Column: This is not how you fix Social Security
Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Editor’s Note: Last week, Social Security expert Larry Kotlikoff warned readers about the budget bill that would cut Social Security benefits for millions of Americans. Larry later notified seniors of revisions to the budget bill. Signed into law by President Obama today, Larry Kotlikoff has another update on the deal’s Social Security provisions.
We’ll continue publishing updates on what this new law means for your Social Security benefits. Stay tuned. And for more on Social Security in the future, check out “Ask Larry” published every Monday on Making Sen$e.
— Kristen Doerer, Making Sen$e Editor
Many of you have read my recent column in this space about the 2015 budget deal’s changes to Social Security.
Today, I’d like to correct several mistaken views about the law’s fairness and provisions, which have shown up in leading newspapers and websites. I also want to explain why the budget deal may produce a major increase in divorce rates over the next couple of years and how it lets nasty ex-spouses keep their exes from collecting divorcee spousal benefits for up to four years.
MORE FROM MAKING SEN$E
The final version of the bill was, it seems, put together over a very short period of time though some such plan was vaguely mentioned in the President’s budget as submitted last winter. But there have been no public hearings and no public debate. From talking with high-level Social Security officials, there’s reason to believe the bill was amended thanks to my article here a week ago, in which I pointed out that the original language would eliminate benefits that people were already collecting. That’s how seat-of-the-pants this process has been, though thank goodness at least for the 11th hour amendments. Those amendments made a terrible bill a bit less terrible as my inbox full of outraged emails from people who feel they have been betrayed can attest.
The Senate and the House passed their bill with the amendments that grandfather in some people (as discussed below), and the President signed it into law today. I think both he and members of Congress will find they have opened a hornet’s nest and will rue the day they changed Social Security provisions with a hatchet rather than a scalpel.
Alicia Munnell of Boston College, among others, has been a strong advocate of the change in Social Security rules included in the budget deal that will keep millions of Americans from collecting full spousal benefits while they wait to collect their own retirement benefit at 70. She has implied that high earners were likely to be the primary beneficiaries of this strategy. She also estimated that if all spouses and divorced spouses were to take advantage of the strategy it would cost the system $9.5 billion per year. This figure has been widely cited, including in yesterday’s New York Times, and full disclosure, in my co-authored book, “Get What’s Yours.”
But alleging something to be true (that the well-to-do will differentially benefit) doesn’t make it so. There is actually recent evidence from Stanford economist John Shoven and his co-authors that the rich aren’t much more likely to delay their claiming than the poor. And the estimate that costs could reach $9.5 billion per year doesn’t mean they have gotten anywhere near that level.
Let me tell you about someone who doesn’t fit Alicia’s presumed typical case. My secretary Norma is 64 and works two jobs for a total of 80 hours a week. She’s been doing so for the last 15 years. Her husband doesn’t work because he needs to stay home with their severely disabled child. Norma makes a modest combined income in the two jobs, but spread over three people, she and her family are decidedly lower middle class.
Norma had planned on filing and suspending her retirement benefit at 66 so that her husband could collect a full spousal benefit while she waited till 70 to collect her retirement benefit. She told me on Friday that she had planned to stop work at her second job based on getting that full spousal benefit. Now she can’t. But if she can’t keep working at her current pace, she’ll have to retirement benefit early. This will activate the spousal benefit for her husband, but it will also mean a permanently lower retirement benefit for her than she had planned.
How many Normas are there out there and how many like Alicia? (I use Alicia because she stated publicly that she and her husband are high earners and that she personally took the full spousal benefit while waiting to collect her own retirement benefit at 70 while feeling guilty about it. But the upshot is that she and many other Americans did take advantage of rules that have now changed. I tried to reach Alicia before publishing this, but I haven’t been able to get in touch.)
Let me turn to some features of the law that people are, it seems, getting wrong or may not yet have spotted.
1) The budget deal gives each of us 180 days from the date of signing (today) to file and suspend our retirement benefit. But you can’t file and suspend until you reach full retirement age, which is now 66. So only those that are within six months of their 66th birthday can still file and suspend. If you were born even one hour too late, too bad.
2) The spouses of those who can and do file and suspend over the next 180 days can collect a full spousal benefit starting at full retirement age if they are 62 before the end of the year. If they were born one day too late, too bad. The spouses who do luck out in turning 62 before Dec. 31, 2015 and who have a spouse who can file and suspend in the next 180 days are grandfathered in not just for 180 days, as many have alleged, but right up to the point they file for their spousal benefit, which can be several years.
3) The budget deal provides a huge incentive, up to $120,000 in some cases, for married couples to get divorced, “live in sin” and then get remarried at 70. Take a couple in which each spouse is now 63. Neither can file and suspend over the next six months because neither will reach full retirement age by then. But if they get divorced, they will be able, at full retirement age, to each collect a full spousal benefit based on each other’s work records while waiting until 70 to collect their own retirement benefit. You need to be divorced for two years before you can collect on an ex, so this couple would have to get divorced by 64 in order to start collecting their full spousal benefit at 66. Can working couples under age 62 do the same? No, because they will be deemed to be filing for their own retirement benefit at full retirement age if they file for their divorcee spousal benefit and will end up with the larger of the two amounts.
4) From these examples, we see that the budget deal has introduced two new types of “notch” babies — those that are a day shy of reaching age 66 in 180 days and those that are a day shy of becoming 62 this year. The difference can mean that two people that were born a day apart can end up receiving, all else equal, benefits that are up to $60,000 different. This strikes me as grossly unfair.
5) The budget deal says that:
In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect —
(A) no retroactive benefits (as defined in subsection (j)(4)(B)(iii)) shall be payable to such individual;
(B) no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income.
No retroactive benefit means that if you suspend your benefit, you can’t go back to Social Security and ask for a lump sum check equal to all your suspended payments. To see the impact of this, consider someone now age 61, who I’ll call Pam. To keep matters simple, we’ll assume Pam never married. Suppose Pam takes her retirement benefit early at 62, but then suspends it at full retirement age. At 69, Pam discovers she has pancreatic cancer and has at most one years to live. She also has huge medical bills. Under the old law, Pam could receive a check for all her suspended benefits. Now she can’t collect a penny retroactively. This strikes me as grossly unfair.
6) Thanks to provision (B), a nasty ex-spouse can cancel the spousal benefits of his ex by filing and suspending even though doing so provides no advantage to himself. Take Sue who was unhappily married to John for decades before Sue called it quits. John earned a lot of money. Sue earned very little. Sue and John are now both 66. John plans on waiting until 70 to collect his retirement benefit. Sue files for her divorcee spousal benefit. John, who is a nasty person and hates Sue, chooses to file and suspend his retirement benefit, and poof, there, thanks to provision (B) go Sue’s benefits for four long years.
7) Thanks to provision (B), the decision to suspend one’s benefit at full retirement age and wait until 70 to collect a 32 percent higher monthly retirement check — something that everyone should do to better safeguard against extreme longevity — will come at the cost of wiping out the benefits of children and spouses who are collecting on your work record during the period of suspension (which would now be four years between 66 and 70). Take Sam, now 64, who took his retirement benefit at 62 in order to provide a disabled child benefit to his daughter, Alice. If John suspends his retirement benefit between 66 and 70, Alice’s check will stop for four years. I find this incredibly unfair, especially given that Sam’s decision to take his retirement benefit early may have been predicated on being able to suspend between 66 and 70 without affecting the benefit going to Alice.
Look, anyone who knows about Social Security knows it is crazy complex. This, after all, is why my book with Paul Solman and Phil Moeller became a best-seller — because no one could safely figure what to do on his or her own. But if you are making Social Security policy and you know the system is dealing with all kinds of people in all kinds of situations and that abrupt changes to it can do them serious harm and wind up making arbitrary distinctions among Americans based solely on their age, you don’t go into a back office at the 11th hour and start rewriting the law, and then make it public the next day, only to discover that you have to amend the most egregious provisions within a few hours because someone immediately discovered things you would have seen had you taken more time. Fixing Social Security, which certainly needs plenty of fixing, needs to be done in the light of day, in hearings open to the public, based on testimony by a range of experts, and with careful consideration of a range of options. That’s what our democracy both demands and fully deserves.