5 secrets and 5 gotchas to help you navigate Social Security’s new rules

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If you don't want your money to be swindled out from under you, don't invest it in a brokerage account, says Larry Kotlikoff. Photo by  shironosov/iStock/360 via Getty Images.

Here are five Social Security gotchas and five secrets from the new and revised book, “Get What’s Yours.” Photo by shironosov/iStock/360 via Getty Images.

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.


Author’s Note: The new Social Security law passed last November has forced many (if not most) households to revise their optimal collection strategies. This is particularly the case now that we’ve passed Social Security’s April 29 deadline for providing spousal and child benefits while one’s own retirement benefit remains in suspension. The new law forced me and my co-authors, Paul Solman and Phil Moeller, to rewrite our “Get What’s Yours” book. The revised edition, published by Simon & Schuster, is out today. It explains the new law and how best to adjust to it. But it also provides some new secrets and gotchas that we came across in the almost 15 months since the first edition appeared. To our amazement, the first edition became a #1 New York Times bestseller. We’re hoping the second will do just as well. Our hope is not based on a need to succeed. Rather, things have changed so much for so many people that we’re worried that readers of the first edition will take that advice and run with it when it’s no longer completely legitimate.

And with that, here are five Social Security gotchas and five secrets from the new book.

Larry Kotlikoff, co-author of “Get What’s Yours”


5 SOCIAL SECURITY GOTCHAS THAT CAN LIMIT YOUR BENEFITS

1. If you take two benefits at once, you lose one of the two.

Social Security won’t pay you two different benefits at the same time. Instead it will pay you the larger of the two benefits (or something pretty close to this amount). For example, if you are married and take or are forced to take your retirement benefit when you take your spousal benefit, you’ll lose your retirement benefit if your spousal benefit is larger. Social Security won’t say it has eliminated your retirement benefit. Instead, it will claim it’s giving you your retirement benefit plus the difference or excess between the two. But, in reality, it has used the spousal benefit to wipe out your retirement benefit. Spouses and qualified divorced spouses who were 62 before Jan. 2, 2016, can take just their spousal or divorced spousal benefits starting at full retirement age and their retirement benefit at 70. Those spouses who were widowed before taking their retirement benefit can take their widow(er) benefit before or after they take their retirement benefit. The same holds for qualified divorced widow(er)s.

2. If you are forced to take your retirement benefit at the same time as your spousal or divorced spousal benefit, your retirement benefit will generally wipe out your spousal or divorced spousal benefit.

As we discuss in Chapter 3, the formula that takes your average indexed monthly earnings and turns it into your primary insurance amount — your full retirement benefit — is highly progressive. Benefits paid to lower-paid workers are a much higher percentage of their pre-retirement incomes than is the case for highly paid workers. Consequently, even if you’ve earned relatively low covered wages during your working years, taking your retirement benefit will likely mean never receiving a spousal benefit, because 1) taking your retirement benefit keeps you from ever taking another benefit by itself, and 2) spousal benefits are at best only half of your spouse’s primary insurance amount, so your retirement benefit will likely exceed your spousal or divorced spousal benefit and, therefore, wipe it out. Stated differently, as shown in Chapter 10, excess spousal benefits or divorced spousal benefits are generally zero or very small if we’re talking about two spouses or two ex‑spouses who earned even modest wages.

3. Being deemed before age 70 leads to permanently reduced retirement benefits.

Apart from those grandfathered against post full retirement age deeming, being deemed whether before or after full retirement age, but before age 70, forces you to take your retirement benefit earlier than 70, which means your retirement benefit will permanently fall below its value were you to start it at age 70. Furthermore, if your excess spousal benefit is zero, you’ll receive only your reduced retirement benefit.

Yes, you can undo some of the damage by suspending your retirement benefit at full retirement age and starting it up again at 70 at a 32 percent higher real (after inflation) level. But this 32 percent kicker coming from the delayed retirement credit will be applied to your reduced retirement benefit, not to your full retirement benefit. So once this gotcha gets you, you are gotten for life.

4. You can contribute to Social Security your entire working life and receive nothing whatsoever in extra benefits.

Suppose you start working at age 16 and continue working through full retirement age. Every week, week in and week out, you and your employer pay 12.4 percent of every dollar you earn in Social Security payroll (FICA) taxes. Also, suppose you earn relatively little in absolute terms as well as relative to your spouse. Then you may do best to wait to collect your spousal benefit starting at full retirement age (spousal benefits don’t increase after full retirement age) assuming your partner has filed for his or her retirement benefit, and you were 62 before Jan. 2, 2016.

At age 70, you file for your own retirement benefit, but now you get hit by Gotcha #1. And if your spousal benefit exceeds your age-70 retirement benefit (that is, inclusive of the delayed retirement credits), your total payment will continue to equal just your spousal benefit. Yes, Social Security will describe your total check as consisting of your own age-70 retirement benefit plus your excess spousal benefit. But the sum of these two components will just equal your spousal benefit. So you’ll get nothing in extra benefits for all the years you contributed. Furthermore, when your spouse dies, you’ll collect a survivor benefit based on their earnings record, which will be even larger than your spousal benefit, which is larger than your own retirement benefit.

5. Suspending your retirement benefits can cost you big bucks.

This gotcha pertains to those whose auxiliary benefit is larger than their retirement benefit even inclusive of the maximum amount of delayed retirement credits that can be accumulated. For these people, the amount by which their auxiliary benefit exceeds their retirement benefit is treated by Social Security as their excess auxiliary benefit.

Now suppose you are in this boat and you decide to suspend your retirement benefit and restart it at 70. Under the new law, you can’t collect any excess benefit of any kind during the period your benefit is suspended. So you get nothing whatsoever until you reach 70. At 70 you restart your retirement benefit only to find that the total payment is no larger than you would have received during the suspension period had you not suspended. Yes, your retirement benefit is larger thanks to the delayed retirement credits. But given our assumption that your excess benefit at 70 is still positive, this excess benefit is lower by exactly the amount by which your retirement benefit is larger. Hence, suspending in this situation is simply a decision not to take benefits for the period of suspension. It does nothing to raise your total future benefit payment.

In other words, you would have suspended for nothing, losing potentially thousands of dollars in lifetime benefits. If you realize you made a mistake in suspending your retirement benefit (and seeing no change in your monthly payment is the clincher), you may be able to undo the mistake and recover all your suspended payments — but, it appears, only if you suspended before April 30, 2016.

5 SECRETS TO HIGHER LIFETIME BENEFITS

1. Unless you ask, you won’t receive.

Social Security doesn’t know to whom you are married, whom you’ve divorced, whom you will divorce, whether your spouse or ex-spouse(s) died, whether you have young or disabled children, whether you are taking care of dependent parents. It knows nothing about your family — absolutely nothing. So if you can collect benefits for yourself based on the work histories of current or former relatives or if current relatives can collect benefits based on your work record, you must tell the agency. Furthermore, if your marital situation changes, or a former or current spouse dies, and this can affect your current benefits, you must tell the agency. Don’t expect your benefits to change unless you tell the agency.

2. If your spouse was 62 by Jan. 2, she or he can still collect full spousal benefits on your record between 66 and 70 (while waiting until 70 to collect her or his own retirement benefit) even if you didn’t suspend before April 30, 2016 — provided you are taking your own retirement benefit.

Married couples are connected at the hip when it comes to making collection decisions that can involve full or even excess spousal benefits. What one spouse does affects what the other can collect.

3. There may be no advantage to waiting until full retirement age to collect widow(er) or divorced widow(er) benefits.

If you are below full retirement age and are a) widowed (or were widowed, but remarried after age 60) or b) qualified, widowed and divorced (including those who remarried after reaching 60), and your deceased spouse took retirement benefits early, there may be no incentive in waiting to collect survivor benefits even before you reach full retirement age. This is due to the RIB-LIM widow(er) benefit formula, which entails no increase in this benefit past a certain point that comes before full retirement age, even up to 51 months before full retirement age.

4. Already collecting? Consider suspending and restarting your benefits later.

If you are already collecting your retirement benefit and want to raise it, there may be a way. If you are between full retirement age and age 70, you have the option to suspend your retirement benefit and restart it at any time up to age 70. Social Security will add its delayed retirement credits — 8 percent a year or 32 percent for four years — to your existing benefit.

But be very careful. Some people suspend their retirement benefits and restart them four or so years later only to find their benefit hasn’t gone up. These are folks who are receiving their own retirement benefit plus an excess spousal benefit, an excess divorced spousal benefit, an excess widow(er) benefit or an excess divorced widow(er) benefit. The excess benefits are designed to decline dollar for dollar with the increase in one’s own retirement benefit due to accretion of delayed retirement credits. This dollar for dollar reduction in excess benefits leaves the total payment when it’s taken unchanged unless the excess benefit has been reduced to zero before the retirement benefit stops growing. Even then, it may not pay to file and suspend, because what’s lost in the short run may not be made up in the long run when properly valued.

5. Filing early can be a winning strategy for some.

If you have a spouse and children who can collect on your record, starting your retirement benefit early can permit your family members and, indeed, your ex-spouse, to collect on your work record sooner than would otherwise be the case. But doing so comes at a cost of permanently reducing your age-70 retirement benefit.

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