Calling out Social Security for its awful inequities

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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. Find a complete list of his columns here. 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. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

As many of you who have been following my weekly Social Security column know, I’m absolutely outraged that we have a basic retirement system so complicated that no one can remotely understand it without years of study. This means that we Americans are flying blind when it comes to preparing for our retirement, with many of us over-assessing what the system will pay and others under-assessing what we’ll get. This produces under saving or over saving, neither of which is part of Social Security’s mandate. And it’s not just that the system is impossible to decipher. Its Byzantine provisions produce terrible inequities that virtually no one, including Social Security’s most ardent supporters, perceives.

So before answering this week’s Social Security questions, I thought I’d give you my list of Social Security’s 20 worst inequities. I’m hoping that some readers of this column are actually members of Congress and will take steps to eliminate them.


Pose Your Questions to Larry Here

  1. You can contribute to Social Security your entire life and get back less in benefits than someone who never worked and never contributed a penny to the system.
  2. You can get divorced or remarried one day too soon and lose massive amounts of benefits.
  3. You can try to take your spousal benefit early and not only lose it, but also be forced to take a permanently reduced retirement benefit.
  4. If you take your retirement benefit even just a day before your spouse or ex-spouse dies, your widow’s benefit will only be the positive excess of it over your retirement benefit. If your spouse dies before you take your retirement benefit, you can take your full spousal benefit and let your own retirement grow (if you are under 70).
  5. You can take your retirement benefit early and end up losing your right to receive a full spousal benefit.
  6. Disabled workers face a potentially far less generous formula for maximum family benefits than do retired workers.
  7. Thanks to the special disabled-worker family benefit maximum, families of very low-earning (think minimum wage) workers, who become disabled may lose all their family benefits. This never happens to the families of high-earning workers who become disabled.
  8. Thanks to the non-indexation of federal income tax thresholds triggering taxation of Social Security benefits, our children will have a much larger share of their Social Security benefits taxed away. Indeed, over time 85 cents of every dollar received in Social Security benefits will be subject to federal and often state income taxation.
  9. The family benefit maximum doesn’t apply to ex-spouses. Hence, your ex-spouse(s) can receive higher or much higher spousal or widow(er) benefits than your actual spouse.
  10. High-earners making more than the taxable earnings ceiling over 60 are guaranteed to get higher benefits from working longer. Low-earners over 60 are not.
  11. Divorcées can get a full spousal benefit each, whereas only one married spouse can get a full spousal benefit.
  12. All else equal, Social Security hands out up to 87 percent more benefits to certain workers (including retired investment bankers) with kids and spouses without requiring a penny more in contributions.
  13. Social Security is 32 percent underfinanced. (See table IVB6 of the 2013 Social Security Trustee’s Report). The system is in far worse shape than Detroit’s two pension systems combined. Since we aren’t about to pay 32 percent higher taxes or take 22 percent lower benefits, our kids face even more massive Social Security tax hikes or benefit cuts.
  14. If your child becomes disabled on her 22nd birthday, she’s one day too late to ever collect disability benefits or child survivor benefits based on your work record.
  15. The family benefit maximum formula provides a much better deal to higher than to lower-earning retired and deceased workers.
  16. Nine months before you die, you can get married and leave your new spouse your full retirement benefit for the rest of her (his) life without you or your new spouse paying a penny more in taxes.
  17. Low-earning workers receiving a pension from non-covered pensions lose a much larger share of their Social Security benefits from covered employment than do high-earning workers. This is because the Windfall Elimination Provision differentially reduces the Primary Insurance Amount of low-earning workers.
  18. If you take your retirement benefit early, you can permanently and dramatically reduce your family’s survivor benefits if you die.
  19. If you get divorced, you will lose the spousal benefits you were receiving for caring for the young or disabled children of your retired ex even if these kids are yours as well and live with you full time.
  20. If you lose some or all of your retirement benefits due to the earnings test because you had to work before full retirement age, you will recoup these lost benefits once you reach full retirement age in the form of a larger retirement benefit, but not if you start collecting an excess spousal or widow(er) benefit. In this case, your excess benefit will be reduced one dollar for every dollar your retirement benefit is increased.

Lance: I have a question that I’m sure is going to sound odd, but here it is. I am 40 years old. My wife is 33. Our marriage has failed, but we are not getting divorced and are still best of friends who have committed to support each other no matter what happens. Neither of us is going to get married again so there is no real reason to go through the paperwork. We are co-owners of each other’s businesses (mine is biotech, hers a restaurant), which complicates our financial situation…and another headache we don’t want to deal with in divorce proceedings.

My question is what happens when we reach retirement age? By that time both of us will have several six-figure payroll tax years under our belt. What would be the best strategy to maximize our benefits?

Larry Kotlikoff: From Social Security’s perspective, you’ll still be married. The system doesn’t seem to care if you have conjugal relations or whether you even live in the same building, town, state or country. So when it comes time to start collecting, your wife will be able to collect a full spousal benefit based on your work record starting at 67 — her full retirement age. Then, at 70, she can take her own highest possible retirement benefit. For your part, it will be best to wait until 70 to collect your retirement benefit. Were you to get divorced, you could both get a full spousal benefit in principle. But for you to collect a full spousal benefit, you’d have to be divorced for two years and your ex would have to be 70.​ When she’s 62, you’ll be 69. Hence, you could, if you got divorced, collect one year’s worth of free spousal benefits by applying just for a spousal benefit starting at 69. Your wife would, in this case, do the same thing as if she were married.

Question: My ex-wife is on full disability, has been for years, but will not have reached full retirement age when I do. My question: Since we were married for more than 10 years and have been divorced for more than two years, can I file for a spousal benefit when I reach full retirement at age 66?

Larry Kotlikoff: If your ex-wife weren’t disabled, she would need to be at least 62 ​and you would have to have been divorced for two years or she would have to be collecting her retirement benefit for you to be able to file for a spousal benefit.

But the conditions are different since your ex-wife is disabled. You are free to apply for a spousal benefit even when she is under 62. You still have to have been divorced for two years when you file.

Ken Patwari, Melbourne, Fla.: I started taking my Social Security benefit at the age of 64. I am 71 now. I was a high-earner. My monthly benefit is around $2,200. My wife will turn 65 in November this year. According to Social Security calculations, her check will be around $1,100 (at full benefit age). We both are retired but do not need her Social Security income for our day-to-day living.

What we are planning to do is that she will file for Social Security when she turns 66 (full benefit age) and suspend her benefits until the age of 70. At the same time, she will file for the spousal benefits between age 66 and 70. Does this make sense? Do you have another approach?

Larry Kotlikoff: No, do not have her file and suspend! If you do, she won’t receive a full spousal benefit, but rather an excess spousal benefit, which could well be zero. Instead, just have her file only for her spousal benefit. This is called a restricted application.

The general rule for you and other readers to bear in mind is that the day, nay the hour, nay the minute, nay the second, nay the nanosecond (I’ll stop there), you file for your retirement benefit — whether or not you suspend it — you forever surrender your ability to take a spousal or widow(er) benefit by itself. Instead, Social Security will pay you the sum of your own retirement benefit plus your excess spousal benefit. A similar story holds for widow(er) benefits, but the formula for what you get in total is much more complicated if your deceased spouse takes (took) his or her retirement benefit early.

Adelina: I was married from 1990 to 2010 to an American citizen. We were married and lived in the USA. We divorced in 2010 and he remarried in 2013, five days before he died on Aug. 5, 2013. Do I have right to a pension? I’m 60 years old, but I’m not American.

Larry Kotlikoff: ​I believe you do have the right to a widow’s benefit. If you take it now at age 60, it will be reduced by 28.5 percent compared to waiting to take it at full retirement age. Contact the local Social Security office.

Question: My husband passed away in 2001. My minor child and I have collected Social Security since then. I was paid five months out of the year for having a minor in the household. I no longer qualify for that benefit since she turned 16. She will no longer qualify once she graduates from high school in May 2015. I don’t plan to file for Social Security until age 70. As a widow, what options, if any, do I have until then? Keep in mind that I will continue to work until that time. Do I qualify for widow’s benefits now or at age 60 (I was born in 1959)? Will my earnings affect the benefit received?

Larry Kotlikoff: You can’t collect widow’s benefits until age ​60, but if you do so, they will be reduced relative to what you’d receive by waiting. If your husband was collecting a retirement benefit before he died and he collected it early, a special formula called the RIB LIM formula (as described in this previous column) will be used to calculate your widow’s benefit.

You will have the option, starting at age 62, to take a reduced retirement benefit. Depending on the specifics of your case, it may be best to take your widow’s benefit first, either at 60 or later, or take your retirement benefit first, starting at 62 or later. Only extremely careful software can suggest to you what’s best.

Question: I am 67 years old; my husband is 63. We are both still working full-time. Neither of us plans to claim Social Security benefits until we are 70, and we both plan to continue working full-time until that time. We are both attorneys employed in-house, and our earnings have been roughly equal, although he has typically earned somewhat more than I do in recent years. We have been trying to determine whether and when either of us would be able to claim a spousal benefit without jeopardizing our full benefits at age 70, but I have not seen our particular scenario covered in your columns.

Larry Kotlikoff: ​Sounds like the optimal thing to do is for you both (as you plan to do) is to take your retirement benefit at 70 ​and for your husband to file just for a spousal benefit based on your work record at full retirement age, which will be when he reaches 66.

​For you to collect a spousal benefit now, he’d have to file for his retirement benefit. His retirement benefit and your spousal benefit would then both be wiped out by the earnings test. This loss of benefits would be made up to you both at full retirement age via Social Security’s adjustment of the reduction factor. But, you’d be onto collecting your own retirement benefit and your excess spousal benefit would almost surely be zero, notwithstanding the adjustment of the reduction factor.

For your husband’s part, the adjustment of the reduction factor would undo his loss of retirement benefits due to the earnings test, but he’d no longer be able to collect a full spousal benefit because he’d have filed in the past for his retirement benefit (even though he, in fact, collected nothing after the earnings test). Even if he suspends his retirement benefit, he’s still stuck getting just his excess spousal benefit during the suspension period, which will also surely be zero.