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Ask Larry: I learn something about Social Security’s arcane provisions every day

While, under certain circumstances, you can receive all of your suspended retirement benefits in one lump sum, it’s not necessarily a good idea if you’ve got survivors to think about. Photo courtesy of Flickr user dumbeast. 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

Here’s my Social Security question to myself for this week, to which I just learned the answer.

Question: Dear Larry, I just read a column by the superb personal finance columnist Mary Beth Franklin. Mary relates learning that if, after reaching full retirement age, you file for and suspend your retirement benefit (in order to permit your spouse to receive a spousal benefit or your young or disabled children to receive child benefits) you can, before reaching age 70 (beyond which there is no value to waiting to collect your retirement benefit), undo your decision and receive all your suspended benefits in one lump sum payment. Is this true?

Larry Kotlikoff: Yes, Larry, it’s true. And this is highly relevant to someone who may run into health care or other crises and need money right away. However, if you do this, your retirement benefit, from the point you take your lump sum onward, will be calculated as if you had never suspended your benefit.

This may also be relevant to a person who discovers that he or she is going to die a lot sooner than expected and wants to get his or her suspended benefits back instead of waiting. But this thinking may be off base. By continuing to delay the collection of retirement benefits through age 70, one increases the survivor benefit one’s widow(er) will receive. So cashing out in order to party big may make for a fun exit, but can permanently harm one’s survivors.

Question: My husband died yesterday. I live in Houston, Texas. Am I entitled to his Social Security paycheck?

Larry Kotlikoff: My deepest sympathies for your loss. Unfortunately, there is no simple answer to your question. As described below, your survivor benefit may be less or more than what your husband was receiving depending on when he took his retirement benefit and when you take your survivor benefit.

Here is what Social Security makes widows like you go through when trying to determine when to take their survivor benefits.

First thing is first. If you are 60 or over (or 50 or over and disabled, which I’ll assume you are not), you can collect widow’s benefits starting immediately.

If your husband took his retirement benefit after full retirement age and you take your benefit at or after full retirement age, you will, indeed, receive his full retirement benefit. This may be more than the check he was receiving each month because his monthly Medicare Part B premium may have been withheld from his monthly Social Security check. His check may also have been less than his retirement benefit if Social Security was withholding some of his retirement benefit for income taxes.

If your husband took his retirement benefit after full retirement age and you take your survivor benefit before full retirement age, your survivor benefit will be reduced. For example, it will be reduced by 28.5 percent if you take it at 60, assuming you were born between 1945 and 1956.

If your husband took his retirement benefit early and you take your survivor benefit at full retirement age, your survivor benefit will equal the larger of either the early retirement benefit he was receiving or 82.5 percent of his full retirement benefit. For example, if he took his retirement benefit at age 62, the early retirement benefit he would be receiving would be smaller than 82.5 percent of his full retirement benefit. In this case, your survivor benefit would exceed what he was receiving.

If your husband took his retirement benefit early and you also take your survivor benefit early, your reduced survivor benefit can be less than what he was receiving if you take your survivor benefit early enough. In this case, your survivor benefit will equal your late spouse’s full retirement benefit reduced by your survivor benefit reduction factor.

If you take your survivor benefit early, but not too early, your survivor benefit will equal the larger of what your husband was receiving or 82.5 percent of his full retirement benefit. In this case, it won’t help you to wait until your full retirement age to collect your survivor benefit. For survivors in this situation, they will get the same widow’s benefit by taking it as much as four years before full retirement age. In other words, if they were to wait until full retirement age, their survivor benefit would be no larger.

John Dewey — Athens, Ga.: I am planning to retire June 2014 at age 65-and-a-half. My primary insurance amount (PIA) will be about $2,150 per month. If my wife takes her spousal benefit at the same time, she would receive half of this or $1,075, correct? Now, because she is taking this 24 months before her full retirement age (FRA), however, she will only get approximately 41 percent of the $2,150 and not 50 percent. Am I still assuming correctly?

Larry Kotlikoff: You are assuming incorrectly. If your wife is eligible to receive her own retirement benefit (she has 40 quarters of covered employment), she’ll be deemed to be applying not just for an early spousal benefit, but also for an early retirement benefit. The term “early,” in this context, means reduced. So by doing this, she’ll be stuck with reduced benefits for the rest of her life.

But, the story gets worse. If you take your spousal benefit having filed for your own retirement benefit (which will be her case), you are thrown into the world of excess spousal benefits. Google “excess spousal benefit” and you’ll probably just get hits to my columns. The reason is that Social Security goes out of its way, it seems, to hide the fact that the calculation of spousal benefits is different if you have filed for your retirement benefit.

Your wife’s excess spousal benefit will equal (before it is reduced because she’s taking it early) half of your full retirement benefit, then less 100 percent of her full retirement benefit. If this quantity is negative, her excess spousal benefit will be zero.

So your strategy will condemn you to permanently reduced retirement benefits. (The benefits would be 35.5 percent higher after inflation if you were to wait until 70 to start collecting them. Your strategy will also condemn your wife to permanently reduced retirement benefits. (They’d be 46 percent higher after inflation if she were to wait until 70 to start collecting them.) And, lastly, your strategy potentially ensures that your wife never ever collects a single penny in spousal benefits.

A better strategy is likely to be either that you and your wife wait until 70 to collect your retirement benefits, and when your wife reaches full retirement age, she applies just for her spousal benefit (at which point it will be her full spousal benefit equal to half of your full retirement benefit) and you apply for, but suspend collection of, your retirement benefit. Or, the other strategy is that your wife files for an early retirement benefit when you reach full retirement age, you then file just for your full spousal benefit (based on her earnings record), and you file for your retirement benefit at 70, while she suspends her retirement benefit at full retirement age and starts collecting an excess spousal benefit when you are 70. Then she restarts her retirement benefit at 70.

Janet Turvey — Clinton, N.Y.: I have consulted with our local Social Security office three times and always get different answers. I intend to retire at age 65 in April. My husband intended to retire this year too. But, we have now been told we are subject to the Windfall Elimination Provision — we have to have worked in the U.S. for 30 years or we will lose some of our U.K. pension. It would take me another 10 years to work in this country and I would be around 75. My husband will have worked in the U.S. for 30 years in August of 2015. Should I claim my Social Security when I retire in April or in May at age 65 and wait until my husband retires to claim off of his in 2015? Should we draw on our retirement savings and not claim our Social Security until we are both 70?

Larry Kotlikoff: I’m not surprised you are getting different answers from different offices. But let’s try to get you the right answer.

First, the good news! Because your non-covered pension comes from earnings you made abroad, neither of you will be hit by the Government Pension Offset (GPO) provision, which would otherwise reduce your spousal and survivor benefits by two-thirds of your non-covered pension.

You, Janet, will get hit by the Windfall Elimination Provision (WEP) because you won’t have 30 years of substantial earnings. But your husband, who has 30 years of substantial covered earnings, will not.

The WEP will simply reduce your own Social Security retirement benefit. It won’t wipe it out.

Second, here is what’s possibly some additional good news. The WEP won’t apply to you until you start collecting your U.K. pension. So if your U.K. pension is structured so that it rises the later you take it, you may do best to take your own Social Security retirement and spousal benefits as early as possible.

Your husband, though, should wait until age 70 to collect his own retirement benefit. But when he reaches his full retirement age, he should file for his own retirement benefit and suspend its collection. This will let you collect an excess spousal benefit (which may or may not amount to much) in addition to your own retirement benefit.

Tracy Porter: Can I draw a check from my husband’s SSI credits before he ever retires if I was already disabled prior to our marriage?

Larry Kotlikoff: I’m going to assume that “SSI” refers to your husband’s Social Security income and not Supplemental Security Income. You have to be 62 to qualify to receive spousal benefits based on your husband’s earnings record. Were your husband to pass away, you could collect a widow’s benefit starting at age 50. Your spousal benefit will be reduced because you are taking it prior to full retirement age. But because you are disabled, you won’t be forced to take your spousal benefit early.

So you can wait until full retirement age, and withdraw your retirement benefit, and, assuming your husband has filed for his own retirement benefit (which he can suspend if he’s full retirement age or over), apply just for your full spousal benefit. Then, at 70, you can apply for your retirement benefit, which will equal your disability benefit times 1.32. The fact that you were disabled prior to getting married doesn’t matter for these questions of when to take what.

Kim — Alburtis, Pa.: I am 53 and have worked since college. My (only) husband passed away two years ago. If I stop working, can I collect his Social Security benefits until I reach full retirement age? I’d like to stop working at 60, but not begin collecting my pension and Social Security benefits until age 65.

Larry Kotlikoff: You can collect a reduced widow’s benefit starting at 60 and then collect your own retirement benefit later. It may be best for you to start your own retirement benefit at 70, when it is as large as possible. Or, it may be best for you to wait until 62, take just your own retirement benefit, and wait until full retirement age to start collecting your survivor benefit when it will be as large as possible. I’m presuming your husband was not collecting early retirement benefits from Social Security when he passed away. If he were, it may be, as discussed in my other answer today about survivor benefits (above), that there’s no advantage, even before full retirement age, to waiting to collect survivor benefits.

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

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