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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. 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
Sally McFarland — Middletown, R.I.: I am a federal employee with 15 years service. I am planning on retiring at 19 years when I reach age 66. Some of my coworkers are insisting I will not get both my federal retirement and Social Security — that I must take one or the other. Is that true?
Larry Kotlikoff: Not if you have 40 quarters of covered earnings history under Social Security, it’s not: 40 quarters of a year in which you had earnings on which you and your employer paid the Social Security tax. If you did that, you’re entitled to Social Security benefits. And if I am reading your numbers correctly, you’re now 62 and only began working for the federal government at age 47. So you had plenty of time to accrue those 40 quarters or 10 years’ worth of Social Security earnings.
Perhaps your co-workers are referring to the Windfall Elimination Provision (WEP). The WEP can reduce, but not wipe out, the benefits to which you are entitled.
This said, you appear to have started work as a federal employee after 1986. If this is true, and you have paid Social Security taxes for the requisite 40 quarters, your Social Security benefits will not be affected by the WEP.
Sherm Fairbairn — Orange, Calif.: I have been a teacher in California for 13 years and am now 62. My penalty is offset upon payment of California State Teachers Retirement System (CalSTRS) retirement of 66 percent of Social Security. Should I take it now and in full? Or wait until I retire? I’m confused. Also, how about my spousal benefit based on my wife’s Social Security record? Do I lose that?
Larry Kotlikoff: You have a pension coming from work not covered by Social Security — i.e., work earnings which were not subject to Social Security taxes. Once you start receiving your non-covered pension, your own Social Security benefit will be reduced due to the WEP. As for your spousal benefit based on your wife’s, it will be reduced due to the Government Pension Offset provision (GPO). So, in order to maximize your Social Security benefits, you should probably take your retirement and spousal benefit starting immediately and wait as long as possible to take your non-covered pension.
Denise — Palm Bay, Fla.: I am receiving Social Security disability for myself, but I lost my husband in 2008. Am I able to be collecting widow’s benefits and my own Social Security disability?
Larry Kotlikoff: Disabled widow(er)s can get survivor benefits based on the work histories of their deceased spouses as early as age 50. If you take your survivor benefit between age 50 and 60, it will be reduced by 28.5 percent relative to what you would receive were you to wait until full retirement age.
But here’s an important secret I learned from former Social Security technical expert Jerry Lutz, with whom I check over my answers, especially with respect to disability benefits. (This said, I, not Jerry, am responsible for any mistakes in my answers.)
If you take your disabled widow’s benefit between ages 50 and 60, your total benefit will be calculated as your disability benefit plus .715 (the applicable early survivor benefit reduction factor) times the difference between your deceased husband’s primary insurance amount (PIA) and your own PIA.
The PIA is the full retirement benefit to which a worker is or was entitled. So if your husband’s PIA exceeds yours, you get this excess survivor benefit in addition to your disability benefit right through full retirement age.
And here’s the secret: if you take your disabled widow’s benefit between age 50 and 60, the .715 reduction factor goes away when you reach full retirement age. This means your total benefit will increase and become equal to your husband’s primary insurance amount. So you don’t lose anything by starting to take your disabled widow’s survivor benefit as soon as you can between 50 and 60.
If you become disabled after age 60 and then your spouse dies, you can get reduced disabled widow’s benefits. But the reduction doesn’t go away when you reach full retirement age.
In addition, your total benefit is calculated as your own disability benefit plus the difference between A., your spouse’s PIA multiplied by the relevant reduction factor and B., your PIA.
This formula is less generous. The system is treating disabled workers whose spouses die before the disabled worker reaches age 60 better than disabled workers whose spouses die after age 60.
When you reach full retirement age, the 28.5 percent reduction factor goes away, at which point you start receiving 100 percent of your survivor benefit. Hence, there is no advantage to waiting to collect your survivor benefit once you have reached age 50.
One caveat. This feature — that you get to collect full survivor benefits starting at full retirement age — only applies if your disability benefits began before or in the same month as you became entitled to collect a widow’s benefit and you started to collect your survivor benefit sometime between ages 50 and 60.
Champak Patel — Atlanta, Ga.: I am a 68 year-old male and my wife turned 66 this month. I can get $2,800 a month. She can, on her own, receive $175. Should we apply, and I withdraw to have her 50 percent of my benefits? I am planning to work one or two more years and pay maximum Social Security.
Larry Kotlikoff: Yes, this is one of the most useful “secrets” I’ve revealed over the 10 months I’ve been writing this column: what I call the File-and-Suspend strategy. You should file for your retirement benefit and then suspend its collection until age 70, when you will begin to take it.
Your wife should file just for her spousal benefit and wait until 70 to collect her retirement benefit. From the sound of it, your wife has had a low earnings history. So her check, at age 70, may not increase because she takes her own retirement benefit. That’s because she gets that, plus the excess spousal benefit.
Your age-70 retirement benefit will equal your full retirement benefit kicked up by a 32 percent factor reflecting the application of the delayed retirement credit. The excess spousal benefit will equal half of your full retirement benefit minus her age-70 retirement benefit. If the excess spousal benefit is positive, the total benefit she’ll get will just equal half of your full retirement benefit.
This raises an issue that drives me crazy. Whenever your wife does apply for her own retirement benefit — either now or anytime between now and age 70 — Social Security will describe the total benefit as the sum of her retirement benefit and her assumed positive excess spousal benefit. In fact, however, her retirement benefit is completely eliminated because of the spousal benefit.
This feature of Social Security is among the nastiest of its terribly unfair gotchas. Low-earning spouses can work every day of every week or every year, pay Social Security taxes on all their earnings, and end up with absolutely nothing more as a result of all those contributions compared to a spouse who spends his or her entire life sitting at home watching the soaps and collecting the very same spousal benefit. And on top of this injustice, Social Security has the chutzpah to tell the low-earning spouse that she’s getting her own retirement benefit.
Joseph Toka — Santa Rosa, Calif.: My wife is 100 percent disabled. She receives Social Security Disability and is on Medicare. I’m planning for my retirement in two years at age 62. My plan is to take Social Security at 62 to pay for our medical coverage from my employer, which is an HMO, to bridge us to my age of 65, when I can get Medicare coverage for the rest of my life. What are the consequences of my plan for our retirement? My wife is 53 and I’m 60.
Larry Kotlikoff: This is a reasonable plan, given your circumstances. When you reach full retirement age, you can suspend your retirement benefit and then start it up again at age 70 at a 32 percent higher “real” level – adjusted for inflation, that is.
As for your wife, when she reaches full retirement age, she can stop taking her current benefit — otherwise her disability benefit will automatically turn into her retirement benefit — and she can then apply for a spousal benefit only. Because she will have stopped taking her disability benefit, she’ll get her full spousal benefit. This will equal half of your full retirement benefit.
A very important note: she’ll need to pay her Medicare Part B premiums out-of-pocket to ensure that when she reaches age 70 and applies for her own retirement benefit, she’ll get the delayed retirement credits that will make her retirement benefit at age 70 32 percent larger than it would have been had she taken it at full retirement age.
In a prior Making Sense Business Desk column, I discussed this option for disabled workers — of ceasing to take their disability benefit when they reach full retirement age and then starting their own retirement benefit at 70.
Sander J. Smiles — Skokie, Ill.: Can you explain spousal benefits? I understand my wife can take her spousal benefits when she is 62 even though I continue working. Is that right?
Larry Kotlikoff: Yes, but she can’t take her spousal benefit unless you file for your retirement benefit. If you are at or are over full retirement age, you can file for your retirement benefit and then immediately suspend its collection and then wait until, say, 70 to collect a higher benefit.
Assume you either file and collect or file and suspend, your wife will have to file for both her retirement benefit and her spousal benefit if she files for either one early. This is due to Social Security’s deeming provisions. Having your wife take benefits early will mean permanently lower benefits.
Also, her own retirement benefit may wipe out her spousal benefit. Having filed (or having been forced to file) for her retirement benefit, your wife’s spousal benefit will be calculated as an excess spousal benefit equal to half of your full retirement benefit minus all of her full retirement benefit.
This could well be negative, in which case her excess spousal benefit will be set to zero. If she were to wait until full retirement age, she could file just for her full spousal benefit, which would be calculated as simply half of your full retirement benefit. Under this strategy, she’d wait until, say, 70 to collect her own retirement benefit, when it would be as large as possible.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions