Avoid the Social Security nightmare that doomed this couple

BY Laurence Kotlikoff  January 20, 2014 at 4:09 PM EST
Social Security expert Larry Kotlikoff's fictitious horror story about a couple who was misled about their benefit collection strategy is a cautionary tale. Photo by Flickr user John Fraissinet

Social Security expert Larry Kotlikoff’s fictitious horror story about a couple who was misled about their benefit collection strategy is a cautionary tale. Photo by Flickr user John Fraissinet

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.


Before answering a few of your questions, I thought I’d provide a short Social Security horror story that I made up but that could happen to you.

Sally and Arthur Blackstone are a nice, hypothetical upper-middle class New York couple who contributed at the maximum level to Social Security since graduating law school.

Many people think Social Security is a big deal for the poor but not that important for the middle class. Not true. Though Social Security is progressive — higher contributions produce less than proportional increases in benefits — those that earn and contribute the most also stand, in absolute terms, to get the most back from Social Security.

Take Sally and Arthur, who just turned 62. They’re burned out and calling it quits. Their goal is to retire in Austin, Texas, where they grew up. But housing there has gotten expensive and after putting the kids through private schools and college and paying New York City prices for decades, they aren’t particularly flush.

Apart from their small, two-bedroom condo, they have $1.3 million in retirement accounts. That may sound like a lot. But it’s not actually very much when it comes to financing an upper middle-class lifestyle for what may be another 35 years. Sally and Arthur were good savers, but Arthur pulled them out of the market at the bottom in 2008 and has invested everything in money market funds ever since. They are earning no income after inflation on their money and are terrified of putting it back in stocks.

Now, after decades of paying FICA taxes without much attention to what they’d get back from the system, they are greedily eyeing their Social Security benefits. Arthur’s plan is to take benefits this year. He figures they are worth around $1.2 million in present value. But Sally, who could kill Arthur for losing so much money on the market, has a different view. She thinks they should wait until 70 when their retirement benefits will start, after inflation, at a 76 percent higher value. That would bring their lifetime benefits, valued as of now, up to over $1.5 million.

Making an extra $300,000 by doing nothing more than waiting eight years to collect their benefits has prompted Arthur to do his own research. He’s read about a way for one of them to get a free spousal benefit starting at 66 and kick their lifetime benefits up to $1.56 million. Sally’s gone one better and learned that if she and Arthur get divorced between now and age 64, they can both get free spousal benefits starting at 66, and their combined $1.56 million in Social Security wealth will grow to almost $1.62 million.

As they sit over breakfast, debating whether to live in sin or finally get free of one another (it’s been a rocky road since 2008), Arthur realizes they’ve forgotten to value the higher survivor benefits one of them could receive between 66 and 70, were the other to die before 70, as well as the higher child benefits their disabled son would start receiving when they reached full retirement age and one of them were able to file but suspend his or her retirement benefit. They also realized that their son’s child survivor benefit would be higher once the first of them passed away as a result of their waiting until 70 to collect retirement benefits.

Figuring out precisely what these extra benefits are worth is beyond Sally and Arthur’s ken, but they figure optimizing their Social Security decisions over the kitchen table has raised their lifetime benefits by roughly 50 percent — at zero risk.

But lawyers being lawyers, Sally and Arthur decide to check things out with the good folks at the local Social Security office. The Social Security lady with whom they meet, Gladys, is convinced that waiting to collect means losing benefits if you die early. She swore to her husband never to let anyone who crosses her desk make such a mistake. Even though she’s not formally permitted to give advice, she repeatedly asks Sally and Arthur how they would feel were they to die before collecting a single penny of their benefits after contributing taxes for the past 40 years.

Sally and Arthur are won over and sign up for immediate benefits. But one year and one day after the day they went to the Social Security office, they realize they’ve made a huge mistake — had they died without taking their benefits, they would be dead and feeling no pain, including painful regret.

Gladys, the woman from Social Security, was trying to help, but she wasn’t thinking about their retirement benefits the right way. In reality, their past contributions represented insurance premiums to purchase an insurance policy against living longer than average, and the payoff from the policy was their monthly benefit. Giving up eight years of retirement benefits in order to get much higher benefits starting at age 70 simply represented another way to buy more longevity insurance from Uncle Sam. In this case, the eight years of lost retirement benefits represented the premium payments and the 76 percent addition to their retirement benefit starting at 70 represented the larger payout. And this is not to mention the free spousal and extra widow(er) and child benefits they forfeited.

With this realization now clearly in mind, Sally and Arthur rush back to the Social Security office, sit down with Gladys again, and tell her they want to pay back every penny they’ve received in the last year and return to their original collection plan. They bring along confirmation from a software program they’ve run that underscores the huge gain from following their original plan compared to following Gladys’ strategy.

Gladys smiles, shakes her head, and says, “You’re making a mistake in your thinking. Social Security set up the system to be actuarially fair — so that you’d get the same deal on an expected value basis no matter when you take your retirement benefit.”

Arthur screamed, “But we’re not an insurance company! ‘Expected this, expected that’ is relevant to an insurance company, but not to us. We’re only going to die once and the way it’s looking, that will be damn late!”

Gladys smiles again and says, “But, in any case, you’re a day late. You have one year exactly — not a day, nay not an hour, minute, second or nanosecond longer — to repay and start your collection strategy from scratch.”

Arthur, who suffers from hypertension, goes ballistic. Soon, Glady’s manager, Jane, appears. Jane tells Arthur, who is now feeling chest pain, to calm down and stop shouting.
“Gladys,” Jane explains, “didn’t advise you what to do. She just laid out your options. You decided what to do. And now you have to live with the consequences. You can’t undo what you’ve done.”

“Does this mean we can’t collect spousal benefits?” asks Sally.

“Well, you can collect them, but they’ll be zero,” replies Jane. “The only option you have to raise your benefits is to wait until 66, your full retirement age, and suspend your retirement benefit and then start it up again at 70 at a 32 percent higher level from where you suspended it.”

“So we’re permanently screwed?” screams Arthur.

“Not if you die young,” replies Gladys, still smiling. “And there’s every chance that could happen.”

Sure enough, Arthur collapses on the spot and the EMTs pronounce him dead. As he’s wheeled past Gladys, she pats his body. “See, aren’t you glad you followed my advice? At least you got one year of benefits.”


Sam Henefin: I cannot be alone in this situation — to wit, married to a disabled spouse. For all of the articles discussing options and strategies for claiming Social Security for married couples, women, divorcées and survivors, there is an extreme dearth of material related to claiming strategies for the disabled and their spouses.

Just a couple of the questions that might be answered (I’m sure there are plenty of others):
If my wife is receiving Social Security Disability (SSDI) benefits, can I file a restricted claim for spousal benefits at 66 — even if she is younger than 62? Can my wife file for spousal benefits at 66 instead of having her SSDI automatically switch to Social Security payments?

Larry Kotlikoff: The answers are “yes” to both questions. But, for your wife at 66 to file just for spousal benefits and collect half of your full retirement benefit, she has to have withdrawn her retirement benefit right before hitting 66 (to keep her SSDI benefit from automatically converting to her retirement benefit), and you need to have filed for your own retirement benefit (but, if you do this before 70, you can suspend its collection). She and you can both start or, if you suspended, restart retirement benefits at 70, when they will be 32 percent larger than had you taken them at full retirement age (66 in your cases).


David B. — Houston, Texas: My spouse is receiving a benefit on her own earnings record that began when she reached her full retirement age (FRA). When I reach my FRA, I intend to file and suspend so that I may earn an enhanced benefit at 70 and my spouse can begin receiving half of my primary insurance amount (PIA).

The question is, if my average indexed monthly earnings (AIME) increase due to earnings between my FRA and age 70, will my wife’s spousal benefit increase each year as well? That is, will the PIA on which her spousal benefit is based be recalculated each year?

Larry Kotlikoff: Glad you wrote. Sounds like you are going to make a mistake. But before I say what I think is best (only proper software can say for sure), let me say that the answers to your two questions are yes and yes. Her excess spousal benefit will rise if you earn enough to raise your own primary insurance amount (your full retirement benefit) via Social Security’s recomputation of benefits provision.

Now here’s what I think you should reconsider. You should explore taking just your spousal benefit when you reach full retirement age (FRA) and then take your own retirement benefit at 70. When you reach 70, it’s possible that your wife’s excess spousal benefit will be positive and she can then collect some more from that source. But if she earned decently, chances are her excess spousal benefit will be small or zero. Meanwhile, you’ll be giving up four free years of receiving half her full retirement benefit in the form of a full spousal benefit.


Michele — New York, N.Y.: I am 60 years old and lost my job. My husband is 75 and collects Social Security. I am collecting unemployment but that will run out soon. My husband has a lot of medical problems and needs me to help him daily. He cannot be left alone. Is there any way he can receive additional money from Social Security for me?

Larry Kotlikoff: Very sorry to hear about this situation. When you are 62, you can start collecting your own Social Security retirement benefit and an excess spousal benefit, which could be very small or zero. It may be best for you to wait until you reach full retirement age to collect just your full spousal benefit and then wait until 70 to collect your retirement benefit.


Kevin Koekemoer — Sacramento, Calif: I am 63 this year and my wife is 64. I have worked throughout my life and my wife has been a homemaker with our four children. I have also spent some years overseas where I worked but did not pay U.S. taxes or into Social Security. There are, therefore, some periods that are listed as zero in my Social Security history. Will my wife qualify for any kind of independent benefit payment based on my working history? If she does, does that affect the total on my own benefit payment?

I will have worked and contributed approximately 20 years when I retire. I have heard that I need to have a certain number of “quarters” — what are these quarters and would 20 years of contribution to Social Security give me the number of quarters required?

When I first came to the U.S., I worked under a visa and paid self-employment tax. I left to work overseas again and when I returned, I was given a Social Security number. All of my payments under Social Security have been credited, but there were three years when I worked on a visa where the self-employment tax has not been credited to my history. Should I ask the Social Security office to look into this and credit my history? Would it make any difference?

Larry Kotlikoff: You need 40 quarters or 10 years (but not necessarily consecutive quarters) of covered employment. When you start collecting your retirement benefit, your wife will be able to receive half of your retirement benefit as a spousal benefit.

If she collects spousal benefits, that won’t impact your own retirement benefit. By all means, try to get the extra years of covered employment that you worked while on a visa included. I’m not sure how you could have paid self-employment tax without having a Social Security number, but if you did, you will need copies of your tax returns and proof that you paid the taxes in order to receive credit.


John Carter — Rantoul, Ill.: I’m 49 and receiving disability benefits. I’m getting married in June. How will this affect my disability payments?

Larry Kotlikoff: Your wife will be able to collect spousal benefits on your earnings record. And if you die, she can start receiving survivor benefits. Spousal benefits can begin, at a reduced level, starting at age 62. Reduced survivor benefits can begin at 60. You need to be married for nine months for your spouse to qualify for survivor benefits if you die, and for one year for your spouse to qualify for spousal benefits. Your getting married won’t adversely affect your own Social Security benefit, although it could impact your means-tested Supplemental Security Income as well as eligibility for food stamps and other forms of government assistance.