Expecting a public pension? Don’t hold your breath for Social Security too

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.

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.

Lynda — Tustin, Calif: I have a government pension, and am currently working outside of a government agency. I qualify for Social Security and also qualify as an ex-spouse for my ex-husband’s Social Security benefits.

I have been told that my Social Security will be reduced by two-thirds from the Windfall Elimination Tax. Is that correct? Also, if I choose to take my ex-husband’s Social Security, will that also be reduced by two-thirds due to my pension?


Pose Your Questions to Larry Here

He is 66 and collecting. I am 62 and not sure if I should wait until I’m 66 or begin now, and whose benefits should I collect when and whose would be more. Social Security has not been overly helpful in the calculations. I need to maximize my Social Security benefits. Is it possible to collect my spousal benefit and my own?

Larry Kotlikoff: Your divorced spousal and divorced widow​ benefits (once your ex dies) will be reduced by two-thirds of your non-covered pension, which may mean you end up losing all of these benefits. That’s because of the Government Pension Offset provision. The Windfall Elimination Provision is a different way in which Social Security goes after you for allegedly trying to double dip. It reduces your own retirement benefit by using a less generous formula to calculate the full retirement benefit, or Primary Insurance Amount, for folks with non-covered pensions.

You can lose Social Security benefits that total, at the maximum, half of your non-covered pension. You do need to figure this out, and there is very careful and inexpensive software on the market that can help you figure out what strategy will maximize your lifetime benefits.

The GPO and WEP don’t kick in until you start collecting your non-covered pension. So if your non-covered pension will be significantly larger if you hold off collecting, do so and then consider filing right away for your own retirement if the software says to do this.

Be aware that if you take your retirement benefit early (before full retirement age), you’ll be deemed to also be applying for your excess divorced spousal benefit, which would give you, essentially, the larger of either your own retirement benefit or your divorced spousal benefit. In other words, you can’t get both benefits.

The only way to collect both benefits by themselves, at least for awhile, is to wait until full retirement age to take just your spousal benefit and then take your own retirement benefit at 70, inclusive of the credits, called delayed retirement credits, that you’ll receive for postponing the collection of your retirement benefit. So, yes, the government has made your decision immensely complex. But again, the right answer is quick and easy to get with the right software.

Note that there are exemptions to the WEP based on the number of years worked.

Question: I am a retired teacher in Arizona. Federal taxes are taken out of my pension payment, but they are not reported to Social Security account. Why is this? I thought the taxes would be used to increase my contributions for my account. I will not be getting Social Security for at least six years.


Are Public Pensioners Safe?

Larry Kotlikoff: Your earnings record, which determines your Social Security benefit, is based on FICA contributions you make on your labor earnings. None of the money you earn in interest, withdraw from your 401(k) or receive in a pension is subject to FICA taxation, so none of it counts for determining your Social Security benefits.

My concern with your situation, though, is whether this pension you are now collecting is coming from non-covered employment. In other words, was your teaching job covered by Social Security? If not, your Social Security retirement benefit will be zapped by the Windfall Elimination Provision and any benefits you might be able to collect based on the work record of a current or former spouse, who is deceased or from whom you divorced after 10 years of marriage, will be zapped by the Government Offset Provision. Sorry about this bad and scary news. But I don’t want you operating under false pretenses about what you will receive.

Debra: The husband, who is 63 and not employed, just filed for Social Security in order to purchase a downsized home. The wife is 62 and took a buyout in 2013. They have a $546,000 hedged annuity, and $329,000 in a rollover IRA. The husband’s Social Security is $1,874 per month, with expenses of $2,500 per month. Should the wife file for Social Security benefits or should they fill their income gap with withdrawals from the annuity and IRA? How long should the wife wait to file for Social Security?

Larry Kotlikoff: They should, if possible, try to maximize their lifetime Social Security benefits. So I would urge the husband to withdraw his retirement benefit by repaying everything he’s received so far.

The strategy for maximizing their lifetime benefits may entail the wife applying for her retirement benefit at 65 in order to let her husband file just for a spousal benefit at full retirement age (66), the wife suspending her retirement benefit at full retirement age and then starting it up again at 70, and having the husband collect his retirement benefit at 70.

The alternative is for the husband to file for his retirement benefit and suspend its collection when his wife reaches full retirement age, then restart his retirement benefit at 70, while she files just for a spousal benefit at her full retirement age and starts her own retirement benefit at 70.

Which scenario is best depends on their earnings records and their maximum ages of life. But, in general, I would have them spend their non-Social Security resources to get over the hump and wait to collect much higher Social Security benefits, albeit at a later date.

Tim — New Albany, Ind. I am 62 years old, and am eligible for full retirement at age 67. My wife is 57. I currently work full time making around $45,000 per year. I have no investments or retirement accounts of any great worth. My wife currently receives a small disability check. My plan for my Social Security is to file and suspend at age 67 hoping my wife can file for half my benefit at 62. Is this possible? Does it sound like the plan I should use? Social Security is going to be our only income source.

Larry Kotlikoff: ​If you file at 67, your wife will be able to collect a reduced excess spousal benefit equal to the difference between half of your full retirement benefit and her current disability benefit. If she waits until her full retirement age, there will be no reduction factor applied to her spousal benefit for taking it early.

So to maximize your lifetime benefits, it appears that you may want to wait until 70 to take your own retirement benefit and have your wife wait until full retirement age to take her largest possible spousal benefit.

A slight variation on this strategy, which could produce a few more bucks for her after age 70, is for her to withdraw (I’m saying withdraw as opposed to suspend!) her retirement benefit at full retirement age to keep her Social Security disability benefit from automatically converting to her retirement benefit. At 70, she would take her retirement benefit, which will equal 1.32 times her current disability benefit, after inflation. At 70 she would then collect the larger of either half of your full retirement benefit or 1.32 times her current disability benefit.

My other advice is to keep working as long as possible. And try to save by paying off any mortgage or other debts you have.

Yuri — Los Angeles: My question is unusual. I tried to get help in the Social Security office, but got none. I immigrated to the U.S. in 1989 and am still working for the same employer. In 2010, 2011 and 2012, I received Social Security estimates with the same dollar amount. As far as I know, 35 years will be counted in a calculation, but I do not have 35 years on my record (only 25 years). Every year I worked the quantity of “0” has to be replaced by my earnings and contribution to the Social Security system. My full retirement age is 66 years, which was in 2012.

I am still working and not receiving my Social Security benefit (I delayed it). Please explain to me how to resolve this problem with the Social Security office. I feel it is not correct to receive the same benefit estimate for three years in a row.

Larry Kotlikoff: This does sound strange. I would try to meet with a Social Security Technical Expert in the local Social Security office and have him or her show you your earnings statement and make sure it includes your past three years of covered employment.

Susan — Cottonwood, Ariz.: I am a divorced 65-year-old who, after 40 years of marriage, had to start collecting Social Security benefits at almost 63 because of the Arizona economy. I receive $710 on my earning and $80 from my former husband’s Social Security. He is 67 and started collecting at 64 or 65 (again, because of the economy).

The way I read the Social Security regulations, I should receive 33 percent of his benefit. I don’t know what he is making, but I am fairly sure it is more than $240. He made over $70,000 for the last five years of his working life. I have had my local Social Security office investigate it twice and they claim it is correct. I would appreciate any help you can shine my way.

Larry Kotlikoff: ​Your divorced spousal benefit should equal A times B, where A is the difference between half of your ex’s full retirement benefit and 100 percent of your full retirement benefit, and B is the reduction factor arising from taking your divorced spousal benefit three years before full retirement age. Exactly when you started collecting will determine the size of B. Do this calculation, and if you aren’t in the right ballpark, ask Social Security to explain to you in detail why your reduced excess spousal benefit is only $80.