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How one call to Social Security could doom your financial future

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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. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. And be sure to keep the questions coming: pose yours here.

I thought I’d share an exchange I had today with someone named John, who called me out of the blue to ask whether Social Security had given him the right advice. Social Security had not only given him the wrong advice; it had given him the worst possible advice, which underscores my maxim: never trust Social Security unless you are talking with a Social Security technical expert and have provided all the details of your situation.

John is 66. His wife just turned 62. He and his wife are fairly well off. John is still working. So they don’t need to take Social Security right away. John called Social Security and asked the person on the phone if he could file for his retirement benefit and suspend its collection so that his wife could get a spousal benefit right away.

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John told the Social Security representative that he’d been the high earner. According to John, the Social Security rep told him that he could and should file and suspend and that his wife would then get a spousal benefit.

I asked John how much his wife had earned over the years. He said over $60,000 a year up until the last 10 years, but not much of late. John and the Social Security rep both surmised that his wife’s own Social Security retirement benefit would be very low.

I surmised the opposite. Social Security’s retirement benefit formula is highly progressive, so it’s likely that both John and his wife have fairly similar full retirement benefits. Let’s make this assumption.

Now if John files for his retirement benefit, and his wife files for her spousal benefit, she’ll be deemed to also be filing for her retirement benefit. What she’ll end up getting, then, is her reduced retirement benefit plus X, where X is not her full spousal benefit reduced because she’s taking it early, but rather her excess spousal benefit reduced because she’s taking it early. Her excess spousal benefit is the difference between half of John’s full retirement benefit and 100 percent of her full retirement benefit (assuming this difference is positive). But even if John’s wife earned half of what John earned, this difference would still be negative because of the progressivity of the benefit formula. Hence, John’s wife’s excess spousal benefit is surely zero.

So if John follows the Social Security rep’s advice, his wife will end up with no spousal benefit whatsoever — not an excess spousal benefit and certainly not a full spousal benefit. Furthermore, John’s wife will receive a permanently reduced retirement benefit.

Yes, John’s wife can suspend her benefit at full retirement and start it up again, say, at 70 when it will restart from its prior level (augmented by 32 percent for taking it later). But this post-age-70 benefit will be permanently lower than had she simply waited until 70 to collect her retirement benefit.

Furthermore, during this suspension period, John’s wife won’t be able to collect a full spousal benefit between her full retirement age and age 70. What she’ll be able to collect in terms of a spousal benefit is her excess spousal benefit, which we know is zero. As I’ve written before, the second you file for a retirement benefit, even if you immediately suspend it, you can no longer file just for a full spousal benefit starting at full retirement age; you’d be deemed to be filing for both.

Furthermore, by having John file and suspend, the Social Security rep was throwing away John’s option to collect a full spousal benefit through age 70 on his wife’s earnings record — were she to file just for her retirement benefit. (She can’t file for her spousal benefit under this scenario until John files for his retirement benefit, which happens at 70.)

Here’s what the rep should have said: “I don’t have enough information or the right software available to advise you.”

And here’s what I told John: If you do your homework and plug in your and your wife’s earnings histories and projected future earnings into the right software program, you’ll be advised to do one of two things:

1. You, John, file just for your spousal benefit. At 70 you file for your retirement benefit. Your wife files just for her retirement benefit. At 66, she suspends her retirement benefit and files for her spousal benefit (which she’ll be able to do because you have filed for your retirement benefit). It’s possible, but not likely, that she’ll get a positive excess spousal benefit. At 70, she restarts her retirement benefit at a 32 percent higher value (after inflation).

2. You, John, do nothing until you are 70, when you file for your retirement benefit. When your wife reaches 66, she files just for her spousal benefit, which will be a full spousal benefit. At 70, she files for her retirement benefit. If her retirement benefit, inclusive of delayed retirement credits, exceeds her full spousal benefit, her check will go up at 70 because she’ll receive the larger of either her age-70 retirement benefit or her full spousal benefit. If not, she’ll always collect her full spousal benefit — when she applies for her own retirement benefit doesn’t matter.

Had John not called me, he and his wife could well have headed to the local office and made a huge financial mistake.