Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Editor’s Note: Boston University economist Larry Kotlikoff has spent every week, for over three years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security columns 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 updated book, “Get What’s Yours — the Revised Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) is now available and includes guidance on how to navigate the Social Security changes made in the Bipartisan Budget Act of 2015.
Kotlikoff has been keeping readers updated on how the budget act changes a number of Social Security rules with “This is not how you fix Social Security,” “Congress is pulling the rug out from people’s retirement decisions” and “12 secrets to maximizing your Social Security benefits under the new rules,” as well as his answers to viewer questions. We’ll continue publishing updates on what this new law means for you. Stay tuned.
I thought I had heard it all, but this week, before I answer questions, I will present three true Social Security horror stories, which I’ve heard in the last few weeks.
Horror Story 1: Can you safely spend your Social Security benefits?
Imagine you become disabled, lose your job, go through the horrible stress associated with adjusting to your new status, apply and start collecting disability benefits and then discover you can do something you didn’t think you could do: namely, write. You write a children’s book and it does well and you start receiving royalty checks. All this happens in 1996. You then immediately realize that you need to check with Social Security if you can still receive your disability checks. You check and they say royalty income is not the same as labor income and it doesn’t affect your ability to collect disability benefits. You still can’t believe this so you check many more times over the years. Each time you are told the same story. “Royalty income does not affect the receipt of disability benefits.”
Then 10 years later, in 2006, out of the blue, you receive a letter from Social Security demanding repayment of $309,000! You also learn that Social Security wants to take back the money it provided your children in the form of child benefits.
You go through the long and arduous appeals process. A judge decides that because you went on some book tours, your royalty income is not royalty income. So what you were repeatedly told — royalty income does not disqualify you from collecting Social Security income — was true but not true.
An appeals judge rules that even if Social Security was at fault in sending you payments you are liable to repay unless you were without fault. The appeals judge decides you were without fault because you consistently informed Social Security that you were receiving royalty income. But then the appeals judge says it is OK for Social Security to claw back your benefits if doing so wouldn’t defeat the purpose of the law. He then examines how much you spend on vacations, purchases on home improvements, cars and everything else. Following this forensic examination, which includes statements like, “She also paid $662.07 for a clutch in April 2015,” and “She has an expensive cable plan,” the judge decides you are liable for the $309,000.
I find this simply appalling. You are told royalty income is not a problem, you repeatedly, year after year, tell Social Security about your royalty income, a decade later you get a bill for $309,000. You appeal and after a decade you learn that it was all Social Security’s fault, you did everything right, you told them all about your royalty income, but you gave a few talks about your book, so we’re now going to called the royalty income earned, not unearned income. Furthermore, since you spent money on a clutch, took a vacation, did home improvements, etc., it wouldn’t be unjust for us to claw back the $309,000. So pay up!
This truly feels like Russian justice.
Horror Story 2: Taking disability benefits can produce no benefits and a huge tax bill.
Janet Novak, Forbes’ personal finance columnist, wrote this amazing and dismaying story about a federal worker, I’ll call him Joe, who was receiving workmen’s compensation and applied for Social Security disability benefits. Social Security awarded him disability benefits, but they reduced Joe’s disability benefits to zero because they deduct workers’ compensation benefits. But then Joe gets a 1099 from Social Security for the disability benefits he never received. He ignored the 1099. Next the IRS went after him and his wife, claiming that the gross not the net disability benefits are taxable income and that he and his wife owe taxes on 85 percent of the disability benefits he never received. Here’s the huge takeaway: If you are receiving workmen’s compensation, you need to think many times over before filing for Social Security disability benefits.
Horror Story 3: If you filed and suspended before the deadline, don’t listen when Social Security calls.
A gentleman emailed me in great alarm. He had filed for his retirement benefit and suspended its collection in April before the April 29th deadline. He did so intending to have his wife collect just her spousal benefit starting in two years when she turns 66. He received a call from a staffer at Social Security saying she was processing his paperwork, but that he had made a mistake thinking his wife could collect just a spousal benefit when she reached 66 and let her own benefit grow through 70. In order to do that, she said, her wife had to have been 66 before April 30. She then asked him if she should continue to process his request to file and suspend his retirement benefit.
Fortunately, he wrote down the staffers name and phone number. I called and spoke to her. I mentioned the gentleman’s name and that I was calling on his behalf and thought she had given him the wrong information. I said I had considerable background on the topic and had co-written a bestselling book on the topic. She then embarked on what I can only describe as a half-hour tirade in which I got in only .005 percent of the words. At the end, when she said she had to go, I asked her to double check and take down my phone number as I was going to write about our discussion in my PBS NewsHour column. Ten minutes later, she called back and apologized and said I had been right and that I had no idea how many people they have to deal with and that it was overwhelming.
I don’t mind Social Security staff getting things wrong. I expect this will happen. The top brass has failed to train people properly and provided misleading instructions. The staff are also incredibly underpaid and overworked. But the arrogance is what gets me.
Now for the answers to some questions:
Claudine – Baltimore, Md.: I’m 70. My retirement age was 66 I was married 14 years divorced 30 plus years. What advice do you give? When I called Social Security I was told I am already receiving the maximum amount, but I can apply for benefits upon my ex’s passing. He has remarried.
Larry Kotlikoff: Hi Claudine, They told you exactly the right thing assuming your ex is receiving a higher benefit than you are receiving.
Anonymous – Calabash, N.C.: I collect New York government pension from working for Suffolk County. I am now retired at age 61. I paid Social Security taxes for over 40 years. If I collect Social Security at age 62, will my pension affect my benefit?
Larry Kotlikoff: No and yes. You surely have enough years of substantial earnings so you won’t be subject to the Windfall Elimination Provision, which would otherwise lower your own retirement benefit. But if you become eligible to collect a widow(er)s benefit or a divorced widow(er)s benefit, it will be reduced by two-thirds of your non-covered pension.
Alexandra – Shorewood, Wis.: Hello! I will be 64 this year, never married, with two kids I adopted relatively late in life (15 and 11). I will retire later this year and file for Social Security benefits for me and my two daughters when I’m 64. My plan is to continue benefits for all three of us until I turn 66, at which time I’ll suspend mine until I turn 70. I know I’m bucking your book’s patience mantra, but I have stretched working from 62 to 64 and can do no more. I’d rather be more present, physically and mentally, for my two girls. In reading your book, I realized I may be able to suspend at 66 to minimize the hit I’m taking by retiring at 64. Am I being reasonable? (I also have a good Wisconsin state pension than will be two times what Social Security will be and a healthy 403(b), so I’m not completely reliant on Social Security.) Thank so much!
Larry Kotlikoff: The new Social Security law has made your situation far more complicated. When you reach 66, you can still suspend your retirement benefits, but your daughters won’t be able to collect child benefits while your benefit is in suspension. Thus it might be best to wait to suspend until you are 67. Also, depending on how much you are earning, you may want to file for your retirement benefit immediately. The earnings test may not take away 100 percent of your benefits, and your children can collect. Finally, if the Wisconsin state pension is from non-covered employment, this will impact the entire calculus. Very precise software can figure out precisely which of the tens of thousands of alternative strategies will maximize your family’s combined lifetime benefits and do so in a second. You need to use extremely precise software that handles child benefits, the earnings test and the Windfall Elimination Provision.
Anonymous: I have been collecting Social Security as a widow since age 62. I followed the advice of someone at Social Security who said, “My advice, take it now.” I took my husband’s rather than my own, because it was greater. It was my understanding that you can only collect one or the other. Is that true? Am I entitled to anything more, based on my own earnings, or in any other way? My husband had already drawn on his Social Security before his demise, starting also at age 62, which cut down on my subsequent widow’s benefit. Please let me know whether I have any chance of collecting additional funds.
Larry Kotlikoff: Ex ante, they gave you bad advice. But ex post, given that your husband passed away, you may have done better taking your retirement and excess spousal benefits early. There is no way, unfortunately, for you to raise you widow’s benefit. Sorry not to have better news.
Rose – Syracuse, N.Y.: My husband passed away July 2015. He was 66 and had been collecting Social Security disability for a couple years. I am 63 and still working full time. Are there any Social Security laws out there to help me? I was told by Social Security that I make too much money to collect his Social Security, even though I have a modest income.
Larry Kotlikoff: I may see a biased sample, but in my experience, Social Security gets more things wrong than right. So I would use very accurate software that handles the earnings test as well as widow’s benefits and triple check they got it right. At a minimum, at 66, when the earnings test ends, you will want to take just your widow’s benefit and your own retirement benefit at 70. If your own retirement benefit exceeds your widow’s benefit, your check will go up.
Anonymous — Fenwick, W.V.: My husband died at age 61 and four months. I am currently 58. I receive his teachers pension and I work full time. When should I apply for survivors benefits? Will my income from his pension be included in my Social Security earnings?
Larry Kotlikoff: Your survivor pension income is not included under the Earnings Test. You may do best taking your widow’s benefit at 60 and your own retirement benefit at 70. Or it may be best to take your own retirement benefit at 62 and your widow’s benefit at full retirement age. Precise software is the only thing that can say for sure.
Jessie – Orlando, Fla.: I turn 62 this year and have been collecting Social Security disability for two years. I finally qualified for Medicare. I heard there would be changes at the end of April that would take away money from Social Security. Does this apply to disability too, and if so, how do I apply before April 30 so I won’t lose future Social Security Disability checks?
Larry Kotlikoff: The April 29th deadline didn’t apply to you. At 66, when your disability benefit becomes your retirement benefit, you’ll want to decide whether to suspend your retirement benefit and restart it at 70 when it will restart 32 percent higher.
Kay – Fremont, Calif.: How do I apply for benefits from my ex-husband? We were married 10 years and I am now single. Also, I am living with my ex-husband and helping care for him because he has Parkinson’s. He is pretty much bed-ridden and incontinent. I am 70, and he is 79. Am I entitled to benefits for this? I am not employed. If so, where do I start?
Larry Kotlikoff: Very sorry to hear about this. My dad had Parkinson’s. I know what you are going through. I presume your ex-husband is collecting his retirement benefit and you are collecting your own retirement benefit, plus any excess spousal benefit, if it’s positive. If so, there is no more money to be had. When your ex-husband passes, you will receive his retirement benefit as a widow benefit if it exceeds your retirement benefit.
Geneva – Seguin, Texas: I am 66 and will be 67 in October 2016. My ex passed, and I filed and got the widow’s pension. At age 62, I have not collected my own yet, which will be much less, but was thinking about filing for mine when I turn 67. Can I collect both or will I lose my widow’s pension. Will I screw my self by not waiting until I turn 70? Can I continue to work until I turn age 70? With new change, am I already too late? I was recently diagnosed with fibromyalgia. I am too old to collect disability. So I don’t know what I should do. Please explain my options.
Larry Kotlikoff: Very sorry to hear about your illness. You can’t collect both. If your retirement benefit at 70 is higher than your widow’s benefit, wait until 70 to take it. Taking your retirement benefit early would, in this case, be a very bad move. If your retirement benefit at 70 is less than your widow’s benefit, you won’t receive anything more at 70, I’m very sorry to say.