee who applies for spousal benefits before full retirement age will
automatically be forced to apply for retirement benefits even if her/his ex
isn't collecting retirement benefits.
11.
There
is no advantage to waiting to start collecting spousal benefits after you reach
your full retirement age.
12.
There
is no advantage to waiting to start collecting survivor benefits after you
reach your full retirement age.
13.
If
you started collecting Social Security retirement benefits within the last year
and decide it wasn't the right move, you can repay all the benefits received,
including spousal and child benefits, and reapply for potentially higher benefits
at a future date.
14.
If
you wait to collect your retirement benefit after you reach your full
retirement age, but before you hit age 70, you have to wait until the next
January to see your full delayed retirement credit show up in your monthly check.
15.
Millions
of Baby Boomers can significantly raise their retirement benefits by continuing
to work in their sixties. This may also significantly raise the spousal, child,
and mother and father benefits their relatives collect.
16.
If
you take retirement, spousal, or widow/widower benefits early and lose some or
all of them because of Social Security's earnings test, Social Security will
actuarially increase your benefits (under the Adjustment of Reduction Factor)
starting at your full retirement age based on the number of months of benefits
you forfeited. This is true whether the loss in benefits due to the earnings
test reflects benefits based on your own work record or based on your spouse's
work record. Consequently, you should not be too concerned about working too
much and losing your benefits if you elected to take them early.
17.
When
it comes to possibly paying federal income taxes on your Social Security
benefits, withdrawals from Roth IRAs aren't counted, but withdrawals from
401(k), 403(b), regular IRAs, and other tax-deferred accounts are. So there may
be a significant advantage in a) withdrawing from your tax-deferred accounts
after you retire, but before you start collecting Social Security, b) using up
your tax-deferred accounts before you withdraw from your Roth accounts, and c)
converting your tax-deferred accounts to Roth IRA holdings after or even before
you retire, but before you start collecting Social Security.
18.
Social
Security's online benefit calculators either don't handle or don't adequately
handle spousal, divorcee, child, mother, father, widow or widower benefits, or
file and suspend options.
19.
The
default assumptions used in Social Security's online retirement benefit
calculators is that the economy will experience no economy-wide real wage
growth and no inflation going forward. This produces benefit estimates that
can, for younger people, be significantly less than what they are most likely
to receive.
20.
Some
widows/widowers may do better taking their survivor benefits starting at 60 and
their retirement benefits at or after full retirement. Others may do better
taking their retirement benefits starting at 62 and taking their widow/widowers
benefits starting at full retirement age.
21.
If
you're below full retirement age and are collecting a spousal benefit and your
spouse is below full retirement age and is collecting a retirement benefit,
your spousal benefit can be reduced if your spouse earns beyond the Earnings
Test's exempt amount. And it can also be reduced if you earn beyond the
Earnings Test's exempt amount.
22.
The
Windfall Elimination Provision affects how the amount of your retirement or
disability benefit is calculated if you receive a pension from work where
Social Security taxes were not taken out of your pay, such as a government
agency or an employer in another country, and you also worked in other jobs
long enough to qualify for a Social Security retirement or disability benefit.
A modified formula is used to calculate your benefit amount, resulting in a
lower Social Security benefit than you otherwise would receive.
23.
Based
on the Government Pension Offset provision, if you receive a pension from a
federal, state or local government based on work where you did not pay Social
Security taxes, your Social Security spouse's or widow's or widower's benefits may
be reduced.
24.
If
you have children, because you started having children late or adopted young
children later in life, they can collect child benefits through and including
age 17 (or age 19 if they are still in secondary school) if you or your spouse
or you ex-spouse are collecting retirement benefits.
25.
If
you have children who are eligible to collect benefits because your spouse or
ex-spouse is collecting retirement benefits, you can collect mother or father
benefits until your child reaches age 16.
26.
Your
children can receive survivor benefits if your spouse or ex-spouse died and
they are under age 18 (or age 19 if they are still in secondary school).
27.
You
can collect mother or father benefits if you spouse or ex-spouse died and you
have children of your spouse or your ex-spouse who are under age 16.
28.
There
is a maximum family benefit that applies to the total benefits to you, your
spouse, and your children that can be received on your earnings record.
29.
If
you choose to file and suspend in order to enable your spouse to collect a
spousal benefit on your earnings record while you delay taking your benefit in
order to collect a higher one later, make sure you pay your Medicare Part B
premiums out of your own pocket (i.e., you need to send Social Security a check
each month). If you don't, Social Security will pay it for you and treat you as
waving (i.e., not suspending) your benefit apart from the premium and, get
this, you won't get the Delayed Retirement Credit applied to your benefit. In
other words, if you don't pay the Part B premiums directly, your benefit when
you ask for it in the future will be NO LARGER than when you suspended its
receipt. This is a really nasty Gotcha, which I just learned, by accident, from
one of Social Security's top actuaries.
30.
If
you are collecting a disability benefit and your spouse tries to collect just
his/her Social Security benefit early, she will be deemed to be filing for her
spousal benefits as well. I.e., if your spouse takes his/her retirement benefit
early, he/she won't be able to delay taking a spousal benefit early, which
means both her retirement and spousal benefits will be permanently reduced
thanks to the early retirement benefit and early spousal benefit reduction
factors.
31.
When
inflation is low, like it is now, there is a disadvantage to delaying until,
say 70, collecting one's retirement benefit. The disadvantage arises with
respect to Medicare Part B premiums. If you collecting benefits (actually were
collecting them last year), the increase in the Medicare premium this year will
be limited to the increase in your Social Security check. This is referred to
as being "held harmless." Hence, when inflation is low, the increase
in your check due to the cost of living adjustment will be small, meaning the
increase in your Medicare Part B premium will be limited. But, if you aren't
collecting a benefit because you are waiting to collect a higher benefit later,
tough noogies. You're Medicare Part B premium increase won't be limited. And
that increase will be locked into every future year's Medicare Part B premium
that you have to pay. You can wait to join Medicare until, say, age 70, but if
you aren't working for a large employer, the premiums you'll pay starting at 70
will be higher and stay higher forever. So much for helping the government
limit its Medicare spending!
32.
Hold
harmless -- the provision that your increase in Medicare Part B premium cannot
exceed the increase in your Social Security check due to Social Security's Cost
of Living Adjustment -- does not apply if you have high income and are paying
income-related Medicare Part B premiums.
33.
The
thresholds beyond which first 50 percent and then 85 percent of your Social
Security benefits are subject to federal income taxation are explicitly NOT
indexed for inflation. Hence, eventually all Social Security recipients will be
tax on 85 percent of their Social Security benefits.
34.
If
you take your retirement benefit early and your spouse takes his/her retirement
benefit any time that is a month or more after you take your retirement
benefit, you will NOT be deemed, at that point (when your spouse starts
collecting his/her retirement benefit) to be applying for a spousal benefit. In
other words, you can, in this situation, wait until your full retirement age to
start collecting your unreduced excess spousal benefit. The retirement benefit
collection status of your spouse in the month you file for early retirement
benefits determines whether you are deemed to be also be applying for spousal
benefits. This means that you should think twice about applying for retirement
benefits in the same month as your spouse if one or both of you are applying
early.
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Friend of Making Sen$e.
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entry is cross-posted on the Rundown- NewsHour's blog of news and
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