When Social Security’s advice just doesn’t add up

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 original 34 “secrets” 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 before the changes from the Bipartisan Budget Act of 2015 went into effect.

Social Security expert Larry Kotlikoff has been keeping readers updated on how the budget act changes a number of Social Security rules. We’ll continue publishing updates on what this new law means for your Social Security benefits. Stay tuned.

Nancy: I am a retired Social Security Administration employee of 30 years, and I have worked the last 10 years as a paralegal at a law firm where I represent disability clients. I have a client who will reach full retirement age (66) in a few days. He has a young wife, age 54, and a 10-year-old daughter. His family maximum benefit is currently $3,901 per the records we secured from the internet, and his primary insurance amount is $2,600. The disability insurance benefits (or DIB) claim was filed in September 2014, onset 2010. He is due benefits of about $105,000 retroactively to September 2013 for his family thus far, although his hearing is still pending scheduling. The Social Security Administration has recommended that he withdraw his disability insurance benefits application, and file and suspend instead, as his wife and child would be due $975 each (compared to the $650 each they would receive plus his own disability insurance benefit), and then he could take his benefit at age 70.

First of all, I thought the wife also had to be able to file (that is, that she must be 62 or older). Secondly, his wife has never worked, is from another country and will never build a benefit that exceeds his even if she goes to work after their child turns 18.

I have searched the Program Operations Manual System [the primary guide used by Social Security employees] and cannot find any provisions for file and suspend to provide for auxiliary benefits. I don’t trust the information provided to him by Social Security Administration, since the representative did not lay the figures out for him to compare how long he might have to live before he would regret his decision to keep the disability insurance benefit. Using the figures he was quoted (without a cost of living adjustment increase) and assuming that his family can receive benefits, it would be $93,600 before he attains age 70. My client has a life threatening disease.

Thank you any comments you might share regarding this situation.

Larry Kotlikoff: I don’t see how this family could be due benefits of $105,000 even if the benefits provided are retroactive to September 2013. It seems like too large a sum given what you wrote.

In any case, what Social Security is probably talking about is the child-in-care spousal benefit, which would be available to the wife as long as their daughter is under 16. Between the ages of 15 and 18 (or 19 if still in school), the child would still be able to collect a child benefit. But, as you are indicating, these auxiliary benefits are available to the children and spouses of disabled workers as well. And, yes, the family benefit maximum would limit the total amount available in auxiliary benefits.

Because the wife won’t be 62 by or on Jan. 1, 2016, the new law (passed as part of the Budget Act of 2015) would prevent the wife from filing just for her own spousal benefit at full retirement age. But from what you wrote, the wife won’t qualify to collect her own retirement benefit. So the fact that she won’t be able to file a restricted application for just her spousal benefit while letting her own retirement benefit grow is of no consequence in this case.

Given the husband’s health status, it does sound like collecting his disability benefit and having his family members collect their auxiliary benefits retroactive to September 2013 would be a better move than what your client is being advised to do. But I would need to see all the facts before saying for sure.

I’ve asked former Social Security technical expert Jerry Lutz to weigh in.

Jerry Lutz: Assuming that what the Social Security Administration said is accurately described, the advice given is nuts. There would be absolutely no conceivable advantage to withdrawing the disability insurance benefit, which would amount to a back pay of around $105,000 if you figure 27 months at $3,900 a month.

I can understand the Social Security Administration suggesting voluntary suspension at full retirement age, which would suspend his benefit, but allow the auxiliary benefits to continue. The resulting delayed retirement credits would potentially increase his future benefit amount as well as the benefit amount of his widow were he to die. The suspension itself would have no impact on the auxiliary benefits, which would be paid in the same amount whether he suspends or not. The auxiliary benefits will probably be higher beginning the month he turns 66, as the retirement insurance benefits maximum will apply at that point. The conversion from disability insurance benefits to retirement insurance benefits at full retirement age and the according adjustment of the family maximum is automatic and will happen regardless of whether or not he voluntarily suspends.

With 20/20 hindsight, this may have been a case where the man should have filed for both disability insurance benefits and reduced retirement insurance benefits. If he had done so in September of 2014, he would have the option of taking reduced retirement insurance benefits instead of disability insurance benefits from September 2014 until full retirement age, which would permit the presumably higher retirement insurance benefit family maximum to be paid to the auxiliaries. He would still be technically entitled to disability insurance benefits while receiving the reduced retirement insurance benefits, so no permanent reduction would apply. His unreduced retirement insurance benefit would then resume at full retirement age.

It’s too late to do that now, however, unless he didn’t restrict the application he filed to only disability insurance benefits. I suppose it’s possible that the reduced retirement insurance benefit wasn’t restricted from the original application, and the Social Security Administration is now trying to explain that he has the option of going back and opting for reduced retirement insurance benefits from September 2014 through full retirement age. If that were the case, the only reason to do so would be if the total family benefits would be higher (that is, if the increase in auxiliary benefits more than offsets the difference between the number holder’s disability insurance benefits and reduced retirement insurance benefits). I’m sure that the spouse and child were listed on his disability insurance benefits application, which protects their filing date and allows them to be paid auxiliary benefits back to September 2013. Even if he had also filed for reduced retirement insurance benefits in September 2014, however, the auxiliary rates for September 2013 to August 2014 would be subject to the disability insurance benefit family maximum.


Jerry Lutz: After rereading Nancy’s letter, it sounds like her client hasn’t yet been approved for disability benefits. In my initial reply, I had assumed that he was already approved.

In any case, he is NOT REQUIRED to withdraw the claim for disability benefits in order to file for retirement benefits, and it would be crazy to do so. If he hasn’t already applied for retirement benefits, he can and should do so now, and the Social Security Administration will pay him his retirement benefits pending the outcome of his disability benefit appeal. He can either choose to voluntarily suspend his own retirement benefits in order to accrue delayed retirement credits or not. Either way, his wife and child can start drawing auxiliary benefits now and still potentially receive back pay to September 2013 if the disability benefit appeal is approved.

Update: This piece has been updated with Jerry Lutz’s second response.