Can You Trust Social Security’s Estimate of Your Benefits?


You may receive several conflicting estimates of your future benefits from Social Security. Photo courtesy of Justin Sullivan/Getty Images.*

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: Depending on which Social Security source you use, you may receive very different answers to your request for an estimate of future benefits. Social Security has six different ways for us to come up with an estimate of our benefits. First, it provides a printed earnings statement with benefit estimates. Second, it has four online benefit calculators. Third, you can ask Social Security staff directly — on the phone or in person — for a benefit estimate. And in each case, you’ll get a number, but the numbers may vary and you’ll have no idea what they mean.

Take the printed earnings statement, which presents your earnings history and lays out its assumptions about your future earnings. But in presenting the retirement benefits you can collect starting at different ages, the statement doesn’t say whether the amounts are shown in today’s dollars or in dollars of the years in which you’ll start collecting. In other words, it doesn’t say whether the inflation adjustment — the consumer price index (CPI) cost-of-living adjustment (COLA) — between now and the particular collection year is being included. Nor does it say whether the benefit estimate is taking into account projected real wage growth, which, if you are under age 60, will affect the degree of wage indexation of your past Social Security-covered earnings.

Likewise, if you call or visit your Social Security office, they will give you benefit estimates but won’t tell you what dollars they are quoting your benefits in or whether they are assuming economy-wide real wage growth. The staff may not even understand the nature of the system’s wage indexation, so your question may sound as if it’s coming from outer space. Moreover, they may quote your benefit net of Medicare’s Part B premium payment since this is the check you actually get in the mail each month.

What’s riled me up about this issue? A conversation I just had with a financial planner, who was only operating on his client’s printed earning history, using a Social Security optimization tool that just requests the full retirement benefit, or the primary insurance amount (PIA).

The PIA varies depending on the dollars in which the PIA is quoted and whether it really is the full retirement benefit versus the early or delayed retirement. (Is the individual subject to the delayed retirement credit, the windfall elimination provision or the government pension offset provision?) You also need to know whether it incorporate future real wage growth in the economy, whether it is gross or net of the Medicare Premium, and whether it incorporates future earnings. None of that can be calculated based only on knowledge of the PIA.

His response to my efforts at explanation was, “Gotta go. Client’s coming in in five minutes.”

This particular financial planner was an insurance agent, using an insurance software that collects commissions on every policy he sells. His focus is on selling annuities, not providing good Social Security advice.

For example, the source for a husband’s benefit could well be quite different from that for the wife. If so, the software this planner is working with, even if it’s correct under the hood (which is far from an easy task), could be advising his clients to wait years too late to collect particular benefits or start benefits years too early. Or it can tell clients to take the benefits in the wrong order. Strategies to maximize your Social Security benefits can be extremely sensitive to what’s entered into these programs, so choose carefully as you would when purchasing any other service or product.

Cliff L. — Honolulu, Hawaii: I just turned 61. My wife just turned 62. I would like to retire a year from now and start to take my Social Security benefit. I am the higher wage earner. My wife plans to work three more years. Lately, we read that we should wait until age 66 before taking any Social Security benefits. I also know someone who is taking a spousal benefit. Could you give us some advice as to how we should take our Social Security?

Larry Kotlikoff: Your best strategy is, most likely, for you to both wait until 70 to collect your highest possible retirement benefits and for your wife to file and suspend for her retirement benefit when you hit 66, at which point you can apply to collect just your spousal benefit. And, because you will not be filing for a retirement benefit prior to age 70, the spousal benefit you’ll get at 66 will be a full spousal benefit, equal to half of your wife’s full retirement benefit, or primary insurance amount (PIA).

Another option is for you to take retirement benefits at 65, permitting your wife to take a full spousal benefit starting at 66, and then you suspend your retirement benefit at 66 and start it up again at 70 (paying your Medicare Part B premiums out of pocket.

Under this scenario, your wife will still wait till 70 to collect her retirement benefit. Which of these two options is best or whether a third option is even better — there are literally tens of thousands to consider in your case — requires running a commercially available software program.

Beth H. — Sussex, Wis.: My husband and I are both 64. At full retirement age, his benefit will be $2,336 and mine will be $2,082. Would our best Social Security strategy be for both of us to file and suspend and collect spousal benefits and then switch to our own benefits at age 70?

Larry Kotlikoff: You can’t file and suspend before reaching full retirement age, which is 66 in your cases. If you both file and suspend, you will both flip yourselves into the realm of excess spousal benefits as opposed to that of full spousal benefits. Once you file for a retirement benefit, even if you suspend it, your spousal benefit will then be calculated as an excess spousal benefit — the excess (the difference) between half your spouse’s full retirement benefit and 100 percent of your full retirement benefit. This excess could well be negative, in which case your excess spousal benefit will be set to zero.

So if you both walk into the Social Security office at 66 and both file and suspend, you may both wipe out your spousal benefits right there on the spot. Let’s not do this.

Instead, let’s have the higher earner file and suspend, while the other does not file and suspend, but rather simply files just for her or his spousal benefit, which will now be calculated as the full spousal benefit, namely half of the other spouse’s full retirement benefit.

Joe — Melbourne, Fla.: I am almost 66 and my wife is 54. I make about five times what she makes. My plan is to start drawing Social Security at age 70. When my wife is 65 and eligible for Medicare she would take early retirement, then at full retirement age (FRA) draw a spousal benefit. Then assuming she outlives me, she would be able to draw my Social Security check. Is this the best arrangement?

Larry Kotlikoff: No, Joe. You probably want to have your wife take Medicare at 65, but wait until 66 to collect her full spousal benefit. If she takes her retirement benefit at 65, she’ll get her excess, not her full spousal benefit. And her excess spousal benefit could well be negative. She should collect just her full spousal benefit starting at 66 and then go for her own retirement benefit at 70. However, if at 70, her full spousal benefit exceeds her retirement benefit inclusive of the delayed retirement credit, her check won’t go up at 70 because she’ll get the larger of her full spousal benefit or her own augmented retirement benefit.

However, Social Security will describe the check as her receiving her augmented retirement benefit plus an excess spousal benefit. In other words, they will redefine her full spousal benefit as her own retirement benefit (inclusive of the delayed retirement credits) plus an excess spousal benefit defined as her full spousal benefit less her own augmented retirement benefit.

The above scenario assumes you have a high maximum age of life. If you expect, based on your own condition, to die before, say, 85, the advice may differ. It will also differ if you use a high discount rate in the valuation (see my discussion of valuing future Social Security benefits in the last part of this column.) If you are sure you will kick relatively young, it may behoove your wife to take her retirement benefit relatively early even if it wipes out her spousal benefit. Run yourself through a software program you trust to see what’s really best.

Eugene L. — Sandy Hook, Conn.: I am 71 and have been receiving Social Security since 65. My wife is 69, a retired teacher who never paid into Social Security. Is she eligible for a death benefit from Social security should I die before her?

Larry Kotlikoff: Yes and no. Her spousal as well as survivor benefits will be zapped by two-thirds of her teacher’s pension via the Government Pension Offset provision. But if her pension is not adjusted for inflation, at some point, her spousal and survivor benefits, which will be rising thanks to Social Security’s annual cost-of-living adjustment, may exceed two-thirds of her pension and then she’ll get a Social Security benefit. It’s possible that two-thirds of her pension is, even today, less than her Social Security spousal benefit (which equals half of your full retirement benefit). So it can’t hurt for her right now to apply for a spousal benefit on your earnings record. Also, when you pass away, your wife will be eligible for a $255 lump-sum death benefit.

Robin W. — West Windsor Township, N.J.: I am 82. My late wife, Marian, who was two years older than I, died at 57. She had good earnings and her Social Security benefits have never been touched. I took early retirement at 62. Should I inquire about taking her benefits or maximize mine now? Or is it too late? I remarried three and half years later to Christine, who just turned 62. Can she apply for her spousal benefits now?

Larry Kotlikoff: You need to have remarried after age 60 in order to qualify for survivor benefits on Marian’s earnings record. Sounds like you remarried earlier, so no, you can’t collect a survivor benefit on Marian’s earnings record.

Christine can collect spousal benefits starting at 62 on your work record, but they will be calculated as the excess spousal benefit (which may be zero); they will be reduced because she is taking her spousal benefit before full retirement; and collecting her spousal benefit before full retirement age will trigger Social Security’s deeming provision, which will force Christine to take her own retirement benefit early.

Given your age differences, it may still be best for Christine to do this. Once you pass away, she’ll qualify for a survivor benefit on your work record. But depending on her past earnings, her own retirement benefit (especially if she waits until 70 to collect it) may exceed her survivor benefit. In this case, taking her retirement benefit early will probably be a mistake.

Yours is a complicated case. There are probably 100,000 cases to consider to find the one that is best — a good task for a software program you trust.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions