What Social Security has yet to get right: It’s your maximum age of life that matters



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

Boston University economist Larry Kotlikoff has spent every week, for more than two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His 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 feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.

Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:

I’m appalled by Social Security’s ongoing effort to mislead the public into thinking they should focus on their life expectancy instead of their maximum ages of life in deciding whether to take their benefits early. Social Security has​ a warning on their website that many people will live beyond their life expectancies. But their life expectancy calculator, simply by its prominent position on their website, strongly encourages people to focus on life expectancy when it comes to collecting benefits. This is ​absolutely ​disgraceful and should be removed.

Social Security’s formal name is the Old Age Survivors Disability Insurance system. Social Security is an insurance company. It’s taking money from us and promising insurance benefits in exchange. (Yes, it’s funded on a take-as-you-go basis and is deeply insolvent, but that’s neither here nor there for this issue.) Insurance companies don’t go out of their way to encourage people to ignore risks and focus on average outcomes. Homeowners insurance companies don’t have calculators showing us that the expected loss we face from having our house burn down is small ​and, thereby, implicitly suggest that we not buy homeowners insurance. Health insurance companies don’t have calculators showing us that on average we won’t get cancer so we, wink wink, shouldn’t buy insurance against that possibility. Car insurance companies don’t have calculators showing us that, on average, we won’t total our car this year and, wink wink, we can get by without full coverage.

Insurance companies don’t discuss or display average outcomes because they know that their clients can’t play the averages. They know they have only one house to lose, only one body that can require super expensive cancer surgery, and only one car that may end up smashed to bits. It’s time Social Security recognized the obvious — each of us has only one life to lose and we may lose it at ​age ​100 or even later.

Social Security is now and has always been dominated by actuaries who look at averages, called expectations. Actuaries are good with numbers, but seem remarkably dense when it comes to the basic economics of insurance. They spent years telling people they might as well take their benefit early since they’d get the same amount on average either way. In the process they lost millions of people billions upon billions of dollars in benefits, when one properly values the insurance feature of Social Security. They are no longer telling people to take their benefit early. But by focusing attention on life expectancy​,​ as opposed to the worst-case scenario, living to one’s maximum age of life, Social Security is doing a grave disservice. So, ​here’s my appeal to ​Social Security​, which I’m sure virtually all economists would endorse: ​​​Take down your life expectancy calculator!

George: Read your latest missive about your doctor friend. Not being a conspiracy nut, without my consent Social Security filed a 6-month retro application when I applied for my benefit at age 70. They said the technician when manually reviewing my application by mistake ticked off the option for the retro. (Uh-huh). Now, two incidences does not make a conspiracy, but it’s one of those things that makes you go hmmmmmm… I immediately returned the large check to SS and demanded they restore my original choice.

Larry Kotlikoff: This really takes the cake. It’s bad enough that the staff as Social Security don’t understand why people should and would want to delay their benefit receipt. But then when you tell them you want to take your benefit starting at 70 they decide you should have taken it earlier and change your application to something you didn’t request. I’m wondering how many of these “mistakes” get made every day and how many of those making these mistakes ever get fired.

What I’d like to see is an independent audit by someone like me of Social Security’s handling of participant requests for information and commencement of particular benefits. My guess is I’d find a 40 percent error rate. If I could, I’d force every member of Social Security’s staff to read my new book with Paul Solman and Phil Moeller. Indeed, it might be good for you and others to donate at least one copy of the book to your local SS office and ask them to read it.

​After showing this reply to Jerry Lutz, the former Social Security technical expert who reviews all my answers in this ongoing column, Jerry wrote me the following:

Based on SSA regulations, retroactivity is automatically applied to applications filed after FRA unless retroactivity is expressly restricted by the claimant.

If you look at the instructions for question 26 of the paper SSA-1, you’ll note that claimants who are six months or more beyond FRA are instructed NOT TO ANSWER the month of election question. I’m not familiar with the online applications, but I assume that those instructions are similar. If the month of election question isn’t answered, and retroactivity is not restricted in the remarks, retroactivity is automatically applied to the extent permissible by law.

If this is a conspiracy, frontline SSA employees are not in on it, so I wouldn’t throw them under the bus. They just try their best to enforce the rules as written by the higher-ups.

What Jerry is saying is something I didn’t know. Anyone who wants to get all of his or her Delayed Retirement Credits must expressly tell Social Security not to provide retroactive benefits. Social Security’s default assumption is that you want to receive retroactive benefits. I would put down in writing your decision not to receive retroactive benefits and get Social Security to provide you a written statement that they have received your statement.

Deb: I’m currently reading your book. It’s a huge struggle to get enough information to know what to do, as you know — and even reading the book, I’m still struggling mightily (and I used to edit very technical information, have a decent education, etc.) — so I can only imagine how folks with less “world savvy” struggle–or not, since they may not know they have choices with regard to Social Security. That so many people don’t understand the system well enough to leave those billions on the table is just plain unreal and even scandalous!

I fear my spouse and I may have made a terrible mistake in our choice — I signed up to start mine (age 62 now) about 3 months ago, to get the first check in April 2015 — he’s still working, has suspended his and has paid in the top amount for 35 years or longer — and I now think I might have left tons on the table also. I foolishly should have either not taken it so early OR maybe just have taken my own retirement benefit, rather than the spousal one.

Larry Kotlikoff: You have one year to pay back every penny you received and start from scratch in deciding what to do. You can’t take your retirement benefit early without taking your spousal benefit early and vice versa. This is the deeming gotcha we discuss. See what the software says to do, and if it tells you to wait until full retirement age and collect just your spousal benefit starting then and wait until 70 to collect your own retirement benefit — just file a request with SS to withdraw your retirement benefit and your spousal benefit. You’ll need to cut them a check, but so be it.

Joan: How do I gather financial information to import my ex’s SS info? Just called social security, they would not give me any amounts for my ex. The only thing they said was that I would get 71.5 percent of his benefit when he dies. Without his info, how can I optimize my decision?

Jerry Lutz, former Social Security technical expert, helps us answer this question.

Jerry Lutz: SSA can and should tell the person what their potential benefit amount(s) would be on their ex’s account, assuming they meet the requirements. An informed person could then use that information to calculate at least approximately what their ex is eligible for.

My guess from SSA’s response to Joan’s question is that her own PIA may fall between 50-100 percent of her ex’s PIA, so they were trying to explain that she wouldn’t get anything on his account if she filed now, but would in the event of his death. If she asks them how much she would receive if she waits until FRA and files for divorced spousal benefits only, they should provide that information.

Julie: In late September 2015, I will turn 62 years old and my ex-spouse will turn 64 years old in early October. I am presently working and plan on working until 70 years old as long as I’m healthy. We got married October of 1971 and divorced in May of 1989. I have never remarried, so I meet the qualifications to collect divorced spousal benefits. After I reach my Full Retirement Age (66 years old), will I be able to collect my divorced spousal benefits, continue working full time and then suspend my own social security benefits until I reach age 70? If I’m unable to continue working after I turn 62 years old, can I draw my divorced spousal benefits and suspend my own social security benefits until my full retirement age? If my ex-husband’s Social Security benefits are more than my own Social Security benefits, can I continue collecting his benefits after I reach my full retirement age and suspend my own benefits until age 70, waiting to get the highest possible retirement benefit?

Larry Kotlikoff: When you reach full retirement age, file just for your divorcee spousal benefit. DO NOT file and suspend. If you do, you will most likely wipe out your spousal benefit. As described in the book, filing for your own retirement benefit triggers excess benefit hell in which you can’t collect a full auxiliary benefit (a spousal benefit or a widow(er) benefit or a divorcee spousal benefit or a divorcee widow(er) benefit or a child-in-care spousal benefit) by itself. In your case, if you file and suspend AND DO NOT DO SO, you will get an excess spousal benefit for the years before full retirement age and 70 and it will likely be either very small or zero.

If you file for your spousal benefit at 62, you will, as the book explains, be deemed to be filing for your own retirement benefit, too. This deeming occurs only before full retirement age.

You have proposed two strategies that will toss you straight into excess benefit hell. Please don’t follow either of them!

Phil: Your program suggests I should apply in December 2014 for survivor benefits. When I went to my local Social Security office they said I was not eligible because I was still working and self-employed. My wife died aged 60 and had not applied for or received any benefits. I am 60 and will not apply for my retirement benefits until I reach 70. How can I follow your strategy? I am earning approximately $14,500 a year and am self-employed. I told the program that, and I think I estimated 3 percent growth per year.

Larry Kotlikoff: If you are telling me all the facts, then my response is a) what Social Security told you is dead wrong; b) you need to go into your local office and ​show them your marriage certificate and your wife’s death certificate and file for your widower benefit; c) you are not earning enough to lose any benefits this year due to the earnings test; and d) even if you were earning so much as to lose all your benefits to the earnings test, you still are eligible to file right now for a widow(er) benefit. Keep me posted on this. If you receive the same answer, ask to speak to a technical expert.

Joe: I’m just now reading the book “Get What’s Yours,” and one of the major premises of the book talks about the lower wage earner taking the higher wage earner’s benefits, allowing the lower wage earner’s Social Security benefit to grow – however I did not see anything in the book that addressed this caveat, to wit: If you receive a lower spousal benefit because you filed prior to reaching full retirement age (currently 66), the reduction is permanent and the amount is not re-calculated once your reach FRA. How does one “square” this with what the book proffers?

Larry Kotlikoff: ​The book discusses one of Social Security’s biggest gotchas — deeming, which forces you, in most cases, to take your retirement benefit early if you take your spousal benefit early and vice versa. ​ But the book also goes to length to point out that deeming ends at full retirement age. At this point, you can take just your spousal benefit and wait until 70 to collect your own retirement benefit. This is the point of Chapter 1’s description of how Paul was able to collect an extra $50,000. His wife filed and suspended after reaching full retirement age. He, at full retirement age, filed just for his spousal benefit. They both took their retirement benefit at 70.

So, yes, the lower wage earner can take the full spousal benefit from the higher wage earner’s work record but only after reaching full retirement age (assuming the higher earning spouses has filed for his/her retirement benefit.) And there will be no reduction in the spousal benefit if it’s first taken at full retirement age.

If you take a spousal benefit before FRA it will be reduced. But there are two other things to say. First, deeming will apply, meaning the spousal benefit, if taken early, will become the excess spousal benefit, which can easily be very small or zero. The excess spousal benefit is the difference between half of the worker’s full retirement benefit and 100 percent of the spouse’s full retirement benefit. Second, if you take your spousal benefit early, the excess spousal benefit, if it’s positive, will be reduced. But if you are earning money, you may not receive all of the reduced excess spousal benefit due to the earnings test. However, at full retirement age, the reduced excess spousal benefit will be adjusted upward by lowering the reduction that was initially applied. This is called “adjusting the reduction factor” by the Social Security Administration.