Americans don’t understand what their retirement incomes will look like. We could learn from the pension system in New Zealand, pictured above, where people have a better idea of what future benefits to expect, argues Larry Kotlikoff. Photo courtesy of Flickr user Beccaplusmolly.
Larry Kotlikoff’s 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 now feature “Ask Larry” every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version
Julian — Denver, Colo.: My ex-spouse passed away four years ago at age 58. I’m now 62 and not working. Will taking survivor benefits affect my own benefit?
Larry Kotlikoff: If you take benefits now, they will be permanently reduced by 19 percent compared to if you waited to take them at your survivor full retirement age. Why did I put this in italics? Because one’s full retirement age for collecting survivor benefits can, depending on when you are born, be different than your full retirement age for collecting retirement benefits. (Compare the first column in these two charts to see this difference: Retirement Planner: Benefits by Year of Birth and Social Security Benefit Amounts for the Surviving Spouse by Year of Birth. In your case, your two full retirement ages are both 66.)
If you worked in the past and your full retirement survivor benefit exceeds your age-70 retirement benefit, you’ll most likely want to take your permanently reduced retirement benefit now and wait until full retirement age to take your survivor benefit. Or if your retirement benefit at 70 exceeds your survivor benefit at full retirement, you’ll most likely want to take your permanently reduced survivor benefit now (not at full retirement age), and wait until 70 to take your retirement benefit.
In the first case, when you reach 66, you’ll stop collecting your retirement benefit and start collecting your survivor benefit, so the fact that the retirement benefit is permanently reduced is not a big deal since you aren’t permanently getting it anyway. Note: Social Security language caveat coming below.
In the second case, you’ll stop collecting your survivor benefit at 70 and start collecting your retirement benefit, so the fact that the survivor benefit is permanently reduced is not a big deal either. In other words, it will be reduced for plenty of years when you aren’t receiving it anyway.
Now, once you are collecting your retirement benefit and your survivor benefit at the same time, Social Security will, as intimated, give you the larger of the two. But, if your survivor benefit exceeds your retirement benefit, Social Security will officially report to you that you are receiving your retirement benefit plus your survivor benefit. In fact, however, your survivor benefit will be redefined to be the excess survivor benefit, which will, in turn, be defined to be the survivor benefit less your retirement benefit.
In other words, the Social Security Administration will make you think you are receiving your retirement benefit when you really aren’t because they want to create the illusion people are getting back something on their own account in exchange for their years of contributing Federal Insurance Contribution Act (FICA) taxes. This practice drives me nuts because I find it highly deceptive and terribly unfair.
Paul, however, thinks this system is the price we pay for a pluralistic democracy, which is inevitably messy. Therefore, he thinks, we are destined to have a basic retirement system that no one can understand and that misleads us about our incentive to work.
But, there’s a very good counterexample to prove I’m right and Paul’s, well — educable is a word that comes to mine. It’s New Zealand, which features a very stable democracy with a social security system that has only one rule (ours has thousands). Their rule is this: When you reach 65, you receive the same amount in benefits as everyone else 65 and older who enjoys the same marital status and living arrangement.
You can go to this website to look up your benefit.
So why is the New Zealand pension system (they call it superannuation) so simple, while ours is so devilishly complicated?
My hunch is that our system reflects, in part, the inability of our two parties to publicly agree that they agree. They love to pretend that they have huge policy differences, and one way to maintain this pretext, while actually agreeing about what should be done, is to have institutions that are so complex that no one can figure out what’s happening. Each side can claim that provisions that seem to go against their political positions were imposed by the other side or forced on them as part of an unsavory political compromise required to obtain a greater good.
A different explanation is that the bureaucrats have, over the years, just captured our fiscal institutions, making them as complex as possible to ensure their continued employment as “experts.”
And yet a third explanation is that social engineers, on both the right and the left, have made the system so complex in order to achieve their ends without anyone being able to see what they were doing. Whatever really underlies the 2,728 rules in Social Security’s handbook and the tens of thousands of rules in its Program Operating Manual System (POMS) that “clarify” the 2,728 rules, our Social Security system as currently designed is a travesty that leaves most of us largely in the dark about our retirement incomes.
Steve Moore — Richmond, Va.: The Social Security Administration says that I am now receiving the maximum benefits that I would get at age 66 and that there will be no other increase when I reach 66. So it seems the four or five years prior to gradual increase does not offer what they say?
Larry Kotlikoff: If you are disabled, the disability benefit you receive before full retirement age will become your full retirement benefit when you reach your full retirement age. So if you are disabled, Social Security spoke with “unforked tongue.” (I just saw “The Lone Ranger,” so you’ll have to forgive the metaphor. I mean that they told you the truth.) However, what they probably didn’t tell you is that at full retirement age, you can withdraw your retirement benefit and then take it at 70, when it will be 32 percent larger, adjusted for inflation, than its current value. I discussed how Social Security treats the disabled here.
If you aren’t disabled, I’d need more information to make sense of what the Social Security staff told you. But my general rule is never go strictly by what anyone from Social Security told you unless she or he is a “technical expert,” which is a special title for the experts in Social Security who really know their stuff. It is our great fortune to have Jerry Lutz, a former technical expert with the Social Security Administration, checking all of my answers to readers’ questions. Jerry has taught me buckets and kept me from a number of goofs — each to my considerable chagrin since I was sure I knew it all before he began correcting me.
Michael Riggan — Oak Hill, Va.: My sister’s husband died 10 years ago at age 54. My sister is a retired Texas teacher and collects retirement benefits. She has only been able to collect about $300 per month from his Social Security benefits due to a law that restricts payments if collecting teacher retirement. Is there anything she can do to collect more?
Larry Kotlikoff: The Government Pension Offset (GPO) provision is reducing your sister’s survivor benefit. This provision can reduce or even wipe out spousal and survivor benefits available to current, divorced or surviving spouses who worked in non-covered employment. It reduces spousal and survivor benefits by two thirds of the pension the current, ex or surviving spouse receives from non-covered employment.
If your sister’s pension is not indexed to inflation, her Social Security benefit should rise each year over and above its inflation (cost of living) adjustment since the GPO offset of two-thirds of her non-covered pension won’t keep pace with inflation.
CJ — Prineville, Ore.: I was married to my ex-husband for 14 years. When he dies, can I receive survivor benefits, even if he has remarried?
Larry Kotlikoff: Yes, provided you don’t remarry before age 60. And you can receive spousal benefits based on his earnings record, provided you aren’t remarried when you seek to collect them. Your ex has to be 62 before you can collect your spousal benefits on his work record. And he either has to be collecting his own retirement benefit or you have to have been divorced for at least two years before you can file for a spousal benefit. The other condition for your filing for a spousal benefit is that you must be at least age 62.
Tammy K. — Lansing, Mich.: Shortly after we married, my husband suffered a traumatic brain injury and is now disabled and collecting Social Security. Two years after the injury, we had our first daughter. When our second daughter arrived dramatically, she was diagnosed with a neurometabolic disorder, and she is autistic as well. Can I apply for Social Security for my children due to my husband’s disability? Or may I apply just for our second daughter because of her disabilities? I’m a teacher, so we don’t qualify for most forms of support, but we are living paycheck-to-paycheck. Thanks for the advice.
Larry Kotlikoff: Paul and I both feel for you. You should be able to receive a spousal benefit starting immediately because you have a child of the worker in your care. Your disabled child should be able to receive a child benefit, and your non-disabled child should be able to receive a child benefit as well if he or she is 17 or younger or 19 and younger and still in school.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions