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Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His 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 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 by Simon & Schuster.
Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:
Jean: I can’t thank you enough for the service you are providing all Americans regarding Social Security. One year ago I would have said “seniors,” but I have learned from you that many more people depend on Social Security benefits. For over a year I have faithfully read your column (and all the comments) and feel that I am in a very good place about being educated on by benefits. But, to be sure, I would appreciate running my situation by you and asking a question.
I just turned 66 at the end of May. My husband is 65 and will be 66 next August. The original plan was to both wait until 70 to collect Social Security, but thanks to you we now know that we have a better option. We were both teachers in New York for over 30 years so we have pensions, and Social Security was withheld so we have full Social Security benefits. In addition, we saved in IRAs and 403b accounts. We are in good shape, but still want to maximize our Social Security benefits.
Being 66, I can file and suspend and next year my husband will file and suspend and collect a spousal benefit from my record. My Social Security is slightly higher ($100 a month), because for a few years my husband worked as a substitute, and they didn’t take out Social Security. As we each turn 70, we will collect maximum benefits. We agree that this is an insurance policy for old age. I am more worried about being comfortable 20 to 30 years from now as my mother is almost 98, and my father lived to 95. My husband’s mother lived to 95 and his father died at 82 (young in our family!).
My question is, does it matter if I file and suspend now? Or is there any reason to wait until next August when my husband turns 66? Any comments on my plan would be appreciated.
Larry Kotlikoff: Thanks for your lovely and encouraging note. Your plan has a huge problem, which, fortunately, is easily fixed. I’m assuming that your husband will be 66 in August 2016, not August 2015. To carry out your plan, you should wait until he reaches 66 and then file and suspend. And he should NOT file and suspend, but file just for a spousal benefit on your work record. If he, too, files and suspends, Social Security will transform his spousal benefit into his excess spousal benefit. His excess spousal benefit will surely be zero, because it’s the difference between half of your full retirement benefit and 100 percent of his own full retirement benefit.
Only one of two spouses in a married couple can receive a full spousal benefit. Why? Well, to collect a spousal benefit, one’s partner must have filed for his or her retirement benefit. But the act of filing for one’s retirement benefit instantly plunges one into excess benefit hell in which you can no longer collect another benefit, be it a spousal benefit, a widow(er) benefit, a divorcee spousal benefit, a divorcee widow(er) benefit, a child-in-care spousal benefit, or a mother or father benefit by itself. Instead, you can only get an excess benefit, which is, exactly equal to or close to, the benefit in question in excess of the retirement benefit for which you are eligible.
So having your husband file and suspend would be a huge mistake. His only task is to file a restricted application just for a spousal benefit. He can, as you know, only do this when he’s reached full retirement age.
Were you divorced (after having been married for a decade or more) at least two years prior to reaching full retirement age, you could both receive full spousal benefits because Social Security treats the ex-spouse as having filed for his or her retirement benefit whether or not that actually occurred. Consequently, divorcees have an advantage over married couples. Were you now both 64, you could get divorced, live in sin, both file for divorcee spousal benefits at 66 and then both collect your own retirement benefit at 70. Why 64? Well, you need to be divorced for at least two years before you can file for a divorcee spousal benefit, or your ex has to have actually filed for his or her retirement benefit.
Another option that careful software could evaluate is your having your husband file now for his retirement benefit and having you immediately collect a full spousal benefit on his work record. He’d then suspend his retirement benefit at 66, and you’d take your retirement benefit at 70. This would permanently lower his own lifetime retirement benefits, but get the full spousal benefit started now rather than a year from this August. I doubt this is worth it compared to the first option, namely he collects a full spousal benefit on your work record.
Finally, if you take the first option, you should file now and suspend or wait until he reaches full retirement age. I’d wait because, God forbid, were he to pass away before reaching full retirement age, you’d want to collect a full widow’s benefit on his work record and then at 70 take your own maximum retirement benefit. But if you filed and suspended right now, you’d be in excess widow’s benefit word and wipe out your potential widow’s benefit.
Q: Anonymous – Ariz.: A colleague and I were discussing the earnings reduction for the year a person turns 66, and a question came up. Let’s say we have an independent business owner who turned 66 on June 1, 2015. Also, let’s assume the person filed and began collecting Social Security Benefits prior to turning 66, but always remained under the earnings limitation since he could control his income as a business owner. Then, after June 1, at 66 years of age, he began paying himself a large salary of $20,000 per month subject to Federal Insurance Contributions Act (FICA). How does Social Security know his earnings occur after he turned 66? Would the person have to produce pay stubs to prevent the earning reduction from causing a charge back?
Larry Kotlikoff: I’m afraid it’s not good news. I’ve asked our Social Security Technical Advisor, Jerry Lutz, to weigh in.
Jerry Lutz: It depends on the type of ownership. If it’s a corporation, and the form of remuneration is wages, then only wages in the months prior to attainment of full retirement age (FRA) count. In the example given by Kevin, the person would likely be required to prove the amount of wages earned prior to FRA. A pay slip showing year-to-date earnings would be ideal for that purpose.
If it’s a sole-proprietorship or partnership, and the remuneration is reported as self-employment income, the yearly net profit is pro-rated. Technically, it’s pro-rated only over the months that the person was self-employed, but the presumption is that the business operated throughout the year. In Kevin’s example, a person born on June 1, would be assumed to attain FRA on May 31, so one-third of the calendar year net profit would be countable.
Martha: When I went into the local Social Security Administration office with a copy of your book, I was able to fill out the paperwork to suspend my benefits. I had started at 62, and on the day before I turned 66, I did the paperwork. The one agent wasn’t sure I could, but he filled out the paperwork anyway. Then, since I wanted to start collecting my spousal benefits, I had to wait and talk to another agent. However, when I talked to her, she said that I couldn’t suspend my benefits, even though I showed her the pages in your book. In return, she made a copy of the same regulation, and after copying off the website, showed me where they had added that one could only start and suspend benefits if one was a first-time applicant, before they determined what your benefit amount was. In a curious follow-up, I received a letter from the office that indicated that I would be getting both my benefits and my spousal benefits. The letter stated that I have 60 days to appeal their decision. There is only one office that handles my area. Do you think I should still appeal? I’d like to suspend my payments so I can get the 8 percent additional money per year.
Larry Kotlikoff: Let me quote this rule from Social Security Administration’s Program Operating Manual System.
Requesting voluntary suspension: Any primary retirement insurance benefit (RIB) applicant or beneficiary, whether reduced or unreduced, who has reached full retirement age (FRA) may voluntarily ask that we suspend his or her benefits to earn voluntary delayed retirement credits (VOLDRC). This request may be either written or oral, and we do not need a signature. A representative payee can make the request on behalf of the beneficiary.
Note: The receipt of disability insurance benefits (DIB) prior to RIB has no effect on a beneficiary’s request to voluntarily suspend his or her RIB.
So there is no question whatsoever that you can suspend your retirement benefit.
I’ve been contacted a lot of late by people how have been misinformed by Social Security staff. Indeed, a financial planner connected me with her client who never married, took her retirement benefit at 63 and is now 66. She called Social Security five different times. Five different times she was told precisely the wrong thing by the Social Security agents to whom she spoke. Specifically, she was told she was not able to suspend her retirement benefit. Some of the agents told her she couldn’t do so because she hadn’t elected to do so back when she was 63. That’s the totally bogus thing they told you, Martha.
Another agent told her she could do so but she’d have to repay all her past received benefits. That too is totally bogus and shows that the agent didn’t know the difference between suspending her retirement benefit and withdrawing it. You can only withdraw your retirement benefit, by the way, within the first twelve months of filing for your retirement benefit.
For this lady—I’ll call her Janet—suspending her benefits is the smart move. Janet will receive nothing for 4 years (and need, by the way, to pay her Medicare Part B premiums out of pocket—this is critically important!), but starting at 70, Janet’s retirement benefit will be 32 percent higher for as long as she lives, which could be till age 100. If she keeps living on and on and every month opens up a check that’s 32 percent larger, she’ll thank her lucky stars she suspended at full retirement age. It took Janet a sixth call to Social Security to come up with someone at Social Security who actually deserved to keep his job. That person agreed that the provision in the Program Operating Manual System said what it said. He also told her that the only way she could suspend her Social Security retirement benefit was to do so in person at the local office. That’s where she is heading. I will keep you all posted!
Now, Martha, back to your case. I presume that when you filed for your retirement benefit at 62 you weren’t forced (under Social Security’s deeming provision) to also simultaneously file for your spousal benefit because your husband hadn’t yet filed for his own retirement benefit (or filed for it and suspended it). So now at 66, you are filing for your spousal benefit and want to wait till 70 to take your own retirement benefit. When you do find someone at Social Security who knows his job, he’ll explain that by filing for your own retirement benefit back at age 62, you gave up the option to ever collect an auxiliary benefit by itself. That is, you put yourself into what I call excess benefit hell where you can only collect the different between the auxiliary benefit in question and your own retirement benefit. So in your case, you can suspend your own retirement benefit and restart it at 70 at a 32 percent larger value, but you won’t be able to collect a full spousal benefit, only an excess spousal benefit, between now and 70. That excess spousal benefit will be calculated as half of your husband’s full retirement benefit (this is also called your full spousal benefit) less 100 percent of your own full retirement benefit. This excess spousal benefit won’t be reduced because you are not taking it early. Now this difference could well be negative or very small. In this case, you’ll get a zero or very small excess spousal benefit until 70 and then starting at 70, you’ll receive your beefed up retirement benefit, plus a beefed down excess spousal benefit. That is, starting at 70, Social Security will recompute your excess spousal benefit. It will be set at the difference between half or your husband’s full retirement benefit less 100 percent of your own retirement benefit after your retirement benefit has been beefed by 32 percent.
If you are following the logic (no small feat, I grant you), your total check at 70 will be your beefed up retirement benefit plus you excess spousal benefit (your full spousal benefit less your beefed up retirement benefit). If your excess spousal benefit, after being beefed down, is still positive, your check, post age 70, will just equal your full spousal benefit. So suspending could actually leave you getting a very small excess spousal benefit between now and 70 and your full spousal benefit after age 70. In contrast, not suspending could leave you getting your full spousal benefit between now and 70 and after age 70.
So, Martha, even though the Social Security staff told you absolutely the wrong thing, it may be better for you not to suspend your retirement benefit and just file for your spousal benefit. Very careful commercial software can work this out for you within a second.
Laurence Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Kotlikoff's columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications.
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