Why Social Security lowballs benefit estimates

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.

Question: I wonder if you could give your opinion about the following scenario. In the case where a husband and wife are about 10 years apart in age, it seems difficult to build a strategy. Let’s look at this example: The husband was born in 1952, has a primary insurance of $2,000 and wants to retire. If he works, he will keep his income below the earnings limit. The wife was born in 1963 and is earning a moderate income but has some strong earnings in the past. If she keeps earning at this level for the next 10 years, the Social Security calculator estimates her PIA would be about $1,950.


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So I am wondering how accurate those projections are. How is it determined? Are average wage increases or inflation considered? Also, the wife will have a full retirement age of 67. So it looks like her benefits will be reduced by 30 percent if she begins benefits at 62 and that she can only earn three years of delayed retirement credits. The husband’s benefits will receive “better treatment” than the wife’s benefits. How do these factors influence the decision? If wages begin to increase more significantly could the wife’s PIA grow faster than the husband’s cost-of-living adjustment will grow his benefit?

Larry Kotlikoff: ​The Social Security Administration’s benefit online calculators aren’t to be trusted for use for people under age 60, even for someone who is single and was never married and will never marry. The reason is that unless you change their assumptions, they assume (in contradiction to the Social Security Trustees’ Report’s own assumptions) that the economy will experience zero economy-wide average real wage growth and zero inflation between now and the end of time. That’s an odd assumption for an economy that’s experienced positive average real wage growth rates as well as inflation for each of almost all the postwar years.

But it’s intentionally used to produce low-ball benefit estimates so people will save more on their own and they won’t be so hurt if the system’s benefits are cut in the future, which seems likely. According to table IVB6 of last year’s Social Security Trustees’ Report, the system needs an immediate and permanent 23 percent cut in all SSA benefits starting now and continuing forever to cover its long-term funding shortfall. And for those of you who think the system’s trust fund is real, this requisite 23 percent benefit cut does take into account all of the trust fund’s assets.

My company’s Social Security software, which is available for free in its basic version, corrects for Social Security’s low-ball estimates. Others may as well. The low-ball estimate problem is particularly nasty when trying to find the optimal strategy for a couple like your hypothetical one because the couple’s optimal joint strategy depends on having accurate projections for each spouse, and the bigger the age gap between the two, the bigger the bias will be in coming up with the accurate strategy if one doesn’t correct Social Security’s PIA estimates.

Question: I will be 57 this August. My husband of 28 years who is considerably older, started taking his Social Security benefits at 62. We have two children, a 26-year-old autistic son who is cared for in a group home, and a 15-year-old daughter who is a high school sophomore. Our son is currently receiving SSA and SSI benefits. Our daughter and I are also receiving SSA benefits based on my husband’s earnings. All three of our benefits are currently capped at the family maximum.

I worked for several years before I got married, but have not accumulated enough credits to be eligible for benefits under my own earnings. If my husband should pass away, I would like to know what benefits I will be eligible for and at what age and amount. What benefits will our children be eligible for after my husband’s death? What will my children be entitled to when I pass away based on my earnings before or after my husband’s death?

Larry Kotlikoff: Your son will continue receiving his current disabled child benefit from Social Security until your husband dies. At this point, the family benefit maximum won’t change, but your deceased husband’s retirement benefit won’t be charged against the maximum. So there will be more maximum family benefits available to be shared by you, your son and your daughter (if, when your husband dies, she is still under 18, or under 19 and still in high school or elementary school).

Your family benefit maximum is somewhere between 150 percent and 187 percent of your husband’s primary insurance amount. When your husband dies, that won’t change. But the 100 percent of this maximum that’s allocated to him (even though he’s not actually receiving his full primary insurance amount because he took his retirement benefit early) will go away when he dies, leaving you and the kids to collect, just among yourselves, up to 150 to 187 percent of his PIA.

If he dies after your daughter is no longer eligible for a child benefit, your disabled son’s child survivor benefit will rise from 50 percent to 75 percent of your deceased husband’s PIA. Your own benefit will become not a widow’s benefit, but a mother’s benefit because you will have a child in care receiving a child survivor benefit. Your mother’s benefit will also equal 75 percent of your husband’s PIA.

Now, 75 percent plus 75 percent of your husband’s PIA totals 150 percent of his PIA. So you and your son will get your full benefits and not be hit by the family benefit maximum.

However, here are a couple of extra points. ​In order for you to continue receiving young spousal benefits (i.e. before age 62) and/or mother’s benefits after your daughter reaches age 16, ​your ​disabled son must be considered ‘in ​your​ care.’ The ‘in care’ requirements vary with the circumstances, but since ​your​ son is living in a group home, ​you​ would need to establish that ​you are exercising parental control and responsibility for him. That’s likely the case, but it’s not a given. Here is the​ SS​A reference.

Also, ​at some point, it will be advantageous for​ you ​to convert to ​your ​widow’s benefits, assuming that your husband dies first​​. Since ​the special ​RIB LIM​ formula would enter (see my prior column on this), ​your​ maximum possible benefit will be 82.5 percent of ​your ​husband’s PIA. This would be the case if ​you​ become eligible​ for such benefits ​any time after reaching approximately age 62 and a half. That could potentially bring the family maximum into play, but probably would not.

​Finally, neither you nor your children will receive any benefit from your account, since you are not insured.

Question: I am a 60-year-old widow. My late husband had a much higher primary insurance amount, so I had been planning to file on my own account at 62 and file for survivors benefits at my full retirement age of 66.

But in light of the ominous phrase in the president’s budget proposal, I am now worried that this might be considered an “aggressive” strategy and perhaps I would be penalized after the fact. I would appreciate your insights. Should I just plan to wait until 66?

Larry Kotlikoff: ​President Barack Obama’s budget proposal seems to be about filing and suspending by married or divorced spouses (with living exes). So I don’t think it will affect ​you if it’s passed, and that’s a big “if.” So stick with your strategy, but check to make sure it’s actually best.