How to Maximize Social Security If Disabled and Other SS Questions
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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 week.
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, for free, in its "basic" version. His considerable and often very useful output is available on his website.
Paul Solman -- Boston, Mass.:
You told me recently about the nuances of disability benefits. A lot of questions on this page come from people on SSDI -- Social Security Disability Insurance. Furthermore, as I was amazed to discover when responding to a question about the minimum wage reducing the welfare rolls, some 14 million Americans depend on disability payments from SS, which dwarfs the 4.3 million getting welfare checks.
Would you please share your discoveries about details of disability benefits that may escape notice?
Larry Kotlikoff: Paul, Social Security has a separate set of equally Byzantine provisions governing disabled workers as it does non-disabled workers.
I want to point out a couple of features of Social Security's treatment of disabled workers once they reach age 62. I'm answering your question in order to assist those who have a hard enough time as it is. (Full disclosure: I've been helped enormously on this column by Jerry Lutz, a former technical expert on Social Security.)
Let me illustrate the options available only to the disabled by considering a disabled worker I'll call "Joe," about to turn 62.
First, Joe can continue to collect his disability benefit through full retirement age (66 in Joe's case) with no reduction in the amount. In contrast, non-disabled workers who apply for their Social Security retirement benefits between age 62 and their full retirement age are forced to take permanently reduced benefits.
Once Joe reaches full retirement age, his disability benefit automatically converts to his full retirement benefit. So disabled workers are, in effect, given their full retirement benefit starting four, gradually rising to five, years before they reach full retirement age. That's 25 percent more than the non-disabled can get. Like you Paul, I'm all for helping the disabled, and I'm glad this feature is in the law.
Second, if Joe has been married for at least one year and his wife is collecting a retirement benefit or she has applied for a retirement benefit, but suspended its collection, Joe can receive an excess spousal benefit between age 62 and 66, though it will be reduced because he's taking it before his full retirement age of 66.
The excess spousal benefit is calculated as the difference between 50 percent of Joe's wife's full retirement benefit and his own full retirement benefit. Assuming this excess is positive, Joe gets 70 percent of this amount starting at the tender age of 62.
If Joe is divorced, but was married for at least 10 years, he can collect a spousal benefit from 62 to 66 even if his ex is already collecting her retirement benefit or has suspended its collection. Moreover, if she hasn't started collecting or hasn't suspended, he can still collect an excess spousal benefit on her earnings history if she is over age 62 and they have been divorced for at least two years. (I keep telling you the rules are Byzantine, Paul, which is why answers like these can be so hard to write -- and to follow.)
By the way, unlike a non-disabled worker, Joe isn't automatically required to apply for his excess spousal benefit. Social Security calls such applications "deeming." There is, however, no deeming for the disabled. This is important because, as I'll explain in a moment, it might be better for Joe not to apply for his excess spousal benefit. Danger lurks.
When Joe reaches 66, he can tell Social Security he doesn't want to take his own retirement benefit. In SS lingo, he will ask to "withdraw" his own benefit. If he doesn't do so, his disability benefit will automatically be converted to a retirement benefit.
But if he "withdraws" his retirement benefit, Joe's reduced excess spousal benefit will flip to a reduced full spousal benefit: 50 percent of his spouse's full retirement benefit, no matter if she's his wife or his ex. And if he hasn't taken an excess spousal benefit by age 66, he'll can still request his full spousal benefit.
Now for that danger-lurks moment. If Joe took his excess spousal benefit starting at 62, the 70 percent reduction factor would be applied to his full spousal benefit. That would mean getting 70 percent of 50 percent of his wife's or ex-wife's full retirement benefit.
If the excess spousal benefit is small, taking it would be a mistake for Joe because it will mean not much money before 66 and less money, potentially a lot less money, after 66. In other words, this second option makes sense of his the full retirement benefit of his wife or ex is more than double his own full retirement benefit. Since Joe is disabled, she may well have earned much higher benefits. But you can't assume anything.
So Joe needs to be careful should well-meaning folks at SS try help him, say at age 62, to get the maximum at that age. They might also be helping him forgo higher benefits after age 66.
The advantage to Joe of withdrawing his retirement benefit, of course, is that he can then wait until 70 to collect his own retirement benefit, which will reach its maximum amount at that point, a full 32 percent higher that had he started taking it at age 66. His full spousal benefit, reduced or not depending on whether he took his excess spousal benefit prior to 66, can help facilitate the wait.
Non-disabled workers who take Social Security retirement benefits early are generally deemed to be applying for their excess spousal benefits and then are stuck with those reduced excess spousal benefits for the rest of their lives. They don't have the ability to withdraw their retirement benefit at full retirement age and flip to their full spousal benefit.
Remember the larger purpose here: for Joe to wait until age 70 to start his retirement benefit and benefit from the Delayed Retirement Credit. At age 70, Joe will get the larger of his own retirement benefit or his full spousal benefit hit, again hit by the reduction factor that prevailed if and when he took his excess spousal benefit.
The big if here is that I'm assuming Joe has a pretty high maximum age of life - something like 85. Note that I say "maximum age of life" rather than "life expectancy." Since Joe may make it to his maximum age of life, he should be planning to live that long. He can't count on dying on time -- at his life expectancy, that is. As Paul and I both regularly emphasize, the greatest danger is outliving your resources. That's why waiting until 70, as I spelled out in a popular recent column, is, with some exceptions, -- and with SS there are always exceptions -- so important, if you can manage to wait.
Peter Goergen -- Chicago, Ill.: I'm confused. If I take my benefit at 62, the earliest I can, why would I be entitled to any of my wife's when she retires? She is younger than me.
Larry Kotlikoff: You are able to collect a spousal benefit when your wife either A., starts collecting a retirement benefit, the earliest age for which is 62 or B., reaches full retirement age and files for her retirement benefit, but suspends its collection.
If you take your retirement benefit early, say at 62, which is likely to be the wrong thing to do in terms of maximizing your lifetime benefits, your spousal benefit will be the excess spousal benefit whenever you are able to collect it. And it will be reduced if you collect it before full retirement age. Also, it will be zero if your full retirement benefit exceeds half of your wife's full retirement benefit. So your spousal benefit could be zero.
A better strategy may involve doing these four things:
You wait until 70 to collect your highest retirement benefit
You wait until full retirement age to collect your spousal benefit, which will be the full spousal benefit, not the "excess" benefit. The full benefit will equal half of your wife's full retirement benefit and not just the "excess": the difference between her full retirement benefit and half of yours.
Your wife collects a reduced retirement benefit when you reach full retirement age, allowing you to do wait until 70. This assumes your wife is not much younger than you since she can't get a retirement benefit until she's 62.
Your wife suspends her retirement benefit at 66 and restarts it at a 32 percent higher value at 70.
Yes, it's crazy complex, but this is what Uncle Sam has provided all of us for a basic saving system. Paul thinks the complexity is pretty much inevitable; he and I argued about it some months ago, with Nobel laureate Peter Diamond weighing in as well. But Paul may underestimate how infuriating the system can be, since he's got a friend, me, to tell him how to handle his Social Security decisions.
Ginny -- Tucson, Ariz.: My ex-husband will be 65 in August, and I will be 65 in June. I am still working. Can I draw off of his SS now, and would it be a percentage of his full amount? When I turn 66, if my benefit is higher, would I switch to draw mine or leave it until I turn 70? Also, when you say "survivor's benefit," would I collect this along with my SS if he dies? Thank you.
Larry Kotlikoff: I'm going to assume, in my answer, that you were married for 10 or more years and that either your ex is collecting his retirement benefit or that you have been divorced for two or more years. Under these assumptions, your best strategy is likely to be to wait until your full retirement age, 66 in your case, and then collect just your spousal benefit based on your ex's earnings history.
This will be the full spousal benefit, equal to half of his full retirement benefit. Then, at 70, you apply for your own retirement benefit, when it will start at its largest possible value.
If you apply for your divorcee spousal benefit now, at age 65, you'll be hit with the "deeming" provision of Social Security that says: if you are divorced and your ex is 62 or older and you apply for your spousal benefit at an age under full retirement age, you'll be forced to take not just a reduced spousal benefit, but a reduced retirement benefit.
Furthermore, the reduced spousal benefit will be the product of a reduction factor times what's called your "excess spousal benefit." Your excess spousal benefit is the difference between 50 percent of your ex's full retirement benefit and 100 percent of your full retirement benefit. If this difference is negative, it will be set to zero.
In short, if you go for your spousal benefit right now at 65, you'll be forced to also go for your retirement benefit right now. Both benefits will be reduced and the spousal benefit, because it's computed as the excess spousal benefit, may be computed to be zero! This is the worst of all worlds! You get no spousal benefit and have to take a reduced retirement benefit forever.
Kathy -- Orlando, Fla.: My husband, 65, is a U.K. citizen. I am 62 and a citizen of the U.S. My husband applied for U.K. Social Security benefits, and received them. I applied for U.K. benefits as spouse, and receive half of my husband's benefits. They don't seem to care in the U.K. that I also received SS benefits in the U.S. I applied for my U.S. SS benefits as soon as I could, at age 62.
We also applied for U.S. benefits for my husband, who has only worked in the U.S. for 2 years. He is qualified under my benefits, and gets half of my SS payment.
Question: It seems like we are double dipping. Do we need to notify the U.S. SS that we get benefits from the U.K.? Will that reduce our current benefits? What will happen if we neglect to tell them?
Larry Kotlikoff: I checked with Jerry Lutz, a technical expert at the Social Security Administration for years and someone who has caught several mistakes in my answers. (I'm now checking all my answers with Jerry first before posting them.) According to Jerry, "Foreign pensions are not considered 'government' pensions for purposes of the government pension offset provision."
So you don't need to report your husband's U.K. pension to SS and he is legitimately entitled to the spousal benefit he is now receiving based on your earnings record, with no application of the Government Pension Offset (GPO). Should you, heaven forbid, pass away, your husband will receive a survivor benefit equal to your retirement benefit, which is your full retirement benefit, reduced due to your taking it early. Furthermore, your receipt of a spousal benefit based on his U.K. pension is not in play; it won't affect what you can get from U.S. Social Security in the form of a retirement benefit."
Having said the above, I think you are probably making a mistake taking benefits at age 62. You have a year to repay every dollar you received plus the Medicare premiums paid out of your SS check and start from scratch. If you do this, you can pursue one of two strategies.
The first strategy:
A. You apply for your retirement benefit when your husband reaches full retirement age (when you are 63), thus permitting him to collect a full spousal benefit (equal to half of your full retirement benefit) for the rest of his life;
B. You suspend your retirement benefit at 66 when you reach full retirement age;
C. You restart your retirement benefit at 70 when it will be 32 percent larger than when you stopped taking it.
A second strategy:
A. You wait until your full retirement age, file for your retirement benefit, but suspend its collection, thereby allowing your husband to collect a full spousal benefit, and then,
B. You restart your retirement benefit at 70, when it's at its highest level.
Also, if you die, the second strategy will provide permanently higher survivor benefits to your husband than will the first strategy.
You may consider this double dipping or triple dipping, even. But it's what you are legally entitled to for having paid the Social Security "payroll" tax for all those years.
Rita Gower Cook -- Eustis, Fla.: What will my SS benefit be if I don't draw on my benefits until age 70?
Larry Kotlikoff: Your retirement benefit at 70 can be as much as 76 percent higher than your retirement benefit at 62 depending on the exact day of the month you were born.
George Herzog -- Hollywood, Fla.: The last five Trustees Reports have indicated that Social Security's Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds would become exhausted between 2036 and 2041 under the intermediate set of economic and demographic assumptions provided in each report.
If no legislative change is enacted, scheduled tax revenues will be sufficient to pay only about three-fourths of the scheduled benefits after trust fund exhaustion. Many policymakers have developed proposals and options to address this long-range solvency problem.
On the Social Security government website addressing trust fund solvency, there are 66 proposals listed. There were no matches when I did a search for proposals addressing trust fund solvency using the keywords "remove cap."
Keeping everything else equal to what it is today, what could be the FICA withholding rate be reduced to if the cap were completely removed?
With the cap completely removed, what would be FICA withholding rate need to be to make Social Security solvent for the next 75 years?
With the cap completely removed, what would be FICA withholding rate need to be to make Social Security solvent for the next 100 years?
Is the thought of removing the cap and lowering the rate for everyone just too simple for our modern, sophisticated representatives?
Larry Kotlikoff: According to Table IV, B6 of the SS Trustees Report, SS is 31 percent underfunded. If we keep the cap, the ceiling, on taxable earnings where it is -- $113,700 in 2013 -- we need to raise the payroll tax rate from 12.4 percent to 16.4 percent immediately and permanently to make Social Security solvent, assuming we do nothing else.
That's a 4 percent increase in all payroll taxes. Removing the cap would lower that requisite increase to about a 1.6 rather than a 4 percentage point hike in the OASDI payroll tax rate. I've long been on record insisting that SS is in terrible long-term fiscal shape.
The President was disingenuous or uninformed when, in the debate, he claimed the system just needs to be "tweaked." SS is in worse long-term shape than when the Greenspan Commission "fixed" it back in 1983, though Paul argues with me about this as well.