By Larry Kotlikoff
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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 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.
Shambhu — Brooklyn, N.Y.: Is there any hope to get any cost-of-living adjustment (COLA) to Social Security this year? In other words, would people on Social Security get any increase in their monthly payments?
Larry Kotlikoff: Social Security increases your benefit on January 1 of each year based on inflation over the 12 months ending in September of the previous year. My guess is that the increase will be around 1.3 percent.
Eliza Camacho — Grants Pass, Ore.: I became disabled at 58 and started receiving Social Security Disability Insurance (SSDI). I’m reading your column and do not understand about my SSDI changing at my retirement age of 66. I’m 62 now. Am I supposed to change it when I’m 70?
Larry Kotlikoff: When you reach 66, your Social Security disability benefit will automatically become your Social Security retirement benefit and will stay at its current level, with annual adjustments for inflation, forever. *Unless* you choose to withdraw your Social Security retirement benefit at full retirement age and then wait until, say, 70 to start collecting your retirement benefit. If you wait until 70, it will be 32 percent larger *over and above any inflation adjustment.*
Reortiz — Garland, Texas: I’m recently divorced for the second time. I was married to my first wife for 13 years before we divorced. She then passed away. Should I try to collect survivor benefits at age 60 or 66? I’m planning to work until age 70.
Larry Kotlikoff: You probably want to wait until 66 to collect your survivor benefit and until 70 to collect your retirement benefit. If you start collecting your survivor benefit at 60, this benefit may be lost due to the earnings test. However, once you reach full retirement age, the earnings test ends and, at that point, Social Security will readjust your survivor benefit to compensate you for the months of benefits you took.
If your ex was the higher earner, your survivor benefit may exceed your own retirement benefit, in which case your benefit at 70 may not change. In this case, Social Security will give you your retirement benefit starting at 70, but they will reduce your survivor benefit dollar for dollar, leaving you with the same total benefit you were getting before. Stated differently, they will redefine your survivor benefit to be your excess survivor benefit, which will equal your original survivor benefit less your retirement benefit.
Kathy Manor — Cookeville, Tenn.: I want to suspend my early retirement and start receiving my benefits at age 66 (I am 63 now). I thought I had suspended my early retirement when I called my local Social Security office in early 2012. But, this summer, I received a lump sum payment for benefits for 2012, and then a month later, received more benefits. When I visited our local Social Security office, they told me that I only had 12 months to suspend my early retirement and that I missed that window.
So they are sending early retirement payments to my checking account. I filed an appeal on July 2, 2013. I did not receive a notification by mail. None of this would have happened if the person I met with was knowledgeable about Social Security rules. They told me the 12 month suspension rule is located on their website.
I was told it was too late for me to suspend. All I want to do is give the money back and suspend until I am 66. Any help would be appreciated. The local Social Security office in Cookeville, Tenn., told me it was against policy for me to give the benefits back.
Larry Kotlikoff: This is typical of what people run into with Social Security. The people in the offices and on the phone far too often provide either bad or incomplete information and advice. Unless they are the very well trained “technical experts,” their answers can lead you to take the wrong actions. In your case, they should have told you over the phone to go into your local office and file a formal claim to withdraw your benefit. If you or Social Security have any documentation that you tried to do this within one year of your 62nd birthday, you may be able to appeal their decision not to let you repay and reapply in the future.
Once you reach full retirement age, you can suspend your retirement benefit and start it up again at a larger value any time before you reach age 70. (You cannot voluntarily suspend benefits *until* you reach full retirement age, however, so people should not file applications to do so ahead of time unless they want to receive reduced benefits.) So if you suspend benefits at full retirement and start them up again at 70, they will start up again at a 32 percent larger value. The reason is that you’ll receive the delayed retirement credit, which is operative between full retirement age and age 70, and credits you for each month of retirement benefits you forgo during those years.
If you do suspend your benefit at full retirement age, make sure to pay your Medicare Part B premiums out of pocket. Send Social Security monthly checks and keep copies of the checks once they have been canceled. If you don’t pay your Part B premiums directly, Social Security will reactivate your suspended benefit, perhaps without telling you, but only use your benefit to pay the premiums for you. In other words, Social Security won’t be sending you any checks. And, if this happens, when you reach, say, 70, and ask to collect a higher benefit, well, tough luck, your benefit will start up again at the same level at which you stopped it when you were 66. In this case, you would have forgone four years of benefits for nothing. How many people in the local Social Security offices know about this terrible gotcha? I suspect virtually none.
Elizabeth Montagna — Fort Collins, Colo.: I am 62 years old and have worked and contributed to Social Security for over 35 years. I have applied for employment at a state university, whose website tells me that it does not participate in Social Security. If I accept employment with them and opt to start collecting my Social Security benefits when I turn 63, will the income limit of $15,000 still apply? Since I would no longer be contributing to Social Security, my benefits would not increase beyond what was in my fund when I stopped working for my previous employer in October, right?
Larry Kotlikoff: The earnings test would still apply even though you are working in non-covered employment. The Social Security Act of 1935 made retirement a criterion for receiving benefits. The country was, of course, in the middle of its Great Depression and the goal of this aspect of the legislation was to get people to retire and, thereby, free up jobs for the unemployed. Over time, the government realized that the economy doesn’t produce a fixed number of jobs and getting people to retire early wasn’t a smart move, either for the people involved or for the economy.
Today’s earnings test applies only through full retirement age, and any months of retirement benefits you lose due to the earnings test prior to full retirement age are compensated by providing you larger benefits starting at full retirement age. This occurs through what’s called the “adjustment of the reduction factor.” However, not all benefits received based on your earnings record will be readjusted at full retirement age to make up for their being lost due to the earnings test. Specifically, child and spousal benefits, while being subject to their earnings test, will not be incremented at full retirement.
Here’s a critical question confronting the 10,000 baby boomers retiring daily, each of whom must decide when to take Social Security. How much are my future Social Security benefits really worth?
Larry Kotlikoff: The answer matters. If we place very little value on future benefits, we’re going to take our benefits as soon as possible. But doing so comes at a price: a permanently reduced level of benefits, and the reduction is substantial. Social Security retirement benefits starting at age 62 are, on an inflation- or purchasing-power-adjusted basis, only 57 percent as large as retirement benefits starting at age 70.
Waiting eight long years without collecting a single penny isn’t easy. Think of all the bills and vacations those Social Security checks could cover between 62 and 70. On the other hand, collecting early can fill our “golden years” with regret. Imagine living to 100 and spending 30 years –- from 70 to 100 –- knowing that your monthly check would have been 76 percent larger had you waited until 70 to collect. (Note, 1 divided by 1.76 gets you to the 57 percent.)
So, you don’t want to undervalue or overvalue future Social Security benefits. Doing either will lead to all kinds of mistaken financial, housing and retirement decisions. It can also lead you to take the wrong benefits at the wrong time.
Unfortunately, valuing your future Social Security benefits isn’t straightforward. Uncle Sam is promising to give us money in the future. But there’s a catch. We have to be alive to collect it. If we croak, well, we’re out of luck. Yes, there is a measly death benefit and substantial survivor benefits for our spouses and children, but that makes valuing future benefits even more complicated.
If we could sell our claims to future Social Security benefits for ready cash, it would be easy to say what our benefits are worth. But we can’t do so. Hence, how we value these benefits is very much a personal choice. No economist can tell you for sure what your benefits are worth.
If you plan on living a long time and know you’ll be starving without Social Security benefits, you’re going to value future Social Security benefits a lot and want them to be as high as possible. On the other hand, if you’re convinced your chances of surviving to, let me put this delicately, a highly ripened state are very low, you’re going to value Social Security benefits, particularly those far off, very little. Finally, if you are really desperate for cash right away, then you’re going to place extra high value on current compared to future benefits.
In my Social Security epistles, I’ve stressed, in many cases, the advantage of waiting until later in life to start collecting benefits so that those benefits will be higher. I’ve been implicitly assuming that most readers are really going to need extra benefits if they fully ripen. But I’m hoping this answer to my own query provides ballast to my bias.