Retirement expert Laurence Kotlikoff advises readers on various Social Security subjects, including disability benefits for disabled children. Creative commons photo by Daniel Rivas Pacheco, via Wikimedia Commons.
Larry Kotlikoff’s Social Security “secrets” and his answers to your questions (Answers to Benign and Scary Social Security Questions, Social Security Confusion: Our Expert Dispels Some More and 11 Social Security Mistakes People Make) have prompted so many of you to write in that we decided to inaugurate a regular feature here on Making Sen$e — “Ask Larry.” You can read last week’s installment here. 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. We run “Ask Larry” on Mondays, where he takes my seat as the sage of the day. Unlike my answers, his are short and sweet (or, for some emailers, bitter) and so he takes on half-a-dozen questions or so, instead of just one.
Mary Ann Gillie: I am almost 59 and am receiving a widow’s pension and disability. Is there another way to get more benefits because I cannot work?
Larry Kotlikoff: I presume your widow’s pension is from your husband’s former employment. If your husband paid Social Security taxes at his work, you should be able to collect a reduced widow’s benefit from Social Security starting at age 62. You should think twice about doing this, however, since it will be permanently reduced by about 30 percent compared to the value it would have starting at your full retirement age, which is age 66. You may want to take your own reduced retirement benefits starting at 62 and then apply for your unreduced survivor benefit at 66. Or it may be better to take your survivor benefit starting at 66 and your highest possible retirement benefit starting at 70.
Jack: I’d like to see a discussion of the decision to take or postpone Social Security benefits if one assumes the discipline and ability to conservatively invest the entire amount from full retirement to age 70 vs. simply waiting and taking the larger benefit at 70.
Larry Kotlikoff: A lot of brokers will tell you to take Social Security early because you can earn a lot higher return investing with them than leaving the money in the system. This is hogwash. Waiting to take Social Security is a completely safe investment. If you are going to consider taking benefits early and investing, you need to consider investing in completely safe assets, which means investing in TIPS — Treasury Inflation Protected Securities, what we economists call inflation-indexed bonds. The yield on TIPS right now is extremely low — about 45 basis points. So if you want to do an apples-to-apples comparison, waiting to collect Social Security, which has a yield built into its actuarial adjustments of 3 percent, if I recall correctly, is a much better deal.
Name Withheld: I am entitled to a widow’s benefit at age 60. When I went to apply I was told I would be bound by the amount of $723, even if I cannot receive benefits due to the earnings test. If I apply now the benefit is $723, but if I wait until age 62 it is $1,012. If I apply now, I get reduced payments for next year for the amount over $14,000. Am I just out that money, or is it applied at a later date? (I cancelled the request for benefits.)
Larry Kotlikoff: I want you to confirm this with Social Security, but my understanding is that at full retirement age your benefit, if you take it early and lose months of benefits due to earnings, will be subject to the Adjustment of the Reduction Factor, which means that your benefit will be raised permanently. So, based on my understanding, you don’t need to worry about losing benefits due to the earnings test because you will, effectively, get them back via higher benefits starting at full retirement age. But to the extent you don’t wipe out all your benefits prior to full retirement age due to earnings, you are giving up to 30 percent higher benefits at full retirement age by taking benefits early.
Richard Lawton: My daughter has been disabled since birth with Down Syndrome. She has a disability benefit on her deceased mother’s record. I am 61 years old and will apply for early retirement at 62. Will my wife, 55, be entitled to a benefit on my retirement record early while she helps care for disabled stepdaughter? If she qualifies, can she also still work? Does my daughter have to switch to my Social Security record in order for my wife to collect on my record?
Larry Kotlikoff: If your wife gets spousal benefits because you are collecting your retirement benefit and she has your daughter in her care, but she continues to work, she can lose some or all of those benefits due to the earnings test. I do think your daughter will need to switch to collecting benefits on your record in order for your wife to collect her spousal benefit. If your wife is going to earn enough to wipe out her benefit entirely, there is no incentive for you to take your retirement benefit early. Even if she doesn’t work and receives all her spousal benefit, you still need to see if this makes sense because you’ll be taking a reduced retirement benefit. On the other hand, if you follow this strategy, you can, at full retirement age, suspend your retirement benefit and restart it, say, at 70 and get what you were getting when you suspended, multiplied by as much as 1.32.
Mary: I am 52 and the mother of a 7 year old. I am widowed and qualify for a mother’s benefit, but it is forfeited since I earn too much. How do they calculate the earnings? If I had put the maximum amount of earnings in a Roth IRA or 401(k) at work to reduce my income, I might have had a low enough income to receive some of my mother’s benefits had I applied right away. I delayed filing because the Social Security agent told me I didn’t need it. But then my earnings were lower than anticipated. Would unemployment insurance count as earnings for the earnings test? Is the earnings test on gross earnings or net (after 401(k) contributions, health insurance deductions and other pretax deductions)? I feel bad that I have to work so hard and pay for so much childcare and don’t get the mother’s benefit. The child’s survivor benefit is a godsend.
Larry Kotlikoff: Unemployment insurance is not counted as earnings for the earnings test. The gross earnings used in the earnings test is net of your employer’s contribution, but gross of your own contribution to retirement accounts. Same is true of employer contributions for health insurance. If it shows up in your pay stub as gross income, it’s counted for the earnings test.
Margaret Peirson: If you want to file for Social Security at 62 and are on Social Security Disability, how does this work? If your husband is already on Social Security collecting his full retirement benefits, does the wife get spousal support and Social Security?
Larry Kotlikoff: You continue to collect disability benefits until you reach full retirement age. At that point your benefit converts to your Social Security retirement benefit. The wife can collect both a disability benefit and a reduced spousal benefit if she takes her spousal benefit early and the husband is either collecting retirement benefits or has filed to collect them, but suspended their collection.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions