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:
A Mr. Stan Mills, age 69, sent me a link to a Fox Business column by Gail Buckner that discusses the “sickening” likelihood of Medicare Part B premiums rising by 50 percent or more starting Jan. 1 unless you are one of the 70 percent of retirees who is “held harmless.”
Held harmless are those middle- and low-income households who already collect Social Security benefits. Their Medicare Part B premium increases are limited to their increase in Social Security benefits resulting from the annual cost of living adjustment (COLA). Today, Social Security announced there will be no COLA in 2016. That is, no one will get any increase in their Social Security benefits, because we’ve had so little inflation. Since the COLA is zero, the increase in Medicare Part B premiums, which can’t exceed the dollar amount of the COLA, will also be zero. As a consequence, some 70 percent of current Medicare recipients will be held harmless. The other 30 percent are in for it. And some are really in for it. As Gail details, for very high-income households, the increase in Part B premiums will total more than $2,000 a year!
Why such a big increase? A part of the answer is that roughly 25 percent of total Medicare Part B costs have to be covered by its premiums. The more people who are held harmless, the less people there are to pay premiums. Thus, the amount of money is spread out over a smaller pool of people, each of whom will have to pay more.
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But what about Mr. Mills? If he doesn’t take his Social Security benefit before the end of this year, he’ll definitely be among the 30 percent of Medicare beneficiaries who won’t be held harmless.
What would Stan’s retirement benefit be if he stuck with his original plan and waited until 70 to collect it? It would be $44,000. Stan’s question was whether he ought to take his benefit early (before the end of this year) or wait another year to collect.
I told Stan to wait to collect his Social Security retirement benefit. If Stan takes his benefit now, it will be over $3,200 smaller (measured in today’s dollars) each year for the rest of his life. The most he could lose from not being held harmless (that is, from not collecting before the year’s end) is about $650 next year, with this amount declining through time (more on this later). This is only the case for low- and middle-income retirees. But in Stan’s case, his income may well have been and continue to be so high that he won’t be held harmless. In this case, there clearly is no extra incentive for Stan to collect early.
In short, collecting early to be held harmless doesn’t appear to provide a strong enough incentive for people to take their benefits earlier than would otherwise be the optimal case.
But here’s the rest of the story that Gail didn’t cover. From what I understand, hold harmless is only a temporary advantage. If you are held harmless this year from, say, a $650 Medicare Part B premium increase, because there was no Social Security COLA this year, you’ll have to hand over your Social Security COLA next year — potentially all of it — and in future years as well until your Medicare Part B premium has been raised by the full $650. Of course, inflation may stay very low for many years. In this case, you’ll have lots of Medicare Part B premium hikes to pay off for many years as a result of no COLAs. Or stated differently, you’ll get your COLAs, but your total Social Security check won’t rise because your Medicare Part B premium, which is deducted from your check, will increase by the amount of your Social Security COLA.
In short, collecting early to be held harmless doesn’t appear to provide a strong enough incentive for people to take their benefits earlier than would otherwise be the optimal case. Below, my colleague Mike points out that there are a few, rare circumstances where it might be advantageous.
My understanding is the same as yours — being held harmless is only a temporary reprieve. That’s how it’s programmed in our Social Security code. However, there can be cases where it’s still worth filing early to be held harmless.
For example, say you were planning to take your Retirement Insurance Benefits (RIB) at age 70 in December 2015. To be held harmless, you need to be entitled to your Retirement Insurance Benefits in both November and December. Say your Primary Insurance Amount is $500, then taking it in November means that your Retirement Insurance Benefits will be $556.60, which is $40.80 per year less than if you waited until December. If your maximum age of life is 85 and the discount rate is 2 percent, that’s a present value of $524. So even if the temporary reprieve of $650 only lasts for one year, you’d be better off filing a month earlier.
While this isn’t a very significant difference, it does mean that you can’t unequivocally dismiss filing earlier in order to be held harmless.
Jim: I read your book. It was excellent. I have a situation that the book doesn’t clarify. I am 62 years old and was recently diagnosed with Parkinson’s. Does that qualify me for immediate fast-track full retirement benefits? How should I proceed?
Larry Kotlikoff: I hope the new meds that are coming out help. You can, I would think, file for disability benefits. Your disability benefit will equal your full retirement benefit. Doing so will, however, prevent you from collecting a full spousal benefit starting at full retirement age and then switching to your age-70 retirement benefit when you reach 70. You can, however, suspend your retirement benefit at full retirement age and get a 32 percent higher retirement benefit starting at 70. My bet is that taking your disability benefit immediately and suspending your retirement benefit at full retirement age when your Disability Insurance (DI) benefit converts to you retirement benefit is the best strategy.
All the best. My dad had Parkinson’s, so I realize this will be a challenge.
Jim: Thank you for your response. Just to clarify, I would technically be receiving DI, which would be a full retirement 66 benefits figure, right? There is no spouse involved. Does converting to age 70 benefits occur automatically, or do I have to stop receiving at 66? Shouldn’t DI qualify you for age-70 benefits immediately? What is someone relying on this income supposed to do from age 66 to 70? Is your Dad still alive?
Larry Kotlikoff: My dad passed in 1990 at 81. I don’t believe Parkinson’s affects longevity or affects it much, but your doc will know. If there is no spouse, are there any ex-spouses to whom you were married for 10 or more years? If you suspend at 66, your benefit is supposed to automatically restart at its higher value at 70. But you should go into the office and make sure. They may try to give you six months of retroactive benefits. Don’t let them unless it is in your interest. If they do, they will permanently lower your benefit when it restarts. Also, pay your Medicare Part B premiums out of pocket directly to the Social Security Administration, so they don’t reactivate your retirement benefit in order to pay the premiums and a) not give it to you and b) not give you your delayed retirement credits when you restart your benefit at 70.
Larry – Dunedin, Fla.: I’m 67 and filed for my Social Security at full retirement age at 66. My wife is 64 and will be retiring later this year prior to her turning 65. After reading your book, I understand that I can suspend my payments at any time, allowing her to file for spousal benefits. What I’m not clear on is: Does she have to be at full retirement age in order to qualify for the 50-percent spousal payment? And secondly, can she claim spousal benefits before reaching full retirement age and not trigger deeming? Thanks for your help.
Larry Kotlikoff: Yes, you can suspend your retirement benefit and restart it at 70. If you just turned 67 and suspend immediately, your age-70 retirement benefit will be 24 percent larger. If your wife files for a spousal benefit before her full retirement age, she will trigger deeming and end up with a permanently lower retirement benefit based on her own work record and an excess spousal benefit that equals zip, nada, scratch, de rien, zero.
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My suggestion is a) for you to immediately suspend your retirement benefit and restart it at 70, b) for your wife to file for just her full spousal benefit at her full retirement age and c) for your wife to file for her own retirement benefit at 70. This will maximize your wife’s widow’s benefit if you kick first as well as produce a higher check for your wife starting at 70 if her own retirement benefit exceeds her full spousal benefit, assuming you are still above ground. (Sorry to be mordant, but Social Security is a deadly subject.)
Bruce – Richmond, Calif.: Most explanations feature the older spouse earning more money. In my case, it’s different. At 61, my wife is almost 2 and a half years older than me. Her Social Security earnings have been modest, and she recently received a statement projecting an $858 benefit at full retirement.
I am turning 59 in November, and I expect my benefit at full retirement age to be about $2,400. As longevity insurance, I want to take my benefits when I turn 70. We are semi-retired already, living off of a taxable investment base of about $1 million, and modest part-time income as musicians. We are hoping this will take us through the next decade, after which we will switch to our IRAs and Social Security benefits. Barring another financial melt-down, we expect our IRAs to be worth about $1 million in ten years. Given the cost of living in the Bay Area, we would love to file my wife’s Social Security benefits sooner and switch her to spousal benefits when I reach full retirement age and do a file and suspend. Short of both of us waiting to age 70 to file, what Social Security strategy would make sense for us?
Larry Kotlikoff: I’d considering moving out of the Bay Area, which is very expensive given your resources. If you own a house, you might be able to sell it for a big number and move to some part of the country where people aren’t so damn happy, the weather is awful and there is plenty of water. Maine comes to mind. With global warming it’s probably the next California.
But back to Social Security. You need to use some highly detailed commercial Social Security software to decide what’s best in terms of maximizing your combined lifetime benefits. Your wife will ultimately collect spousal benefits based on your work record. So one option is for her to take her reduced retirement benefit at 62 and her excess spousal benefit when you file for your own retirement benefit. (Note, there will be no spousal benefit deeming — no requirement that she also file early for her spousal benefit — when she files for her retirement benefit at 62, because you will have not yet filed for your own retirement benefit, which is a condition for her to collect a spousal benefit.)
It might be optimal for you to file for your retirement benefit before you reach full retirement age to activate her excess spousal benefit. Why? Because she can’t collect an excess spousal benefit on your work record until you file for your retirement benefit. If you do file for your retirement benefit before you reach full retirement age, when you reach full retirement age, you can suspend your retirement benefit and restart it at 70. This is what I call the Start-Stop-Start strategy. Another option is for you to wait until full retirement age and then file and suspend at the same time. Only highly analytical software can determine the best general strategy and its timing.
Eddy – Bala Cynwyd, Penn.: My wife is about to retire and will be 62 in a few months. I will be 66 this fall, and I plan to continue working until the end of 2018 when I will be 69. We both would have a monthly pension of about $2,500 at full retirement age, but we do not plan to claim personal benefits until age 70. After reading your book, I’m still uncertain if either of us can file and suspend and claim a spousal benefit without penalizing ourselves over the long run. How do I best assess whether this is a good option?
Larry Kotlikoff: My grandmother lived on 26 Bala Road in Bala Cynwyd! I remember the street number, because I built her a street number sign. Anyway, back to your question. As good software will confirm, your best moves are surely for you to take you own retirement benefit at 70 and for your wife to file for only her full spousal benefit when she reaches full retirement age — the earliest age she can do so without getting smacked by deeming. At 70, your wife would file for her own retirement benefit. Make sure your wife does not file and suspend her own retirement benefit at her full retirement age. This will transform her full spousal benefit into an excess spousal benefit that will, in her case, be zero.
Edward – San Francisco, Calif.: I appreciate your knowledgeable advice in your columns. I am 63, a widower and eligible for survivor benefits. My wife passed away at age 61, and she was receiving Social Security disability benefits. As I understand, if I apply for survivor benefits now, it will be reduced relative to the benefit at full retirement age. But if I intend to switch to my own benefit at age 70, waiting to apply for survivor benefits until age 66 would only give me four years of higher payments.
Example: Survivor benefits at age 63 would be $1,700 and at age 66, $2,100. Total payments received from age 63 to age 66 would be $1,700 times 36 months, which would equate to $61,200. Total difference in higher payments if one were to wait to apply to age 66 would be: (2,100 – 1,700) x 48 months = $19,200. It seems that applying now would result in $42,000 of additional income. Is my logic correct? Also if I apply now and my W2 and net self-employment income exceed the threshold of $15,720, will Social Security recalculate and increase the survivor benefit at full retirement age, and thus will the reduction be temporary? Thank you in advance for your time and assistance.
Larry Kotlikoff: Your logic is nearly spot on. You should take your reduced widow’s benefit right away and then take your own retirement benefit at 70 if your own retirement benefit at 70 exceeds your unreduced widow’s benefit. If that’s not the case, you’ll want to take your own reduced retirement benefit at 62 and wait until full retirement age to take your widow’s benefit, which will be the larger of the two amounts.
If you lose a particular benefit due to the earnings test, that benefit and that benefit only will be kicked back up at full retirement age to compensate you, on an actuarial basis, for the loss of those benefits. Of course, if you flip onto a different benefit, this so-called “adjustment of the reduction factor” won’t be of any real help.
Anonymous – Richmond, Texas: I read your book and still need help looking for divorced spousal support. My ex-husband is 71 this December. I will be 64 this October. We were married for over 10 years. I am not remarried. We both have earned maximum credits. I do not know if he is currently receiving, and I am not. I would like to apply and suspend mine until 70 and use half of his. However, I am hung up each time I read that if I took mine now it would be greater than half of his.
Larry Kotlikoff: You should take your divorcee spousal benefit when you reach full retirement age and NOT before. If you do, Social Security will hurt you very badly. At 70 you should take your own retirement benefit. When your ex dies, you can flip onto his benefit (it will be your divorcee widow’s benefit) if it’s larger.