Am I Bankrupting Social Security by Taking Benefits I May Not Need?

BY Paul Solman  September 30, 2013 at 11:10 AM EDT

By Larry Kotlikoff

Social Security was designed for older folks of all income levels for a reason, Larry Kotlikoff explains. Photo courtesy of William Thomas Cain/Getty Images.

Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version

Paul Solman: Larry, as I often acknowledge, I have been in your debt ever since the day, a few years ago, when after playing tennis, you asked me how old my wife and I were and when we were planning to take our Social Security benefits.

Proudly, I told you not to worry: we had it all figured out. We would both wait until 70 to take our “maximum” retirement benefits rather than our smaller full retirement benefits at our full retirement ages which were, then, coming right up. I boasted that I had read and saved those annual statements from the Social Security Administration over the years with their “estimated benefits” and knew just how much we would gain by waiting — as much as $10,000 a year — and understood how important that money might turn out to be should we reach super-old age. I explained that our main worry is outliving our savings, given that both of our mothers made it to 90, and my father to 99.

“But exactly how old are you two?” you asked.

“What difference does that make?” I said, repeating that we were both waiting until 70. “It makes a big difference,” you said.

Okay, my wife was about to turn 66; I, 65.

“Here’s what you do,” you said, never missing an opportunity to speak in the imperative. “Your wife, who is older than you, should apply for her Social Security retirement benefit before you hit 66. But then she must also simultaneously suspend it. In doing this, she will be letting her own retirement benefit continue to grow until age 70, at which point she should activate it. But by suspending, she’ll permit you to take a spousal benefit at 66 and collect what amounts to a free spousal benefit from 66 to 70.”

“But wait a second,” you continued, clearly thinking aloud. Suppose I applied and suspended at 66 and my wife begin taking the spousal benefit? Might that not net us more in total, since I earned more than my wife?

Now I admit that having reported on business and economics for public television right after attending the first year of the Harvard Business School MBA program — on a journalism fellowship — back in the 1970s, I am stubbornly convinced I understand more about the intricacies of business, finance and economics better than almost all of my fellow Americans. I own up, Larry: this exchange made it humblingly clear that I didn’t know more about Social Security than you did. For starters, I knew nothing about the spousal benefit. I promised to research the matter, went home, decided not to sulk and instead did the calculations. I quickly learned that it was better for us to have my wife suspend and for me to take a spousal benefit rather than the other way around. That’s because I would get an extra year of the spousal benefit, being a year younger, and one extra year was worth more than the difference in benefits.

As a result of our tennis court interaction, my wife registered and suspended when she turned 66, there being no harm in filing and suspending as soon as she reached full retirement age. I called Social Security a year later and explained that I wanted to file, suspend, and then take a spousal benefit. The woman on the other end of the line wondered aloud if this was a legitimate strategy, put me on hold to check with a supervisor, and then returned not only to give it the green light, but to offer genuine gratitude “for teaching me something I didn’t know, and will be able to share with future callers from now on.”

So the episode taught me that you know generally whereof you speak when it comes to Social Security, and your weekly column for the Making Sen$e Business Desk is another happy outcome of that day at the net. But Larry, you have also long harangued our readers, and anyone else you could corral, that the U.S. government is broke — bankrupt, in your words — and that uncounted Social Security obligations are a major factor in our real, if recondite, insolvency.

So then, answer me this: Do people like my wife and I really deserve to take a spousal benefit? For that matter, do we deserve the substantial payments we are eligible for at age 70? Wasn’t Social Security designed to protect poor people from an ignominious old age, not people like us who have worked for decent pay all our lives? And therefore, isn’t the benefits advice you keep giving here in your PBS NewsHour column and elsewhere about maximizing one’s Social Security collection contributing to the financial crisis about which you keep warning?

Larry Kotlikoff: Paul, you ask the best questions. Social Security is, indeed, in bad financial shape. In fact, the system is probably in worse shape than Detroit’s retirement system, which is now part of that troubled city’s bankruptcy.

If you take a look at table IVB6 of the Social Security’s Trustees Report, released in April, you’ll see the program is 32 percent underfunded. It needs either a four-cent-on-the-dollar immediate and permanent tax hike of the earnings taxed by Social Security (a 32 percent tax hike, in other words) or an immediate and permanent 22 percent benefit cut to get its books to balance.

So why am I, on your website and elsewhere, trying to help people, including well-heeled people like you, get the best deal?

First, I think if we are going to have the government give people benefits, it’s unfair for some of us to collect more and others less because of lack of knowledge. I think of my advice as leveling the playing field.

Second, the rationale for forcing everyone to participate in Social Security was to make sure that everyone had some means to survive in retirement when they could no longer work. Libertarians will respond that people should save for themselves and starve in old age if they don’t save or invest poorly. But I think even the toughest-skinned libertarian is, deep inside, altruistic. Sen. Rand Paul, R-Ky., talks tough, but I believe he would surely mend the broken arm of someone who couldn’t pay if he were the only doctor available.

This innate altruism is something we all seem to have, more or less, and to have especially for the elderly who can’t fend for themselves. But it causes what we economists call the Samaritan’s Dilemma. The Good Samaritan helps the poor person today; tomorrow, the poor person comes back and asks for more help.

If we were all identical, all altruistic toward each other, but all aware of each other’s altruism, we’d all have an incentive to save too little for old age. In other words, we’d all look for handouts from each other. Or worse, those endowed with more altruism would regularly be hit up by those with less.

Forcing everyone to save for their retirement, then, as Social Security does, overcomes the so-called “free rider” problem. And this is why Social Security was set up for middle and high earners as well as for low earners. Moreover, not only does Social Security force everyone to save, but it is designed to give the lowest earners — who will need the most help in old age — a better deal. This is another implication of altruism. We care more for those who are most in need.

Also, the system doesn’t let people take any risks with their enforced savings. It doles out their benefits to them on a month-by-month basis.

Finally, the government is using its ability, via the tax system, to observe virtually all of our earnings and force us to save every dollar up to a maximum. This way we can’t claim to each other in old age, “I saved at a high rate, but I’m poor because I earned very little,” when, in fact, we earned a lot.

The closer you look at Social Security, the more you see that it’s been structured to avoid the Samaritan’s Dilemma — to keep us from free-riding on each other.

Look, Paul, if you want to forgo the money Social Security entitles you to, go right ahead. You need never take any Social Security benefits at all. But they are yours, and for good reason. This is an economy-wide solution to an otherwise inevitable problem: the incentive to be the grasshopper instead of the ant, and then appeal to our fellow human beings to bail us out come winter. Or to meet the grasshopper’s fate, and starve.

Jerry Lutz, who worked for years at the Social Security Administration and vets all of Larry’s Business Desk answers for accuracy, adds this: “I only recall a handful of times, if that, when someone passed up benefits for altruistic reasons. I thought it was a noble attitude, but it wasn’t something that we encouraged or discouraged.”

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.