When It Might Actually Make Sense to Take Social Security Early
By Laurence Kotlikoff
It can make sense to start collecting Social Security before age 70 if there are dependent children who can benefit. Photo by Elizabeth Shell.
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. 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.
Rose -- Sussex, Wis.: My husband is turning 62 in October and we have a 5-year-old son. My thoughts are that in his case, it does make sense to start collecting Social Security benefits early because our son will be collecting benefits for 13 years versus only five years if we wait until my husband is 70. Please let me know if I am thinking about this the wrong way. Thank you.
Larry Kotlikoff: For those who don't understand your question, Rose, a dependent child can collect Social Security benefits on a parent's account through age 17 -- or through age 19 if she or he is still in elementary or secondary school or if she or he became disabled before age 22, so long as she or he remains disabled.
So in your case, taking benefits early may be best, in part because you can also receive a spousal benefit as the mother of a dependent child of the retired worker, so long as that child is under age 16 or disabled, although if you earn a lot, the spousal benefit could be wiped out by Social Security's earnings test. But, if you do take early benefits, you'll want to consider having your husband suspend his own retirement benefit at 66, when he reaches full retirement age and can do so, and then restart it at 70. This will result in a 32 percent larger real (inflation-adjusted) benefit than if he took it age 66, and suspending won't affect your spousal benefit or your child's benefit.
I recommend you use commercially available software that incorporates your past covered earnings histories as well as your future projected covered earnings to determine which strategy will produce the highest lifetime benefits. Your case is very complex and depends on your past and projected earnings, your age, and how long you and your husband may live. If you are very young, say 30, there will be many years when you will likely be collecting survivor benefits. In this case, it may make much more sense for your husband to file and suspend at 66 and wait until 70 to collect his retirement benefit since this retirement benefit, which will be up to 76 percent higher than had he taken it at 62, will be what you will collect as a survivor (assuming he dies after age 70).
Angela Muniz -- Glendale, Ariz.: My husband and I retired this year. I started collecting my Social Security benefits at 66, my full retirement age, but my husband, who is younger than I am, will be 63 in September. Can you tell me the difference between collecting at 63 and 66, and would it help if we waited until he is 63 1/2? I don't know if we can wait until he turns 66. Paul, I love listening to you on PBS. You are one of my favorites.
Larry Kotlikoff: First, Paul insists that I thank you on his behalf. As we are close friends, and he edits this column, I am obliged to comply.
MORE FROM LARRY KOTLIKOFF: How the Government Is Fooling Us About the Solvency of Social Security
Second, is there really no way for you to wait? Draw on a 401k or IRA, for example, on which you pay no penalty after age 59 1/2. Although, of course, you will have to pay income taxes unless it's a Roth IRA on which taxes have already been paid.
Third, the difference between collecting at age 63 and collecting at age 66 is 20 percent.
Fourth, yes, every month you wait to take Social Security after age 62 until age 70 will earn you a higher retirement benefit. As my Social Security expert Jerry Lutz points out, the benefit amount would increase by five-ninths of 1 percent for each month your husband delays taking benefits between ages 63 and 66, so his benefit amount would be 3.33 percent higher if he starts at age 63 1/2 instead of 63.
Moreover, every month you wait between age 62 and the official "full retirement age," which is currently 66, will earn you a higher spousal benefit, assuming you're entitled to receive any spousal money at all.
Now, as to what you should do, you have three "simple" strategies to consider.
Strategy A: You begin by repaying all the Social Security benefits you have received thus far, including, importantly, the Medicare Part B premium subtracted from your Social Security check.
You have one year to repay all your benefits and start over from scratch, and it sounds like you are still inside this window. Next, your husband applies for his retirement benefit now but suspends collection of it.
A further step: you apply just for your spousal benefit now. Finally, you apply for your retirement benefit when you reach 70, and your husband reactivates his retirement benefit at 70. Following this strategy will give you full spousal benefits between 66 and 70 (equal to half your husband's full retirement benefit) and also let your own retirement benefit continue to grow to its maximal age-70 value. Your husband needs to apply for his retirement benefit early in order to let you get a spousal benefit. But by suspending it at full retirement age, he can have it grow by 32 percent between 66 and 70 when he starts it up again. And this suspension won't undermine your ability to collect the full spousal benefit when you are 69.
Strategy B: You repay all your Social Security benefits as in Strategy A. When your husband reaches full retirement age (66), you apply for your retirement benefit but suspend its collection. This will permit your husband to apply just for a spousal benefit and thereby, collect a full spousal benefit on your earnings record (equal to half of your full retirement benefit).
When you reach age 70, you reactivate your retirement benefit. When your husband reaches age 70, he files for his retirement benefit and you file for your spousal benefit. Once someone files for a retirement benefit, the spousal benefit the person can collect morphs into the excess spousal benefit, which is the difference between half of one's spouse's full retirement benefit and 100 percent of one's own full retirement benefit, adjusted for any delayed retirement credits. Note that excess spousal benefits, if taken early, are also reduced due to the early retirement spousal benefit reduction factors.
Once you both are collecting your retirement benefits, the excess spousal benefit may be positive for one of you, so one of you may get more total benefits from this source. Mathematically, both spouses can't qualify for an excess spousal benefit. (One full retirement benefit has to exceed half of the other.) And it's often the case, with two earners who have even modest earnings histories, that both excess spousal benefits will be zero. This is because the formula that translates one's earnings history to one's full retirement benefit (called the primary insurance amount or PIA) is highly progressive.
Strategy C: You don't repay Social Security. When your husband reaches full retirement age, he applies for just his spousal benefit, which will be his full spousal benefit. Then he waits until 70 to collect his retirement benefit, at which point you apply for a spousal benefit, which will be calculated as your excess spousal benefit and could provide some extra shekels.
Which strategy will generate the highest lifetime benefits? This depends on your maximum ages of life and how you discount (as in assign less value to) money coming in the future compared to money you receive in the present. My guess is that strategy B is best. But there are also variants on these three strategies to consider. There are so many possible scenarios that to evaluate them all, you'll need to use one of the commercially available software programs out there.
Final point: Even staunch supporters of Social Security, like Paul, have to admit that designing Social Security such that you have to consider, by my best guess, over 20,000 alternative options, is absolutely nuts. With me, Paul?
Paul Solman: No, Larry, not with you. Social Security's rules, like the rules of any complex public policy, were not fully designed; they evolved. In your and my debate over the complexities of Social Security, I have never said that it ought not be simplified, any more than I would oppose pruning the tax code. I simply observed that it's a lot easier to complain about "crazy" complexity in the vast and therefore inevitably byzantine bureaucracy of a democracy than it is to fix it.
Barb -- Vancouver, Wash.: I retired at age 57 and am divorced. If I continue not to work, what is the best age to start collecting Social Security?
Larry Kotlikoff: Regular readers of this column will recognize that I have given the same advice before that I am about to give now. Apologies to those readers, who should of course feel free to skip ahead, but there are many new readers of Ask Larry every week, as evidenced by a question like this one.
Your best option, Barb, if you were married 10 or more years, is likely to wait until full retirement age (66), and then collect just a spousal benefit on your ex's work record, then wait until 70 to collect your own retirement benefit. It will be as much as 76 percent larger at 70, in today's (inflation-adjusted) dollars, than if you take it at 62. And if you take your own retirement benefit, you'll preclude your ability to take a full spousal benefit at full retirement age. Instead, you'll have to take both your retirement benefit and spousal benefit early, and your spousal benefit will be calculated as the excess spousal benefit, which could well be zero.
Teresa -- San Diego, Calif.: I work for a city with its own retirement system. I understand that I may not have access to Social Security when I retire, but I'm wondering if my husband could get access to the spousal benefit of my Social Security. He will be 62 this December, but I will not reach 62 for another seven years. Thank you.
Larry Kotlikoff: If I understand you correctly -- and maybe I don't -- you're not expecting to collect any Social Security benefits yourself. That is, you have worked for a city with its own pension system instead of Social Security. This is usual for state and local government workers. To be eligible for Social Security, you would also have had to work 40 quarters -- the equivalent of 10 years -- in a job where you and your employer paid Social Security taxes.
So no, if you aren't entitled to your own Social Security, your husband isn't entitled to yours either.
On the other hand, I at first thought you meant you had worked 40 quarters -- or that you will have by the time you reach retirement age. In that case, you should be aware that your own retirement benefit may be reduced due to something called the Windfall Elimination Provision. Your husband's spousal benefit may also be reduced -- or even wiped out -- by the Government Pension Offset provision.