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 over 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:
Kathleen — Fort Collins, Colo.: For several years I was employed at a state university that did not pay Social Security taxes for employees. Instead, my funded retirement plan during this employment was a 403B variable annuity plan into which the university paid an annual sum. Is this plan a “pension” subject to the Windfall Elimination Provision
(WEP) or to the Government Pension Offset(GPO)? Thanks!
Larry Kotlikoff: Yes, your 403(b) from your uncovered employment is considered a “pension” subject to both the WEP and GPO. But there are exceptions when it comes to the WEP.
Let me, to begin, explain the WEP formula, which reduces your PIA — your Primary Insurance Amount, which is also called your full employment benefit. If your PIA is lower, so will be your own retirement benefit and the child benefits, spousal benefits, divorcee spousal benefits, and child-in-care spousal benefits that your current and former family members can collect on your work record.
This year’s formula for your PIA is given by:
(a) 90 percent times the WEP factor times the substantial earnings factor of the first $826 of your average indexed monthly earnings, plus
(b) 32 percent of your average indexed monthly earnings over $826 and through $4,980, plus
(c) 15 percent of your average indexed monthly earnings over $4,980.
Your average indexed monthly earnings (AIME) is your highest 35 years of indexed (for economy-wide wage growth through age 60) covered earnings divided by 12. The WEP factor is 40/90. So if the substantial earnings factor is 0, the 90 percent value is lowered to 40 percent. The substantial earnings factor is (X -20)/10, where X is the number of substantial years of covered earnings. The factor is zero if X is 20 years or less, and equals 1 if it’s 30 or more.
If this isn’t perfectly easy to understand, have your member of Congress explain it to you. They wrote this law and are surely on top of it.
Now to the exceptions to being WEP’d.
First, if you had 30 years of covered earnings, which exceeded Social Security’s prevailing substantial earnings threshold, you won’t be WEP’d. And you’ll be only partially WEP’d if you have between 20 and 30 years of substantial earnings.
This year’s substantial earnings limit is $20,050. (This Social Security Administration page provides a table of substantial earnings thresholds in the past. ) If you make this amount or anything above it, you receive a year’s substantial earnings credit and reduce the degree to which you are WEP’d by 10 percent once the number of years of substantial earnings exceeds 20. When it reaches 30, if it does do so, you’ll have reduced the WEP factor by 10 percent times 10 years or by 100 percent.
Note what I view as a virtually criminal injustice. Namely, that if you make even a penny less than the substantial earnings limit in covered employment in a given year, you get no credit whatsoever with respect to the amount of substantial earnings when it comes to reducing the degree to which you are WEP’d. In many states, where the minimum wage is low, you can work for 30 or more years full time in an Social Security-covered job and never receive credit for a single year of covered employment.
Second, once you pass away, you are no longer WEP’d. This is important when it comes to the survivor benefits that your current spouse, your ex spouses (to whom you were married for over 10 years), your children (while still in grade school and below 19 or simply disabled, regardless of age, if they became disabled before 22), and your parents (who were dependent on you for more than half their support) can collect on your work record.
Third, the degree to which you are WEP’d can’t lead you to lose more, with respect to your annual Social Security full retirement benefit, than half of your non-covered pension. Stated differently, your maximum annual exposure to the WEP is half of your full retirement benefit.
How does Social Security translate a 403(b) balance into an annual pension, which it can use to set this maximum exposure? It has a conversion formula that it uses to do this.
Finally, neither the WEP nor GPO kick in until you start receiving your non-covered pension or are judged to be able to start withdrawing funds from your 403(b) account. In some non-covered jobs with 403(b)s, you can’t collect your 403(b) until you leave your non-covered employment. In this case, you can delay both the WEP and GPO from being activated until you stop working in the non-covered job. So one way to collect un-WEP’d and un-GPO’d Social Security benefits for yourself and current and former relatives is to keep working. While you do this, your 403(b) will continue to earn a return in the market. As far as I can tell, you could work until, say, 90, and not be WEP’d or GPO’d until then provided you can’t initiate withdrawals from your 403(b) until you stop working. Furthermore, the minimum distribution requirements — how much you’d have to start withdrawing from your 403(b) starting at age 70.5 — don’t kick in if you are still working and contributing to your 403(b) plan.
Now to the GPO, which reduces benefits that you, not your current and former family members, can collect on your current or ex-spouses’ (to whom you were married for 10 or more years) work records. These benefits that you can collect are spousal, child-in-care spousal, divorcee spousal, widow(er), and divorcee widow(er) benefits. When you are GPO’d, these benefits are reduced by two-thirds of your non-covered pension or your imputed pension from your 403(b), but only after you are judged to be in non-covered pension collection status.
There is one exception to the GPO. If your non-covered pension comes from work outside the country, you aren’t subject to the GPO. Why this is the case is everyone’s guess. I’d ask my members of Congress to explain.
Gary — Uxbridge, Mass.: My wife is a teacher and has a state retirement plan from Rhode Island worth about $1,600 a month, which she cannot access until she is 65.5. She also has some Social Security credits that will give her a full retirement amount of $946 a month. She is 59, I am 60. Considering the Government Pension Offset, would it not be better to take her Social Security at 62, which would be $698 a month for 3.5 years as the Government Pension Offset will cut her monthly benefit to almost nothing when she takes her State Retirement at 65.5? I have worked in the private sector all my life and have a full retirement amount of $2,389 a month.
Larry Kotlikoff: Absolutely. This means of temporarily avoiding the WEP and GPO is something Paul and Phil and I discussed in our book and that I mention above in today’s column. The longer your wife can delay taking her RI retirement plan pension or a lump sum from it, provided she is getting full compensated by RI for waiting to collect, the longer she can collect Social Security benefits based on her own covered work record and your work record without worry about either of these nasty provisions.
Lawrence — Kohler, Wisconsin: If a divorcee who is collecting spousal benefits based on her ex-husband remarries, how soon can she begin receiving spousal benefits based on the benefit being received by her new husband? Both are over 70, if that makes any difference, and both began receiving Social Security at age 65.
Larry Kotlikoff: In most cases, a spouse must be married for a full year before they can become entitled to spousal benefits. However, if a person is already drawing benefits as a divorced spouse, they can become entitled to spousal benefits on their new spouse’s record as early as the first full month of marriage. In this case, it also pays to get married on the first day of a month. Otherwise, they won’t be entitled on either record for the month in which the marriage occurs.
Annick — Los Angeles, Calif.: A good friend of mine read your book “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” and tells me that I may be eligible for an increased Social Security benefit as a divorced widow, based on my deceased former husband’s earnings record. I am writing because I would like to verify this with you.
Larry Kotlikoff: Hi Annick, If you aren’t remarried or remarried after age 60, this may be true. I say “may be”, because if you are collecting your own retirement benefit or have filed for it and suspended it, Social Security will just pay you the larger of your widow’s benefit and your own retirement benefit. Hence, if your retirement benefit is larger and you are collecting it or even have filed for it and suspended it, you won’t collect a widow’s benefit. On the other hand, if you haven’t filed for your retirement benefit, you can collect your widow’s benefit starting at 60 (50 if disabled) and then wait until 70 to collect your own retirement benefit when it starts at its maximum value. Or you can collect your own retirement benefit first, starting at 62, and then, depending on whether your deceased husband took his own retirement benefit early, start collecting your widow’s benefit before or at full retirement age. Expert software sold commercially is the only way to figure out exactly what to do.
Anonymous: I was born June 10, 1936 in France, and I am now 78 years old. I married my husband, an American citizen, in 1958 in France. I immigrated to the United States in 1959. We had two children. I became a naturalized U.S. citizen in 1971. My husband and I divorced in 1972, after 13.5 years of marriage. I never remarried.
I began working in the United States about 1974, and retired in 2001.
In 2001, I began to receive a small “social security” payment from the French Government for work I had performed in France before I came to America (approximately $150 to $200 per month, depending on exchange rates). I applied for American Social Security on my retirement in 2001 — at Full Retirement Age — informing the Social Security Administration of my French payment.
When I applied for my American Social Security, the SSA office told me that the benefit based on my work record was greater than the “50 percent” benefit I was eligible to receive based on my ex-husband’s work record.
My ex-husband died in 2002, at age 68. He had remarried twice, and was still married to his third wife at the time of his death. He had two children with this third wife. I do not know if he had applied for his own Social Security; and if he did, when he did.
My friend tells me that based on his reading of your book, I am now eligible for a Social Security benefit based on my deceased ex-husband’s work record. He says that since I worked at relatively low-paying clerical jobs, and my ex-husband worked as an advertising executive and commercial director, the odds are that his Primary Insurance Amount (plus Delayed Retirement Credit, if any) is greater than my Primary Insurance Amount — perhaps significantly so. In addition, as I am now a divorced survivor, my insurance benefits also would be based on 100 percent of my ex-husband’s Primary Insurance Amount (increased or decreased by any adjustments), not the 50 percent I was eligible for as a divorced spouse. On the downside, any possible insurance benefit may be reduced if my ex-husband applied for his Social Security benefit before his full retirement amount – but to no less than 82.5 percent of my ex-husband’s PIA.
Further, my friend states that if I apply for a divorced widow’s insurance benefit, and it turns out that this benefit is less than my current benefit (based on my earnings), under no circumstances will my current benefit be decreased. And, if I do apply and receive a divorced widow’s insurance benefit, that will not reduce any benefits due to my husband’s other two wives. From your knowledge, is he correct? And if he is correct, are there any gotchas I should beware of when I file?
Larry Kotlikoff: Your friend sounds like he read our book very carefully and what he told you is absolutely true. So head over to your local Social Security office and file for your divorcee widow’s benefit. Ask for six months of retroactive benefits, which is the most they will give you. And, don’t worry. This can only mean more money per month!
Lyle: If you don’t mind, I have a follow-up question on the heels of finishing your Social Security book. First, thanks to you and your colleagues for putting together a clear, helpful, and funny piece on such a potentially confusing topic.
I am pretty sure that I have it correct: That when I turn 66 in October 2016 and my wife turns 66 a bit sooner, in February 2016, I am assuming that I can sign up and suspend my benefits, and my wife, the lower earner of the two of us would qualify to receive spousal benefits, with both of us continuing to grow our Social Security benefit until age 70. Is this correct?
What I am less clear about is this: If I actually start taking my own benefit at age 66, would my wife still be eligible to request at the same time a spousal benefit from me, continuing to grow her own Social Security benefit until age 70, at which time she would switch from spousal to take her own full benefit?
Larry Kotlikoff: Yes, your wife will be able to start her full spousal benefit at the same time as you file and suspend your retirement benefit.