When Social Security’s Advisers Get It Wrong
By Larry Kotlikoff
You can’t always trust advice over the phone from Social Security’s advisers. Ask to speak to a technical expert, advises Larry Kotlikoff, to be sure you’re getting the correct information. Photo courtesy of JC Kole.
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
Larry Kotlikoff: As I’ve written before, it’s a bad idea to take advice from Social Security’s advisers over the phone (or online) unless it’s from one of their specially trained technical experts. The system is extremely complex, and you may have a hard time conveying your situation in the Social Security jargon that the advisers are used to hearing. Here’s the latest example of bad Social Security advice care of an email from Jan.
Jan: I just got off the phone with my local Social Security office. They said that in order to collect a higher benefit by deferring to age 70 (after withdrawing at age 66), I would have to be working full time until age 70. On disability now, I cannot work more than eight hours a week due to my condition. So, it sounds like I cannot do what you suggest. Is that correct? I thought I could simply defer for four years and collect 1/3 more at age 70.
Larry Kotlikoff: As I wrote back to Jan and had Jerry Lutz, a former technical expert with Social Security, confirm in a separate email to Jan, the person she spoke with at Social Security got it wrong.
Disabled workers, like non-disabled workers, are credited with a delayed retirement credit, if they wait until after full retirement age to collect their retirement benefit or if they suspend it after reaching full retirement age. The delayed retirement credit adds 8 percent per year up to what is now the four years between the full retirement age and age 70, beyond which the credit ceases.
Jan is just shy of age 66. She is divorced and her ex was the higher earner. Hence, she can avail herself of the delayed retirement credit and collect a 32 percent (four years times 8 percent per year) higher retirement benefit starting at 70.
In a previous column on how the disabled can increase their benefits, I pointed out several things.
First, the Social Security disability benefit converts automatically at full retirement age to the Social Security retirement benefit.
Second, right before the disabled worker reaches full retirement age, she can withdraw her retirement benefit and then, at full retirement age, apply just for a full spousal benefit, if she’s married or was married for at least 10 years prior to getting divorced. A full spousal benefit equals half of the spouse’s full retirement benefit. Note that if you are married, your spouse needs to have filed for his or her retirement benefit for you to be able to file for a spousal benefit based on his or her work history. If you are divorced, the requirement for you to collect a spousal benefit is that your ex be at least age 62 and either you have been divorced for two or more years or your ex has filed for his or her retirement benefit.
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Third, if the disabled worker doesn’t withdraw his or her retirement benefit and applies for a spousal benefit, he or she won’t get a full spousal benefit, but rather an excess spousal benefit. The excess spousal benefit is the full spousal benefit less the worker’s own retirement benefit. This difference, if negative, is set to zero. So, if Jan doesn’t withdraw her retirement benefit and just applies for a spousal benefit, she’ll get an excess spousal benefit, which may be zero.
Fourth, if the disabled worker does withdraw her retirement benefit and starts it up again at, say, 70, it will be augmented by the delayed retirement credit provided the disabled worker pays his or her Medicare Part B premium out of pocket.
(Note also that non-disabled workers who collect a retirement benefit before full retirement age and suspend it after reaching full retirement age need to pay their Medicare Part B premium out of pocket in order to qualify for the delayed retirement credit.)
So Jan can withdraw her benefit, collect a full spousal benefit, pay her Medicare Part B premium out of pocket, and, at 70, start taking her retirement benefit. Her retirement benefit will, in this case, start at a 32 percent higher value, after inflation, than her current disability benefit. The Social Security telephone “adviser” probably never heard of the option, available just to disabled workers, of withdrawing their retirement benefit before starting to collect it. But the “adviser” should have at least known that anyone collecting a retirement benefit, including disabled workers, can suspend their retirement benefit and start it up again inclusive of the delayed retirement credit.
What should Jan do? First, she needs to consider her longevity, in light of her disability, and decide if this strategy is really optimal. Second, if it is, she needs to ask to speak to a technical expert at Social Security and have the technical expert process her application to withdraw her retirement benefit and send her documentation that this has occurred.
Bernie M. — Hollywood, Fla.: Both my wife and I work for our own business. I am seven years older than she is. We want to maximize Social Security benefits by setting a large salary, but at the same time, we want to set an optimal salary for each where we don’t overpay payroll taxes — taking into consideration that we can get distributions as well. How do we figure each one’s salary?
Larry Kotlikoff: If you worked for more than one business, you and your employer (which would be yourself in the case one business is your own) could be forced to overpay Social Security payroll taxes insofar as you get a refund of employee FICA (Federal Insurance Contribution Act) taxes once you exceed the taxable ceiling, which this year is $113,700. But you don’t get a refund of employer FICA taxes. If you just work for one employer, that employer will stop sending in both portions of the tax as soon as you reach the $113,700 threshold.
But if you earned, say, $100,000 from three employers, each of your three employers would end up paying half of the 12.4 percent Social Security tax — in other words, 6.2 percent on $100,000. You’d get credited on your federal income tax for paying the 6.2 percent in Social Security employee tax on your earnings in excess of $113,700 (i.e., on $300,000 minus $113,700), but your three employers wouldn’t get credit for their having to pay 6.2 percent on the excess.
This is the only way I can think of that one can, technically speaking, overpay payroll taxes. Yes, in my example, the three employers are collectively overpaying, but their overpayment would be coming out of your hide insofar as workers’ net earnings reflect what employers have to pay on their behalf.
Now back to your situation, Bernie. I guess your question comes down to deciding whether to pay yourself or your wife the income from your business. This decision can, indeed, affect your benefits since Social Security calculates one’s basic benefit amount (the Primary Insurance Amount or PIA) from the average of one’s highest 35 years of covered earnings, with covered earnings prior to age 60 adjusted for economy-wide real wage growth.
So if you pay, say, all or most of this year’s earnings to your wife and she’s had a relatively low earnings history, her earnings this year could prove to be one of her 35 highest earnings years, and, therefore, raise her average monthly earnings (called her Average Indexed Monthly Earnings or AIME) and her PIA. On the other hand, if you paid yourself all the earnings, it might raise your average and your PIA. Use an Internet Social Security calculator to help you figure this out.
But, and this is a big but, the IRS expects you to allocate your earnings based on your actual respective economic contributions. Transactions that are made simply to lower your taxes are, as I understand it, strictly illegal. So I would be very careful about doing anything in this realm that could run you afoul of the IRS.
Tom Rafferty — Houston, Texas: At what age can you stop paying Social Security tax if you continue to work? I am 78 and still work.
Larry Kotlikoff: You must pay pay Social Security FICA taxes on your earnings, no matter how old you are. But, as I discussed here, if you are earning enough and certainly if you are earning above Social Security’s taxable covered earnings ceiling ($113,700 this year), your benefits will increase each year by more than Social Security’s inflation adjustment factor.
Susie — Watertown, Wis.: My husband passed away in 2009 at age 81. I am 54 now. When can I collect his benefits?
Larry Kotlikoff: Very sorry for your loss. You need to be at least age 60 to collect widow’s benefits unless you have children who are under age 16 or who are disabled. In this case, you can receive mother’s benefits. Taking your survivor (widow’s) benefit early, (before full retirement) may not be the best move since the benefit will be permanently reduced. Indeed, an age 60 widow taking widow’s benefits this year would experience a 28.5 percent reduction in her benefit relative to waiting until 66 — her age of full retirement. Moreover, if your husband took his own retirement benefit before full retirement age, your widow’s benefit, before it’s hit by any potential reduction factor, may be less than his full retirement benefit.
To collect a widow’s benefit, you can’t be married unless you got married after age 60. One can, however, be married and divorced and then become eligible again to collect a widow’s benefit based on the previous spouse’s work record.
You’ll want to run yourself through a commercially available software program to see when to take your own retirement benefit and when to take your widow’s benefit. You won’t want to take both at once since one will wipe out the other; you’ll get the larger of the two. As explained in this column, the trick to maximizing your Social Security benefit is to take one benefit (either your widow’s benefit or your retirement benefit) first, while letting the other benefit grow.
By waiting to take your widow’s benefit, you are avoiding the widow’s benefit reduction factor (which hits you for taking it before full retirement age), effectively letting the benefit grow. You can let your retirement benefit grow by avoiding the early retirement benefit reduction factor and utilizing the delayed retirement credit (the benefit increase for those who postpone taking their retirement benefit between full retirement age and age 70).
Finally, if you were disabled when your husband passed away or became disabled within seven years of his death, you can collect disabled widow’s benefits starting immediately. (Incidentally, such benefits are available starting at age 50.) And if you are entitled to a disabled widow’s benefit, don’t worry about getting remarried. It would affect these benefits even if the remarriage occurred before age 60.
Don Siebert — Cedar Hill, Mo.: My life partner and I are both 66 and drawing full retirement of around $2,000 each per month. Is there any reason to marry?
Larry Kotlikoff: You need to be married for one year, after which both of you will be eligible for spousal benefits based on the other’s work record. Since you both started your benefits within the last year, you still have time to repay what you received (including any Medicare Part B premiums paid on your behalf) and do a Social Security “do over,” enabling you to benefit from filing as a married couple. (Read “When Life Partners Should Marry to Benefit from Social Security.”)
A “do over” entails one of you — the higher earner — filing for his or her retirement benefit and suspending its collection, while having the other person file just for his or her full spousal benefit. Then, when you both reach age 70, you’d both collect your retirement benefits at a 32 percent permanently higher inflation-adjusted value. This will give one of you what amounts to free spousal benefits for about two-and-a-half years.
Getting married will, after nine months, also entitle each of you to collect survivor benefits based on the other person’s work history. If you do the Social Security “do over,” the survivor benefit will be based on the actual retirement benefit the deceased was collecting or would have collected had he or she begun collecting a retirement benefit at the time of death. So, for example, waiting until age 70 to collect will raise the survivor benefits of both spouses. However, if one is taking a retirement benefit at the same time one takes a survivor benefit, one only gets the larger of the two benefits. In other words, if the higher earner dies first, the remaining spouse’s survivor benefits will be higher.
Barbara — Asheville, N.C.: My husband died after we had been married only nine years and seven months. I am 58 and work full time at a good job. Am I entitled to any spousal or survivor benefits?
Larry Kotlikoff: I’m sorry for your loss. You are entitled to survivor benefits if you are not remarried and were married for at least nine months. (One exception to the remarriage prohibition — you can remarry after age 60 and still collect survivor benefits from a previous, deceased spouse.)
You need to be at least age 60 to start collecting survivor benefits, but, as described before, this may not be the optimal age to start taking survivor benefits.
This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.