By Laurence Kotlikoff
Social Security was, it appears, designed to be incomprehensible to the American public. Why else would it have a Handbook with 2,728 incredibly obtuse rules and a Program Operating Manual System with tens of thousands of even more obtuse rules meant to clarify the 2,728 incredibly obtuse rules?
Thanks to this breathtaking public disservice, I routinely get emails from people who have, it seems, been given bad to very bad advice by people at Social Security. Note, the technical experts and actuaries at Social Security know the rules cold. They are brilliant. But getting to them is not easy.
Here’s an email from Dr. Thomas Pelton of Yuba City, CA.:
While filling out my online application for Social Security, I couldn't find where to tell them I wanted to file now for my retirement benefit and suspend its collection until I reached 70, so my wife could receive spousal benefits starting now. We’ve both reached 66 -- full retirement age. Your Maximize My Social Security program told us to do this. It also told us both to take our retirement benefits at 70.
So I called Social Security’s 800 number (1-800-772-1213). The representative told me I probably couldn't specify directly on the screen that I wanted to file and suspend, but that I should enter in the additional information section what I would like to do and that it would be processed that way.
She then asked me why I don't have both of us file now and both suspend until we both reach 70. That way we could both receive spousal benefits from each other now. This information conflicted with what the program says to do, which is why I contacted you.
Here’s what I wrote back to Dr. Pelton:
The minute someone files for a retirement benefit, whether or not they suspend it, they forever change the calculation of their spousal benefit from being a full spousal benefit to being an excess spousal benefit.
The full spousal benefit is half of one’s partner’s full retirement benefit (or Primary Insurance Amount). The excess spousal benefit is the difference between half of one’s partner’s full retirement benefit and all of one’s own full retirement benefit. If this difference is negative, the excess spousal benefit is set to zero.
So the full spousal benefit is necessarily larger than the excess spousal benefit. Also, the excess spousal benefit has to be zero for at least one spouse and could be zero for both spouses!
Social Security has set things up so that it’s impossible for two married spouses to both get a full spousal benefit, either at the same time or at different times. Two divorced former spouses can, however, both get full spousal benefits on each others’ earnings record provided they were married for 10 or more years and don’t file for their own retirement benefits too soon.
For you and many other married couples, the strategy that maximizes your lifetime Social Security benefits often, but certainly not always, involves doing the two things our program recommended in your case. First, the older spouse applies for a retirement benefit when the younger spouse reaches full retirement age, but immediately suspends its collection. This permits the younger spouse to apply just for a full spousal benefit. Then both spouses can wait until 70 to collect their retirement benefits.
Were you to follow the advice you received over the phone from Social Security, you’d both receive excess spousal benefits, but they could well be zero for you both or be zero for one of you and very small for the other. Indeed, depending on your earnings, Dr. Pelton, doing what Social Security told you to do could well have cost you and your wife $60,000 over four years.
Social Security’s website’s statements are literally true, but they often omit key points that make what’s stated potentially highly misleading. For example, Social Security’s website discusses spousal benefits, stating:
If you are under full retirement age and qualify on your own record, we will pay you that amount first. But if you also qualify for a higher amount as a spouse, you'll get a combination of benefits that equals that higher amount. At your full retirement age, your benefit can be equal to one-half of your spouse’s full retirement amount.
What this doesn’t make clear is that if you take your own spousal benefit early you will a) be forced to take your retirement benefit early as well, b) your spousal benefit will be calculated as your excess spousal benefit, not your full spousal benefit, c) your excess spousal benefit may be zero, and d) doing so early precludes getting a full spousal benefit and letting one’s own retirement benefit grow through age 70.
It also doesn’t make clear that to qualify for a spousal benefit your spouse needs to have filed for a retirement benefit. If you spouse hasn’t done this, you can, in fact, get around the deeming provisions and apply just for a retirement benefit before full retirement age. But once your spouse does file for a retirement benefit, the spousal benefit you can get will be an excess spousal benefit with a reduction if it is taken before full retirement age.
All this leads me to ask a simple question. Is Social Security worth retaining in its current form if it's too complicated for anyone to get straight? And, guess what, it's utterly broke? My answer is ardent "no." Were I in charge, I'd leave what we have in place for current oldsters and set up the modern version of Social Security, which I call the Purple Social Security Plan. Take a look. Endorse it online if you agree. And if you do agree with it, push your members of Congress to adopt it. Social Security, in its current form, is a scandal. Don't be complicit in its preservation.
Laurence Kotlikoff is an economist at Boston University, co-author of "The Clash of Generations." His software company markets Maximize My Social Security.
- Investing Education