What all Americans and their representatives need to know about Social Security

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.

Editor’s Note: Social Security columnist Larry Kotlikoff is testifying before the House Ways and Means Subcommittee on Social Security on Tuesday, July 29. He wanted to share a portion of his prepared remarks, edited and condensed below, with Making Sen$e readers first.

Kotlikoff makes the case, as he has on this page many times before, that Social Security is insolvent. They system, which is 32 percent underfunded, is in worse shape than Detroit’s pension system, he says.

The growth of Social Security’s off-the-books debt burdens future generations of Americans, and Kotlikoff reminds Congress that the fiscal gap, more than the official debt, represents the true hole in our nation’s finances. He wants Social Security benefits to be counted in that official debt to provide a more accurate picture of America’s fiscal burdens.

The system’s complexities contribute to what Kotlikoff sees as inequities, with Social Security often ripping off poor people. Why can’t the U.S. system be as simple as New Zealand’s, Kotlikoff has asked, although he’d prefer Congress adopt his own Purple Plan to reform Social Security.

And then there’s the fact that the Social Security Administration can’t be counted on to provide a full picture of individuals’ and couples’ optimal benefit collection strategies, whether that advice is over the phone or online. Too often, Social Security calculators low ball benefit estimates. In short, America’s Social Security system needs to retire, Kotlikoff argues.

We fast forward past these fiscal concerns and pick up with Kotlikoff’s advice about when to claim benefits and how they’re administered. He touches on the Social Security “gotchas” all Americans and their representatives need to know, including the secret about “deeming,” and he addresses policy questions about the file-and-suspend strategy.

— Simone Pathe, Making Sen$e Editor

The Importance of How and When Someone Chooses to Claim Benefits

If you get the right Social Security information and make the right decisions, you can get far more benefits than if you don’t. Let me illustrate the dollars at stake in making the right decisions.

Consider a 62-year-old couple that’s contributed the maximum amount to the system each year they worked. If they do what far too many people do, namely take their retirement benefits at the earliest possible date (age 62), their lifetime benefits will total $1.2 million. But if they wait until 70 to collect and if A) one of the two spouses files for a retirement benefit at full retirement age, but suspends its collection, B) the other spouse files just for a spousal benefit, and C) both spouses take their retirement benefit at 70, the couple’s lifetime benefits total $1.6 million. The $400,000 difference is enormous. It’s also at the upper end of the dollar gain that making smart Social Security decisions can result in. For most households, the increase in lifetime benefits from maximizing Social Security is either smaller or much smaller. But they are generally significant for all households.

Where are the gains coming from? In the main, the gains are coming from waiting a relatively small number of years to collect much higher benefits for potentially a very long number of years. Social Security will tell you that, on an actuarial basis, when you take your benefits is pretty much a wash. But none of us are insurance companies. We have only one life to live. And we have to plan to live to our maximum ages of life for the simple reason that we might. Because of this longevity risk, Social Security can’t be valued as a standard investment. It’s a longevity insurance policy, and its value to households has to incorporate the value of this insurance.


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Economic research on this valuation problem dates back 60 years. This research tells us to value a household’s Social Security benefits using simple discounting — in other words, without applying actuarial factors.

Valuing insurance products in a special manner is not restricted to longevity insurance. To see this, consider valuing homeowners insurance. No one values homeowners insurance simply as an investment. Were we to do so, we’d apply actuarial/break-even analysis and conclude that buying homeowners insurance doesn’t pay.

What Factors Does a Worker Need to Consider in Determining When to Claim Social Security Benefits?

This is another important question. The answer is multifaceted. There are so many different and major factors that come into play that it would take a book to fully respond. Instead, let me illustrate, via examples, three of the many factors workers need to consider.

The first factor is that workers need to understand the benefits for which they may be eligible. Take my friend Jerry, who is 65 years old and a high earner. His wife recently passed away. When we were having dinner in January, he told me he planned to retire at 70 and take his Social Security at that time. He had no idea that he could collect widower benefits based on his deceased wife’s earnings record, which was quite high. Indeed, he was astounded when I told him that by taking his widows benefit starting at age 66, when the earnings test no longer applies, he would be able to collect roughly $120,000 prior to age 70. Needless to say, he paid for dinner.

Now why should my friend, who by chance learned about his rights to collect widower benefits, receive an extra $120,000 from the system whereas someone in his same shoes would have, out of ignorance, lost $120,000 for good? This is an example of the capricious and unjust redistribution and inequity arising from Social Security’s terrible complexity.

My second example involves a marvelous doctor, whom I met by shear accident. The example illustrates the need to know how benefits are calculated. The doctor is age 68. One month ago, he was diagnosed with pancreatic cancer. He figures he has two years left to live. He’s married, his wife is 64, and she had a very limited earnings history. Upon learning his diagnosis, the doctor went to the local Social Security office where the representative told him he should try to get as much out of the system as possible before he passes away and that he should immediately begin collecting his retirement benefit.

The doctor followed this advice and signed up for his retirement benefit. It was the wrong advice. In taking his retirement benefit before age 70, the doctor reduced his wife’s future widows benefit by 16 percent. Neither the doctor nor the Social Security representative understood that the delayed retirement credits the doctor would accrue between ages 68 and 70 would extend to the wife in the form of a higher widows benefit. Had I not accidentally met this doctor, who is now suspending his retirement benefit, his wife would have spent, perhaps decades, receiving 16 percent lower widows benefit than would otherwise have been the case.

A third thing that workers need to know in collecting benefits is that they can’t trust much of anything they read online from Social Security or are told at the local office. I get emails on a daily basis from people who tell me they were misled by Social Security personnel. Here is an email I just received from Donna Strong, a divorcée living in Huntington Beach, California.


I’m currently 63. My ex is older than me and has earned much more. Over the past year, I tried to determine what benefits I could collect. I spoke with three different Social Security reps. One told me I couldn’t receive divorcée spousal benefits unless my ex applied before 66, and since my ex is quite well off, I knew that wouldn’t happen. This, I discovered, was wrong. All my ex needs to be is over 62 for me to collect a spousal benefit on his work record — provided we are divorced for two years (which we are). So I got that right. But no one told me about deeming. I applied for my retirement benefit five months back thinking I’d be able to collect my full spousal benefit at 66.

I just learned about deeming and that I was, without my knowledge, forced to take my divorcée spousal benefit early. Had I been made aware that I would be deemed and forced to take a permanently reduced spousal benefit, I would never have applied for an early retirement benefit. People really shouldn’t have to deal with this kind of stress to receive a benefit for their retirement. I do also acknowledge that with Social Security cutting its hours, providing less training and more turnover, the situation is guaranteed to get worse for us all.


Let me conclude my testimony by answering several questions either raised by subcommittee staff or posed by me.

How can Social Security’s rules for the file-and-suspend strategy and “deemed” filing affect the benefits someone receives? Do most Americans know about these provisions?

The file-and-suspend strategy can be used by one spouse to help another spouse file exclusively for a spousal benefit once that other spouse reaches full retirement age. But it can also be used by workers to accrue delayed retirement credits while leaving open the option of taking one’s suspended benefits as a lump sum if there is a sudden need for a large infusion of cash. File-and-suspend is not the only way that a spouse can receive a full spousal benefit at full retirement age while letting his or her own retirement benefit continue to grow via the accumulation of delayed retirement credits. If one’s spouse has filed for, but not suspended his or her retirement benefit, one can collect a full spousal benefit at full retirement age. Also, divorced spouses can collect full divorcée spousal benefits starting at full retirement age without anyone having filed for and suspended a retirement benefit.

“Deemed” filing can force spouses and divorced spouses to file for their spousal benefits early if they file for their retirement benefits early and force them to file for their retirement benefit early if they file for their spousal benefit early. This provision keeps people who file early from being able to collect one benefit first while letting the other benefit grow.
Most people appear not to know about these and many other Social Security provisions. But those that do are not necessarily taking advantage of the system. One can argue that all the benefits that people can collect based on their own and their current and former spouses’ contributions to the system were fully paid for by those contributions. In this case, the injustice is not in people claiming all their benefits, but rather in many people not knowing enough about the system to ensure that they get back what they paid for.

What are common questions workers ask when trying to decide when to apply for benefits?

It’s common for workers to ask no questions at all. Instead, they figure out when is the earliest date they can take their retirement benefit and apply at that date. They appear to have little or no idea about their eligibility for spousal, widow(er), divorcée spousal and divorced widow(er) benefits, little or no idea about deeming provisions, little or no idea about delayed retirement credits, file-and-suspend options, start-stop-start strategies, family benefit maximums, the adjustment of the reduction factor, which can mitigate the earnings test, and the list goes on.

Should we eliminate the option to file and suspend?

Social Security is such a maze of provisions that it is very difficult to claim that one option, like “file and suspend,” is either fair or unfair. It certainly benefits certain households. But those households that benefit can, as indicated above, be viewed simply as being given the same benefit collection opportunities as other households who don’t need to use file and suspend to, for example, get a full spousal benefit or provide their spouse with a full spousal benefit.

Certainly, restricting “file and suspend” for high-income households, as President Obama proposed in his budget, will save the system money. But the system is so broke and so poorly structured that only a truly radical reform will cure what really ails it.

Should we eliminate deeming?

Deeming is a particularly nasty gotcha that differentially harms lower-earning households that can’t afford to wait until full retirement age to collect a full spousal benefit while letting their own retirement benefit accrue delayed retirement credits. Presumably those who thought up deeming had their reasons. But at least to me, deeming is just another crazy Social Security provision that traps unsuspecting workers like Donna and makes the system complex beyond any reasonable person’s belief.