A cautionary tale about taking retroactive Social Security benefits

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.

Boston University economist Larry Kotlikoff has spent every week, for more than two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His 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 feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.

Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:

The more I talk to people, the more I understand how easy it is to make major mistakes in taking Social Security benefits if you don’t know exactly what you’re doing or, equally important, don’t know exactly what Social Security is doing to you.

Let me tell you about a doctor I saw last week. I’ll call him Gene. This was my fourth visit to see Gene and since he looked to be of age to take Social Security, I thought I should make sure he was getting the most from it. So I told him I was a bit of an expert on the subject and wanted to make sure that he was following the best strategy. He said he was 71 (I thought he was younger) and that he had waited to take his retirement benefit until 70. He also said his wife, who didn’t have much of an earnings record, had taken a spousal benefit at 66, her full retirement age, when the spousal benefit would start at its full value. Gene also said that his wife’s own retirement benefit will never exceed her spousal benefit so this would be all she’d collect while he was alive.

I said, “Well, you two did the right thing.”

He said, “Yes, I think I did. By waiting I got the highest retirement benefit for myself, and by waiting my wife got the highest spousal for herself.”

Then we talked a bit about Social Security’s financing and complexity. At the end of this discussion he said, “You know, the folks at Social Security were really nice. They even gave me six months of retroactive benefits when I went in to file for my retirement benefit.”

“Oh, gee,” I said, “when did you file?”

“Three months before turning 70.”

“Uh oh,” I said.

“Uh oh?” Gene said.

“Uh oh,” I said.

“Did I do something wrong?” Gene asked.

“You were trying to wait until age 70 to start taking your benefits in order to get the highest possible retirement benefit, right?” I asked.

“Yes,” said Gene.

“Well,” I said. “What Social Security did was to start your retirement benefit 9 months before your reached age 70. This means your retirement benefit is 6 percent lower, on a permanent basis, than it would have been had they not given you the retroactive benefits. It also means your wife’s widow’s benefit, if you die, will be 6 percent lower than it would otherwise have been.””

“What?” said Gene, clearly concerned. “Nobody told me taking retroactive benefits would lower my retirement benefit.”

“I’m not surprised,” I said. “Social Security has a long history of pushing people to take their retirement benefits too early.”

“But why is the benefit 6 percent lower?” asked Gene.

“Because waiting an extra year between full retirement age and 70 to collect your retirement benefit, raises it by 8 percent per year. So if you went in three months early, they surely treated you as not waiting till 70 in the first place and then, in giving you benefits six months in arrears, they pushed your retirement benefit filing date back another six months. That’s nine months in total. Nine months is three quarters of a year, so you lost three quarters of the 8 percent yearly benefit increase (called the Delayed Retirement Credit). This is how you got stuck receiving a 6 percent (three quarters of 8 percent) permanently lower retirement benefit.

“They never told me,” said Gene.

“I’m sorry,” I said. “I wish I had talked with you sooner.”

Anonymous: My husband is turning 65 in September. I will be 60 in November. We have a mentally disabled son — age 33 — who lives at home with us. He is employed part time and collects his own SSDI income. He no longer collects SSI with the calculations. My husband wants to wait until full retirement age before he starts to collect SS. I believe my son’s SSDI will be adjusted to be one-half of my husband’s amount at that time, but I thought I read that I could also collect half of my husband’s amount — at any age — because I am the caregiver to an adult child disabled before the age of 22, as long as the amount not exceed the family maximum.

Whenever I call the national Social Security office I get a different answer from the agents. Some say I have to be 62, others are not sure.

I wonder if you have ever encountered this situation and have an answer for me.

Larry Kotlikoff: The real issue here is whether the son’s employment after age 22 will be viewed as disqualifying him from being judged as disabled prior to age 22, which is the requirement for the child to collect on the dad’s record and for the mom to collect a child in care spousal benefit. Hopefully, he hasn’t earned more than the SGA level since turning 22.

Lisa: I am a Missouri public school teacher and thus (as is the case in a number of states) caught in a web of WEP and GPO. I worked in the private sector (more than the requisite 40 quarters) before teaching and anticipate working in the private sector (full time) again after I retire next spring. My husband has worked in the private sector for 35+ years. And yet, apparently, collecting my public school retirement (an anticipated $2,500/month) will prevent me from receiving any of my own or, if widowed, my husband’s SS benefits. I am hoping there is some clever way around this, as I am both not wealthy and very irked at being barred from collecting benefits for which my husband and I have contributed. I’ve visited the SS office and spoken to an attorney (class action suit, anyone?) to no avail. You are my last hope — if possible, I am hoping you will direct me to the definitive article about this circumstance.

Larry Kotlikoff: Try to get the Missouri School System to give you and all others the option to wait until 70 and collect an actuarially higher benefit. This will entail no present value cost to Missouri’s School System, but it will let you and others take your Social Security benefits for eight years without the WEP or GPO kicking in, i.e., the WEP and GPO only come into play when you start collecting your non-covered pension.

Lisa: Teachers don’t expect SS benefits for their teaching years (as not taxed for SS), but it seems a miscarriage of justice to lose earned SS benefits and spouse’s earned benefits if widowed simply because one chooses to teach in a public school in states such as Missouri. There is no option to opt out, or to manage when teacher retirement benefits are received (short of not retiring). Teachers do not receive information informing them that they are forfeiting their SS benefits when they become public school teachers, at least in Missouri, which seems like another miscarriage of justice. Many teachers must work in the private sector to augment their relatively modest teacher salaries, and then — irony alert — are further penalized when they do so. Frustrating, to say the least.