Social Security is contributing to the deficit, says Larry Kotlikoff; it’s just not showing up where readers may have been looking. Photo courtesy of William Thomas Cain/Getty Images. _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
Karen Holden — Duluth, Minn.: How can anyone rationally attack Social Security when it hasn’t contributed anything to the deficit? The Democrats don’t call the right wing out on this, ever.
Larry Kotlikoff: The deficit, which references the change in outstanding federal borrowing, reflects what Congress decides to call borrowing (i.e., what liabilities it decides to put on the books.) Successive administrations and Congresses from both parties have taken money from us and promised us Social Security benefits in the future in exchange and have kept those promises off the books. If you look at table IVB6 of the Social Security Trustees Report, you’ll find that the system is 32 percent underfunded and has a present value debt of $23 trillion (net of the Trust Fund, by the way) that is not on the books. Social Security’s present value debt (what we economists call its fiscal gap) rose by $1.7 trillion last year. This is over twice the size of last year’s official deficit.
So Social Security has and is contributing to our true deficit — the annual increase in the country’s overall fiscal gap. This is a not a right wing versus left wing issue. This is an issue of older generations taking from their kids decade after decade. It’s called pay as you go, but it’s really take as you go. And you didn’t hear this from a right winger. You heard this from an economist and a father.
For more about Social Security’s fiscal concerns, read my June column, “How the Government is Fooling Us About the Solvency of Social Security.” And for a different perspective, read Paul Solman’s response: “Are Social Security’s Fiscal Concerns Overblown?”
Joan: I am 61 and my spouse is 65. I know that if I file for spousal benefits at 66 while I am still working, I can collect half of my spouse’s benefit. However, it was suggested to me at the Social Security Administration (SSA) that I could file for a spousal benefit when I am age 62, while still working full time, and my spouse is 66. My spouse does not plan to collect benefits until age 70. If I work full time (at $75,000 per year) and file for spousal benefits at age 62, I am aware that I would receive a reduced or no benefit because of the earnings test. However, would this also reduce the spousal benefit I would receive from ages 66-70? Also, would the decreased spousal benefit from ages 62 to 66 be added back at age 66? This is what has been suggested at the SSA.
Larry Kotlikoff: Once again it seems that the good folks at the Social Security office have either provided bad advice or you misinterpreted what they said, which is very easy to do given all the complexities. Or, maybe they were trying to suggest a strategy, which I discuss at the end of my answer, to get your spouse a full spousal benefit on your work record.
First, in order for you to be eligible to collect a spousal benefit at 62, your spouse must file for his retirement benefit. If he files after reaching full retirement age (66 in his case), he can suspend his benefit and start it up again over the following four years at a higher level. For example, if he starts up again at 70, his benefit after inflation will be 32 percent higher.
Moreover, the survivor benefit for which you’d be eligible were he to die will be based on his retirement benefit. So if he waits until 70 to collect his retirement benefit, he’ll make your potential survivor benefit 32 percent higher compared to if he took his retirement benefit at 66.
If he files at 66 (whether or not he suspends) and you file at 62, you’ll be forced to take not only your spousal benefit, but also your own retirement benefit. This is because of Social Security’s deeming provisions, which apply before one reaches full retirement age. But once someone files for her retirement benefit, which you’d be forced to do, your spousal benefit is no longer calculated as your full spousal benefit, which would be half your spouse’s full retirement benefit. Instead, you’ll receive a dreaded excess spousal benefit for the rest of your life. The excess spousal benefit is your full spousal benefit (half of your husband’s full retirement benefit) less your own full retirement benefit.
Given your earnings level, your excess spousal benefit will surely be negative, in which case it will be set to zero. And that will be true for the rest of your life.
So, yes, by having your husband file and suspend at 66, having you file for your spousal benefit at 62, and, as a consequence, being forced at 62 to file for your retirement benefit, your spousal benefit from 66 to 70 will not just be reduced; It will be wiped out! You’ll give up your opportunity to collect a full spousal benefit from 66 to 70 and then take your spousal benefit at 70.
(FYI, were your excess spousal benefit positive, the excess spousal benefit would be reduced or wiped out by the earnings test, which applies through full retirement age. But the loss before full retirement age of spousal or survivor benefits due to the earnings test is credited back to you when you reach full retirement.)
So why might the folks at the Social Security office have suggested that you take your spousal benefit early? Perhaps because they knew it would force you to take your retirement benefit early. Normally, taking one’s retirement benefit early would permanently reduce it and by a lot. But in your case, since you work full time and will, I’ll assume, earn enough to lose all your benefits between 62 and 66, the reduction in your retirement benefit will, at full retirement age, be undone by what’s called the adjustment of the reduction factor. This adjustment will credit you for all the months of benefits you lost on your retirement benefit because you took it early.
If you are still with me, the Social Security folks may have said, “Gee, if she takes her spousal benefit early, she’ll be forced to take her retirement benefit early, but because of the earnings test and the adjustment of the reduction factor, she’ll reach full retirement age with no permanent reduction to her retirement benefit. Yes, we’ll have wiped out her spousal benefit by putting her into excess spousal benefit world, but, geewillikers, by doing this seemingly crazy thing, she’ll let her husband collect a full spousal benefit on her work history between the ages of 66 and 70.”
But were the Social Security folks thinking this way, they’d be making yet another mistake. By having your husband file and suspend at 66, they would have plunged your husband into the dreaded excess spousal benefit world and wiped out his spousal benefit based on your earnings record. Recall that the minute someone files for his or her retirement benefit, he or she is thrown into excess spousal benefit territory. He or she can suspend immediately upon filing, but that won’t change the fact that he or she has filed.
Now what two options should the Social Security folks have suggested you compare using highly accurate online Social Security software? The first is that both you and your spouse file for your own retirement benefits at 70 and you file just for your full spousal benefit at 66.
The second is that, at 62, you file for your retirement benefit, permitting your-age-66 husband to file just for his full spousal benefit. At 66, you suspend your retirement benefit and your husband, who will be 70, files for his retirement benefit. At 70, you restart your retirement benefit at a 32 percent higher level than when you stopped it. But note, since the earnings test will, I’m assuming, have wiped out all your retirement benefits between age 62 and 66, the adjustment of the reduction factor will restore all your “lost” benefits so that your age-70 retirement benefit when you start it up again will be exactly the same as had you simply waited until 70 to file for your retirement benefit.
One question you might want to ask is whether the second strategy would affect your husband’s survivor benefit based on your work history were you to die. The answer is yes. Your husband’s survivor benefit can’t exceed the larger of your reduced early retirement benefit or 82 percent of your full retirement benefit.
Sorry for the long-winded answer, but full disclosure requires full disclosure.
Eric — Bellaire, Texas: I saw this article in USA Today, and I wanted to check if it was correct. I thought if you took the spousal benefit, you were deemed(?) to have taken your own Social Security and wouldn’t be able to delay your own retirement to 70 for a higher level. (Which is why you recommend an older/higher earning spouse file and suspend when your younger spouse reaches full retirement age — so they can take the spousal benefit. Otherwise, it would seem you’d usually be ahead by having the lower earning/younger spouse take early retirement and get a spousal benefit off them when reaching full retirement age and then switching when you turn 70.)
Larry Kotlikoff: Let me first quote what USA Today’s Owen Ullmann wrote and explain what’s wrong in what he says.
I always considered myself savvy when it came to personal finance and retirement planning. But here’s a Social Security benefit I almost missed out on — and one that I bet a lot of others may overlook, too: a spousal benefit you can collect at the full retirement age of 66 if your spouse is retired and collecting Social Security, and you choose to continue working and postpone taking your own retirement benefit.
Ullmann’s statement is somewhat mistaken. First, your spouse doesn’t need to be retired or be collecting Social Security for you to be eligible to collect a spousal benefit.
All your spouse need do is file for her retirement benefit, which she can do any time after reaching age 62. Doing so early, however, may come at some potentially major costs as discussed above in this column. Second, you don’t need to keep working after reaching full retirement age in order to collect just your full spousal benefit while postponing taking your own retirement benefit.
There also seem to be some numerical mistakes in the cited example. The article refers to a wife who filed at age 62 and receives $2,000 per month. In that case, her unreduced benefit (Primary Insurance Amount) would be about $2,666, so her husband’s spousal benefit would be around $1,333, not $1,000. Second, although it’s minor and probably just a typo, the husband’s age 70 benefit in the example would be $3,343 rather than $3,334.
Now, let me turn to your questions. Deeming only occurs between age 62 and full retirement age. So you are right. But so is Ullmann since he is talking about someone who has reached full retirement age and has not yet filed for his or her own retirement benefit.
Jane Post — San Carlos, Calif: Why can’t a spouse cancel spousal benefits after his wife suspends her retirement benefit? I decided to wait until I retired and was told my husband could cancel his spousal benefits. When he tried, he was told he could not do this. Is that true?
Larry Kotlikoff: You can withdraw a spousal benefit (i.e., tell Social Security not to send you the money), but you can’t suspend it and start it up later at a higher value. In other words, once you take a spousal benefit, there is no advantage to stopping the checks. As to why we’re allowed to suspend our retirement benefit (only between full retirement age and age 70) and restart it again before or at age 70, but we aren’t allowed to do the same with spousal or survivor benefits, I don’t know.
Social Security’s opaque, intricate, irritating, insulting and indecipherable rules were, it appears, made up over the years to ensure that no one would possibly be able to understand what they could and couldn’t get back from the system. No matter how well intentioned, this is social engineering at its worst.
Mary — Redding, Calif.: My ex-husband is 68 and will retire soon. I am 61 and plan to work until I’m 67. Neither of us has remarried. Can he draw a spousal benefit until he is 70? That would make it easier for him to postpone drawing his own Social Security until then.
Larry Kotlikoff: I’m assuming you were married for 10 or more years. As soon as you reach age 62, he’ll be able to collect a full spousal benefit equal to half of your full retirement benefit, while waiting until 70 to collect his own retirement benefit at its highest possible value.
When you reach full retirement age, you should apply for your full spousal benefit based on his work history.
Norman Oz — Santa Clara, Calif.: My wife is 61 and applying for Social Security Disability Insurance. I am 63 and not drawing on early Social Security. If/when my wife qualifies for Social Security Disability Insurance, should I immediately apply for a spousal benefit? If possible, I will wait until 70 before drawing upon my Social Security benefit.
Larry Kotlikoff: If you apply for a spousal benefit before reaching full retirement age, it will be calculated as your excess spousal benefit and will likely equal zero. Moreover, you’ll be deemed to be applying for your own retirement benefit early and be stuck with an early retirement benefit. I think what you want to do is wait until you are 66 (full retirement age) and apply just for your full spousal benefit and then wait until 70 to go for your retirement benefit.
But, if you still want to apply for a spousal benefit now, you don’t have to wait until your wife is 62 to do so, as would be the case if she were filing for her retirement benefit. As soon as she is eligible for SSDI benefits, you can file for a spousal benefit.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions