To triple-dip the Social Security system, get divorced

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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. Find a complete list of his columns 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. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

Sandi Smith — Queen Creek, Ariz: My husband and I are both disabled. I began collecting Social Security Disability Insurance (SSDI) at age 37 and was married to someone else who has now also remarried. My current husband and I have been married 15 years, but we were not married when he began collecting SSDI at age 50. In May 2015, my husband will turn 66. I will turn 66 in July 2016. I know our SSDI will convert to regular Social Security retirement benefits when we turn 66 respectively. I am collecting benefits on my own earnings, as is my husband. He has a full disability pension from his union. I have no other income except SSDI. We both have Medicare A and B plus a secondary insurer through my husband’s union.

When we turn 66, are there any changes we should make regarding our Social Security? My health is not good. If I were deceased, would there be any effect on my husband’s Social Security? His current benefit is about $800 a month more than my benefit after our Medicare premiums are withheld.

I don’t seem to find too much information regarding Social Security when both husband and wife are disabled when they reach normal retirement age for Social Security. I just don’t want to make a mistake in how we draw our benefits at age 66.

Larry Kotlikoff: You can go into the Social Security office before you reach 66 and withdraw your retirement benefit. You can then collect a full spousal benefit through age 70, which will equal half of your husband’s current disability benefit (which will convert to his full retirement benefit when he reaches age 66). You can then restart your retirement benefit at 70 at a 32 percent larger value after inflation.

If you had another source of income to get you both through age 70, which doesn’t appear to be the case, your husband could suspend (not withdraw) his retirement benefit when he reaches age 66 and restart it at 70.

Why can’t he collect a full spousal benefit based on your earnings record? The reason is that in order to get you a full spousal benefit, he needs to file for his retirement benefit. If he withdraws his retirement benefit too, you won’t be able to get your full spousal benefit.

Wouldn’t his suspending his retirement benefit make you ineligible for your full spousal benefit? No. Suspending a benefit requires first filing for a benefit. And the requirement for you to file just for your spousal benefit is that your husband has filed for his retirement benefit (which happens if he lets his disability benefit convert to his retirement benefit). In other words, the requirement doesn’t involve his actually receiving a retirement benefit while you are receiving your spousal benefit.

When you reach 70 and, under this scenario, take your retirement benefit, you will then have filed for your retirement benefit, permitting your husband to collect an excess spousal benefit. But his excess spousal benefit will be zero because he was the larger earner and the excess spousal benefit is calculated as half of your full retirement benefit less 100 percent of his full retirement benefit.

Had you gotten divorced two years ago, you could both get a full spousal benefit starting at age 66 because, for purposes of calculating divorcée spousal benefits, Social Security automatically treats ex-spouses (who were married for 10 years or more) as having filed for their retirement benefit at 62 — regardless of whether they have actually filed. Getting divorced now is surely not worth it, financially.

What I just suggested you and your husband could do can also be flipped. He could withdraw his retirement benefit and you could continue taking your disability benefit, which, at 66, will be called your retirement benefit. He could then apply just for a full spousal benefit that he’d collect off of your earnings record. At 70, he’d restart his retirement benefit at the 32 percent higher level. You could then either continue to collect your benefit or suspend it until 70.

Given your health, this second, flipped option may be best. But your total income for the next four years will be lower. On the other hand, your husband would have 32 percent larger benefits after inflation for the rest of his life. So if you are quite sure your maximum age of life is pretty short and his is pretty long, trying to get him a permanently higher benefit starting at 70 may make sense. As for survivor benefits, if you were to pass away, your husband would collect the larger of either his actual (not full) retirement benefit or your full retirement benefit (augmented by any delayed retirement credits you might garner if you were to suspend your retirement benefit).

Stated differently, he’d collect his retirement benefit plus an excess survivor benefit. But this excess survivor benefit (equal to your full retirement benefit minus his actual benefit) would be negative and set to zero by Social Security. So there are no survivor benefits here to go after when it comes to your husband collecting on your work record. On the other hand, were he to die before you, your excess survivor benefit would be positive and you’d be able to collect his full retirement benefit inclusive of any delayed retirement benefits, minus your own retirement inclusive of any delayed retirement benefits.

I’m sorry that I needed to go on at length here. But our government has produced a monstrously complex saving and insurance system that no one, certainly not anyone in Congress, can remotely understand without years of training. This is no way to run a railroad, although Paul tells me it’s the price of democracy. New Zealand has a longstanding democracy. Their Social Security system has one rule: When you reach age 65, you get a fixed payment no matter who you are or what you earned and paid in taxes.

Bob — Morgantown, W.Va.: I will reach full retirement age at 66. My wife is two years younger than I am. Our plan is for me to take Social Security at 68. When she reaches her full retirement age (66 and two months), she will file just for a full spousal benefit (50 percent of my full retirement benefit) and let her Social Security continue to accrue until she is 70. At that point, she will stop her spousal benefit and take her full Social Security amount. Can I also receive a full spousal benefit at age 68 when she is at full retirement age (66 and two months) and collect a 50 percent spousal benefit on her earnings record?

Larry Kotlikoff: No. Your wife needs to file for her retirement benefit in order for you to be eligible for a spousal benefit. But the minute, nay nanosecond, she files for her retirement benefit, she’ll be automatically transferred to the world of excess spousal benefits. That means her full spousal benefit will be transformed into an excess spousal benefit equal to half of her full spousal benefit, less 100 percent of her full retirement benefit. This excess spousal benefit is likely to be negative and set to zero.

So for you to collect a spousal benefit, you’ll need to wipe out your wife’s spousal benefit. Once she does file at age 70 for her retirement benefit, you’ll be eligible to collect an excess spousal benefit on your wife’s earnings history, but it will surely be zero. You can double dip the system, but not triple dip, unless you are divorced, as I indicated in my answer to Sandi above.

Cathe Ferguson – Louisville: I am a dual citizen of Australia and the United States. My husband, residing in Australia, and I, now residing in the United States, are in the process of a divorce. Will I ever be entitled to any Social Security benefits?

Larry Kotlikoff: If you are asking about being eligible to receive Social Security divorcée spousal or survivor benefits the answer is potentially yes. But there are a lot of conditions. First, you need to have been divorced for two years. Second, you need to have been married for 10 years. Third, your to-be-ex-husband needs to have 40 or more credits of Social Security-covered earnings in the U.S. Fourth, your ex-to-be must be 62 or over when you file for a divorcée benefit. Fifth, your own full retirement benefit must not exceed his full retirement benefit or you must wait until full retirement age to collect just your spousal benefit and wait until, say, 70 to collect your own retirement benefit (at its highest possible value).

If your to-be-ex doesn’t have 40 quarters of work in Social Security-covered employment, you can still collect on your own earnings record provided you have 40 or more quarters of covered employment. If this is the case, your ex can, by the way, potentially collect a divorcée spousal benefit based on your covered earnings record.

The U.S. does have a totalization agreement with Australia, which could allow payments to you from Social Security with as few as six quarters of U.S. coverage. But you and/or your ex would also need the requisite number of credits under the Australian system to qualify for a totalized benefit. See the technical reference.

Linda Boenish — Jacksonville, Fla.: My husband passed away in 2011 at the age of 63 (before taking any Social Security benefits). I am now 63 and plan to work to 66. At 66, can I take his full Social Security benefit and swap it for my own when I am 70? Or would I only be eligible for the reduced benefits he was entitled to at the time of his death?

Larry Kotlikoff: Yes, you can take what would have been his full retirement benefit by applying just for your survivor benefit at 66. Then at 70, you can collect the larger of either your own full retirement benefit augmented by a 32 percent real increase reflecting Social Security delayed retirement credits or your survivor benefit.

Gail — Madison, Wis.: I am 60 and recently divorced after 18 years of marriage. My ex is 13 years my junior. His income is about three times more than mine. What are my best strategies for making the most out of his Social Security benefits? (Am I correct in understanding that I can do nothing with his benefits until he turns 62?)

Larry Kotlikoff: Gail, unfortunately, you can’t collect a spousal benefit until he reaches age 62, which is when you’ll be 73. You could get remarried and qualify after one year to collect spousal benefits on your new husband’s work record.

But if that’s not an option, what’s best to do will depend on your earnings record compared to his. It’s possible that your largest retirement benefit, which you’d collect if you waited until 70 to start collecting, is less than one half of his full retirement benefit. If this were the case or close to the case, if might behoove you to take your own retirement benefit early — say at age 62 — and take your spousal benefit at 73. At that point, you’ll collect your own reduced retirement benefit plus your excess spousal benefit (calculated as the difference between half of your ex’s full retirement benefit and 100 percent of your full retirement benefit). The only way to know what’s really best is to run yourself through very careful Social Security software and to consider alternative options with respect to your ex’s future covered earnings.

Larry – High Point, N.C.: I have just turned 65 and would like to work at least one more year. My previous employment includes nine years as a North Carolina government employee, and I started receiving a small pension after ‘retiring’ when I reached 60 years of age. My wife is 64 and has retired. She had worked as a teacher in the North Carolina public schools and is receiving retirement benefits. We would like to maximize our Social Security benefits and want your advice on how best to accomplish this.

Larry Kotlikoff: From what you wrote, it sounds like your wife doesn’t have 40 quarters of covered Social Security employment. In this case, your best strategy may be to wait until 70 to collect your highest possible Social Security retirement benefit. If you have 30 years or more of covered employment with substantial earnings, you won’t be hit by the Windfall Elimination Provision.

If you have less than that amount of covered employment, you will get hit, but it doesn’t sound, in your case, that it would be a big hit. By waiting until 70 to collect, you’ll provide your wife with the largest possible survivor benefit if you die before she passes away. Her survivor benefit will, however, be reduced by an amount equal to two-thirds of her North Carolina teachers’ pension, thanks to the Government Pension Offset (GPO) provision.

If you do wait until 70 to collect your retirement benefit, you’ll want to file for your retirement benefit at 66 and suspend its collection. This will enable your wife to file for a spousal benefit at age 66, which will equal half of your full retirement benefit. This full spousal benefit may be fully wiped out by the GPO, but it can’t hurt to see. Also, if her North Carolina teachers’ pension isn’t indexed for inflation, the spousal benefit, even if wiped out initially, may become positive at some point because it will be calculated each year as the difference between your annual cost-of-living-adjusted-full retirement benefit and two-thirds of her fixed (in terms of dollars, i.e., not inflation-adjusted) state teachers’ pension.

All of the above assumes that North Carolina teachers are not covered by Social Security.