Gen X and Y, it’s time to make your Social Security retirement decisions

BY Laurence Kotlikoff  November 11, 2013 at 3:30 PM EDT

Members of Generations X and Y have important Social Security decisions to consider — now. When and which benefits their parents and grandparents collect is just as much their concern. Photo courtesy of Lyza Danger. _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: I receive some 50 questions each week from readers of my column about Social Security. Virtually all of these questions are from people that are in their late 50s or older. This is shocking for two reasons.

First, the fact that so many people are asking so many often basic questions means they really haven’t much of a clue about the most user-unfriendly retirement system in the world — our Social Security System.

Second, the baby boomers’ children — members of Generations X and Y (also called the millennial generation) — are leaving their parents’ and, in some cases, grandparents’ Social Security collection decisions entirely up to their parents and grandparents.

Big mistake. Let’s consider Jay, a 30 year-old who has 62 year-old parents, Hal and Selma. If those parents lose tens of thousands of dollars, if not hundreds of thousands of dollars of lifetime Social Security benefits by taking benefits at the wrong time, guess who is going to pay the piper?

If Hal and Selma run out of money, the first person whom they’ll hit up for support is likely to be Jay. And Jay may have no choice when it comes to helping his parents. It’s not as if Hal and Selma have to directly ask Jay for money; they may just have to make Jay smaller gifts or leave him, when they die, a smaller bequest than would otherwise have been the case.

In short, if Hal and Selma screw up their Social Security decisions, the net flow of bucks from them to Jay can decline to a trickle, even if it doesn’t reverse direction.

So if you’re in Generation X or Y, get involved in deciding when and what your parents should do before they need financial help or you discover your inheritance is far less than expected.

Your parents and grandparents may think it’s their Social Security benefits and solely up to them to decide how to manage or mismanage them. Not the case. It’s actually “your” Social Security benefits just as much as it is theirs that’s on the line. So I recommend you pull up one or more of the reputable software programs that can be run online and start the conversation like this, “Dad/mom, just ran this cool program for you. It’s says you can make a bundle with this Social Security strategy. Is that the one you’re following?”


Becky Sedar — Port Charlotte, Fla.: I am awaiting determination of my Social Security Disability Insurance (SSDI) and am currently 58. My husband is 69 and in poor health. If he passes before me, would the SSDI continue if I applied for survivor benefits?

Larry Kotlikoff: I’m extremely sorry about your health problem and that of your husband. I wish I had some real medicine up my sleeve, but it’s just financial advice.

If your husband passes away, you can, if you are disabled, collect a survivor benefit starting immediately. (They are available to disabled widows and widowers starting at age 50.) You will receive your current SSDI check plus the difference, if it’s positive, between your survivor benefit and your own disability insurance benefit. In other words, you’ll receive what’s known as an excess survivor benefit.

Your survivor benefit (before it’s transformed into the excess survivor benefit by deducting your own DI benefit) will be based on what your husband was receiving in Social Security retirement benefits at the time of this death. Or, if he hasn’t yet started to collect retirement benefits, it will be based on what he would have received had he applied for benefits the day he passed away.

I presume your husband is already collecting. Otherwise, I’d advise (as indicated in this column) that he not begin collecting until 70 so he can permanently raise the survivor benefit that you’ll receive.

When you reach full retirement age, you may want to withdraw what would be your automatic application for your retirement benefit. When you reach full retirement age, your DI benefit automatically converts to what’s called your retirement benefit. But by waiting to file for your actual retirement benefit, your excess survivor benefit will become a full survivor benefit. Meanwhile, your retirement benefit will grow by 32 percent by delaying its collection until age 70. If your current DI benefit multiplied by 1.32 exceeds your full survivor benefit, this strategy may lead to the same benefit value you’d otherwise have received between full retirement and 70, but more benefits after 70.


Eugene Luchansky — Sandy Hook, Conn.: I began receiving Social Security at 65, a bit early. My wife receives a pension from Connecticut’s teacher retirement system and is not eligible for her own Social Security benefit. Is she eligible for a spousal benefit?

Larry Kotlikoff: Your wife will be eligible until she starts drawing her pension benefit from Connecticut’s teacher system. So if she has the option to wait to collect her teacher pension, and if she loses nothing from waiting (i.e., her pension is actuarially increased so it starts at a higher value when she starts taking it), it would be best for her to take her spousal benefit immediately or as soon as she hits 62.

Once she starts taking her state pension, her spousal benefit will be reduced by two-thirds of her pension due to the Government Pension Offset provision. But if her state pension is not indexed to inflation, this offset will stay fixed through time, whereas her Social Security spousal benefit will keep rising through time thanks to its indexation for inflation.

At some point, the dollar amount of her spousal benefit may exceed two-thirds of her fixed (in dollars) state pension, and her spousal benefit may become positive. In this case, it will start out very small and increase by the product of the inflation rate and her spousal benefit through time.


Kathleen Hodges — Gilbert, Ariz.: I started taking my reduced Social Security benefits based on my own earnings. My husband will most likely defer his benefits until 2017 when he will be 70. At that point, can I receive half of his benefit instead of my own or in addition to my own?

Larry Kotlikoff: Your husband can file right now for his retirement benefit and suspend its collection. This won’t change what he’ll collect starting at 70. It will, however, let you apply for your excess spousal benefit, which will equal the difference between half of his full retirement benefit minus 100 percent of your full retirement benefit, augmented by any delayed retirement credits you may have received from waiting to collect.

The value of this excess spousal benefit could be negative, in which case it will be set to zero. An online software program can help you determine if your excess spousal benefit will be positive. The excess spousal benefit is also reduced if you start it before full retirement age. If you started taking your retirement benefit within the last year, you can repay all the benefits and then, at full retirement age, apply just for your spousal benefit. In this case, it will equal your full benefit, not your excess spousal benefit, meaning that it will equal half of your husband’s full retirement benefit. Again, that’s assuming that he files for his retirement benefit, which he can suspend.


Barbara Reese — Rib Lake, Wis.: I have been told that I can earn unlimited income two days after my 65th birthday. I’m skeptical. Exactly when can someone earn unlimited income and not be penalized by Social Security?

Larry Kotlikoff: The first day of the month in which you reach full retirement age. But that’s age 66, not age 65, for workers born between 1943 and 1954 as you can see in this full chart.


Deena Kaufman — Lemont, Ill.: If my husband’s ex-wife tries to collect spousal benefits when my husband starts collecting, how does that affect any spousal benefit I am eligible for when my husband is deceased or if we divorce? Does her claim reduce mine?

Larry Kotlikoff: Whether she files for a divorcée spousal benefit and what she collects has no impact on what you can collect as a spouse or, for that matter, as a surviving widow, were your husband to predecease you. The last thing Social Security wants is to be in the middle of family feuds over whom should get what benefits.



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