Creative Commons photo courtesy flickr user 401(K) 2012 .
Paul Solman: Boston University economist Laurence Kotlikoff has become our Social Security expert here at the Online NewsHour. Some of his previous posts can be accessed from here. During the weeks Larry has been answering your questions, he’s been running into more and more perversities of the system. He’s been keeping a list of them — what he calls “gotchas.” Here they are:
Hidden deep within the 2,728 rules in Social Security’s Handbook and the thousands upon thousands of explanations of those rules contained in its Program Operating Manual System are a number of very nasty gotchas. My posts here on Paul’s Making Sen$e page and elsewhere are attempts to help people avoid them. My company’s software program — Maximize My Social Security — was developed with the same goal in mind though, as Paul is right to remind you, we charge for it.
Here is my current list of Social Security’s worst gotchas. I want to be clear that the system, not the people in Social Security, is generating these traps. No one in Social Security is intentionally trying to sucker us into wrong decisions or lower benefits. But over the years, the rules have become convoluted to the point of indecipherable. Even Social Security employees routinely get things wrong. Here, then, are ten pitfalls to avoid.
- Social Security’s website gives the impression that your spousal benefit is half of your partner’s Primary Insurance Amount (PIA), also called the full retirement benefit. Your spouse is eligible for $2,000 a month? Then you would get $1000 a month. But this is true only if a) you don’t qualify for a retirement benefit on your own, or b) you reach full retirement age but never filed for Social Security and, at that point, you apply only for your spousal benefit, not for your own.
If you have earned your own retirement benefit and have filed for it, your spousal benefit is actually something called your “excess spousal benefit.” The excess spousal benefit begins as half of your partner’s primary insurance amount, as the Social Security website suggests. But your own primary insurance amount, augmented by any delayed retirement credits, is deducted from it. (All this assumes, of course, that half your spouse’s primary insurance amount is larger than your primary insurance amount.)
But here’s another wrinkle. Let’s say you applied for your retirement benefit before you reached full retirement age. Assuming your partner has already filed for his/her retirement benefit, you will then be forced to apply for your spousal benefit early as well. There is one way to avoid this: If your partner applies one month or more after you apply, you’re in the clear. You don’t have to take your spousal benefit early and can wait until full retirement age to collect an unreduced excess spousal benefit. Again, it’s the excess that is at stake because of filing for your retirement benefit before or at the same time as for your spousal benefit.
- If you or your ex-spouse reach full retirement without either of you having filed for your retirement benefit, each of you can collect spousal benefits equal to half the full retirement benefit of the other, provided you just apply for your spousal benefit and wait, say, to 70 to collect your own retirement benefit.
But if you are married, there’s a gotcha. Only one of you can collect this “free” spousal benefit. The Social Security rules actually provide an incentive to get divorced. If you untie the knot at least two years before reaching full retirement age, you can both get “free” spousal benefits. You can continue to live in sin, and then get remarried after you both reach 70. Moreover, so long as you get divorced after age 60, this won’t affect your survivor benefits if one of you dies. For some couples, where both have had significant earnings, getting this extra “free” spousal benefit can be worth as much as $60,000 in total. A no-fault divorce can cost less than $500. You do the math.
- Suppose you drop dead before you start collecting your retirement benefit and before you reach full retirement age. Further assume that you have a low-earning spouse. She/he will be able to collect a survivor benefit equal to your full retirement benefit.
But suppose you started receiving your retirement benefit right before you died. In this case, there’s a gotcha for your surviving spouse. Her/his widow’s benefit will be permanently reduced because it will equal your retirement benefit with the early retirement benefit reduction applied. To make matters worse, if your spouse takes the widow’s/widower’s benefit early, s/he will get hit by the survivor’s benefit reduction. Together, these two reductions could reduce your spouse’s survivor benefit by as much as 47.5 percent.
- Suppose you work your entire life and pay Social Security taxes week in and week out, but you earn relatively little in absolute terms and little relative to your spouse. You’d think that you’d get something back for all those years of paying 12.4 percent of every dollar you earn, including your employer’s share. In fact, you may get not one penny more.
Even more galling, say your neighbor works not a day for her/his entire life and pays no taxes whatsoever. Yet s/he may end up with higher benefits than you because her/his spouse earned more than your spouse.
- Say you’re 62 and your wife, 66, has reached her full retirement age. She’d like to collect spousal benefits for four years and wait until 70 to take her own highest possible retirement benefit. So you apply for your retirement benefit early. You hit 66; your wife is now 70 and goes to collect her own maximum retirement benefit.
So now you think: “Gee, I can apply to get an excess spousal benefit based on her earnings record. All I have to do is suspend my own retirement benefit and start it up again at 70.” So you apply for your spousal benefit and suspend your own retirement benefit.
Having passed age 65, you’re also in Medicare Part B. But you don’t think about paying the Part B premium with a separate check. That’s because Social Security has been deducting the Medicare premium from your Social Security check. But it’s my understanding that if you don’t pay the premium out of your own pocket, your retirement benefit at age 70 will be no larger than when you suspended it. I.e., you would have given up a positive retirement benefit for four years for absolutely nothing.
- The divorce gotcha is one I’ve mentioned in an earlier post but it’s well worth repeating as a gotcha. If you are married nine years, 11 months, and 28-31 days, depending on the month you get divorced, neither you nor your spouse will collect a dime in spousal or survivor benefits. But if you wait one more day — just stick it out with the hate of your life for the 24 more hours required to pass 10 years of marriage — you and your spouse do qualify for these benefits.
- However, even if you did stick it out for 10 or more years and finally divorced, and then are lucky enough meet the love of your life, you will be unlucky if you marry that person before you reach 60. If you’re a day or more short of 60, you will lose both your spousal and potential survivor benefits from spouse one. Here, again, we have Social Security getting into our love lives, however inadvertently. Picture the new couple at the jewelry store picking out a ring when the 48-year-old spouse-to-be suddenly realizes it will cost spousal and survivor benefits, for as long as he or she shall live — unless the couple waits another dozen years.
- If you do remarry after having been married once before to a much higher earner but don’t get divorced from your new spouse, you can’t collect spousal benefits on the first spouse.
- If you work for a government or other organization that is exempt from Social Security, and therefore does not send in Social Security tax payments based on your earnings, you will get lower or no benefits from Social Security itself for former or subsequent work on which you did pay Social Security taxes. That’s because Social Security benefits are based on the taxes paid into the Social Security system. I consider this a “gotcha” because many public employees, I fear, are simply unaware that they start from scratch.
- Let me end this post with a divorce gotcha that goes in the other direction: you taking advantage of Social Security. If you are single and can find someone else single to marry, you only need be married for one year in order for both spouses to qualify for spousal benefits. So two single people can arrange a marriage of convenience at, say, age 64. One of them can then file at full retirement age — currently 66 — and then suspend benefits. At that point, the filer is eligible for spousal benefits. Both members of the couple, in this scenario, would be able to wait until 70 to collect their largest possible personal retirement benefit. At that point, with neither getting a spousal benefit any longer, you and yours could get amicably divorced without affecting your benefits.
I’m not recommending this, just mentioning it as another illustration as how perversely complex — or complexly perverse — Social Security’s rules and regulations can be.
This entry is cross-posted on the Making Sen$e page.