The Social Security pitfall we just learned about

Paul Solman
Business and Economics Correspondent
California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES BUSINESS) - RTXPWMT

Economics correspondent Paul Solman explains how a hidden Social Security provision known as retroactivity can lose you money. Here’s how it works, and here’s how to avoid it. Photo by Max Whittaker/Reuters

Making Sen$e columnists “Ask Larry” Kotlikoff,  “Ask Phil the Medicare Maven” Moeller and I have just finished rewriting our Social Security bestseller, “Get What’s Yours.” We had not planned to do so, figuring we had written a guidebook for the ages. Unfortunately, the “ages” lasted a scant nine months after the book’s February 2015 publication date. That’s because in November, Congress and the President summarily changed the rules of the game, forcing us to overhaul the book for — well, for however it long it will be until the rules change again.

The new version of “Get What’s Yours” should be out this spring. While you wait, though, you would do well to consult Larry’s latest columns, written after the new law and published here on Making Sen$e — “This is not how you fix Social Security”“Congress is pulling the rug out from people’s retirement decisions,” and especially his “12 secrets to maximizing your Social Security benefits under the new rules,” as well as his answers to viewer questions. You can find a full list of his columns here.

But this column is about a Social Security pitfall or “gotcha” that we hadn’t realized when we wrote the book: a hidden provision known as retroactivity. And all three co-authors of “Get What’s Yours” agree, as does the adviser we use to vet everything we write, career Social Security technical expert Jerry Lutz: this gotcha can be, in our view, a doozy. Here’s how it works.

Let’s say you’re waiting until age 70 to take your Social Security benefit, as we strongly advise, so long as you can manage it financially. (Less than 3 percent of Americans wait until 70.) You set up an appointment by phone for a formal interview, either in person or, again, over the phone. Or you apply online. During the interview or online, you formally apply for your benefit. And at that point, it turns out, you are entitled to take six months of retroactive benefits in a lump sum.

So what’s not to like? Well, the problem is that if you do take the lump sum, you will be assumed to have taken your benefit six months early — at age 69 and a half. And since your benefit grows at 8 percent for every year you wait until 70 to take it, you will be losing a full half-year’s worth of what’s called delayed retirement credits — 4 percent a year — for the rest of your natural life.

Most pernicious of all: You may not be told about this. There’s a chance your Social Security contact will simply sign you up for the retroactive lump sum, under the assumption that anyone would want a windfall of free money, not realizing that it comes at a price in terms of later, lower benefits, just as claiming at any time before age 70 does.

Here’s how technical expert Jerry Lutz explains it:

The ‘paper’ online SSA-1 form instructs people who are at least six months over full retirement age (currently age 66) not to answer the month-of-election question, number 26. Lacking evidence to the contrary, the assumption is that people would naturally want any back pay for which they are eligible. This undoubtedly dates back to the era when there were no such thing as delayed retirement credits [before 1972] or when they amounted to a minuscule 1 percent per year [until 1983]. I don’t know how this question is stated on Internet applications, because the only way to see those is to actually state that you wish to file an application for benefits.

The pertinent POMS [Social Security Operating Manual] references are GN 00204.030 and GN 00204.032. Lacking a written statement from the claimant restricting retroactivity, maximum retroactivity is automatic.

Sounds pretty ominous. Fortunately, the question of when you wish to start receiving benefits is now clearly stated on Internet applications, though you have to actually begin the process for real in order to see the entire application. It’s longish, a close friend of this book reports, but simple enough. Eventually, you reach a page which asks “When to Start Retirement Benefits.” Our friend sent us his copy of the three pages relevant to retroactivity. They are reproduced below, as filled out by him.

Social Security Online Application Social Security Online Application Social Security Online Application

Our friend writes:

Last week, I filed for my retirement benefit online. I found the online application form clear and easy to use. It asked me if I wanted to receive benefits right away. When I answered “No,” it asked me the reason why and then provided a form at the end of the process for me to add any additional information. In both locations, I said I wanted to begin my benefits when they had reached their maximum value as of my 70th birthday.

Today, I received in the mail a confirmation letter that my benefits will begin in March when I turn 70 and that my first payment will be received in April. The amount agrees with the figure contained in my most recent my Social Security statement.

As for applying in person or by telephone, Jerry Lutz, our longtime technical expert for Social Security, writes:

The Social Security Administration claims reps are trained to explain all filing options to claimants, so if someone applies for benefits in person or by telephone, the claims rep should appropriately restrict retroactivity in remarks if that’s what the claimant chooses.  Based on my personal experience, however, when you explain to someone that they can either wait until age 70 and receive $3,000 per month, for example, or receive $2,909 per month and get a lump sum check of $17,454, the vast majority opt for the latter.

That, of course, is because people are both financially myopic and bad at arithmetic. If told that the choice was either getting almost $1,200 more a year — forever — or $17,454 right away, the vast majority might think twice.

“Just to clarify,” Jerry Lutz added, “Social Security applications taken by phone and in the office are electronic. Claimants have no access to the electronic form, so it is impossible for them to write anything on it. They can dictate to the claims rep what they’d like to have put in remarks, however. They can then review their printed copy of the completed application to insure that it contains the proper remark. If it doesn’t, the claims rep can add an amendment to the electronic application, which will also be printed out for the claimant’s review.”

I had one last question for Jerry: Did he think people should go to a Social Security office and apply in person? His answer:

No, I don’t think it’s necessary for people to apply in person. My understanding is that most offices are understaffed, resulting in long wait times. When I was working, most people could get an appointment within a few days after they first contacted an office, but now it usually takes more than a month, from what my former coworkers tell me.

Most of the claims that I took were by phone, and I never had any problems with incorrect months of entitlement or unwanted retroactivity. The claims rep completes the application in exactly the same manner whether in person or by phone, with the only difference being that the application is either mailed or given to the claimant for review.

Bottom line, from my point of view: The best option would seem to be applying online. And making sure you follow our friend’s guidelines, putting in your 70th birthday as the date you wish to receive benefits and explaining why just to make double sure. If you apply by phone or in person, make sure the person you speak with understands your intentions and acknowledges them in writing.

P.S.: After I finished writing this column, co-author Phil Moeller received an email from another technical expert who retired from the Social Security Administration after 35 years on the job. Phil had written about the retroactivity danger for Money magazine. Here’s the email in response:

I just got done reading your Social Security article on line about six-month lump sum payments. It was spot on. I retired two and a half years ago after working as a claims representative and technical expert for over 35 years.

Although they would never admit it, the agency is now understaffed and undertrained. Therefore the mistake(s) you refer to are all too common. Now the agency no longer asks the claims representative to help counsel the person as to the best choice, but has taken a position of let the taxpayer chose what they want, no matter how bad the choice is. That and their vigorous efforts to have people file online just perpetuates the problem. Those claims filed online are only given a cursory review before being processed. In fact, it is common for people to come into the office to ask questions and try to file for benefits, only to be refused service and told to go home and file online. Again, the agency would never admit that is the official policy, but believe me, it is stressed over and over again that people are to file for benefits online. Statistics are kept by office, and believe me, if your office does not meet a certain percentage of claims being filed online, you hear about it.

Mediocrity is now the norm. Manual calculations are often done incorrectly because representatives are not taught how to do them. All the agency cares about is getting cases off the desk ASAP and to be able to run all these computerized programs. They have taken the human element out of the process.

The agency is in sad, sad shape. From the top down, it has become a numbers-driven agency: How much is done online and how long does it take to do it…

The motto used to be world-class service. Sadly, that isn’t the case.

I leave the last word on this email and the issue of retroactivity to our own retired technical expert, Jerry Lutz:

I certainly share this former employee’s frustration with the downhill slide in Social Security Administration’s performance. The majority of the public only cares about lower taxes and have been hoodwinked into believing that there is no price to pay for that.  When I was working, I got so sick of hearing the management’s spiel about doing more with less, and that only got worse as time went on. I consider the vast majority of the people I worked with to be excellent employees, but no one can work miracles.

Even then, I stand by my opinion that if you tell a claims rep what month you want to start benefits, either by phone or in person, there is little chance that will be messed up. Same goes for the online applications. As long as you know enough to enter the correct month of entitlement, like [our friend whose forms we reproduced above], you’ll be fine. I’m not as confident about the online process with regard to people being able to properly restrict the scope of their application to the type of benefit they are applying for. If they read your book, though, [or acquaint themselves with the rules by other means,] they should do fine.

Editor’s Note: For more on the following topic of retroactivity and the best way to file for your benefits, check out Larry Kotlikoff’s column “Should you file for your Social Security benefits online, over the phone or in person?”