Social Security Q&A July 12, 2014: What Social Security's Survivors Planner Won't Tell You About Taking Widows Benefits
by Larry Kotlikoff
July 12, 2014
Social Security may be your largest or one of your largest assets. How you manage it by deciding which benefits to collect and when can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.
I’ve been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR’s website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company’s site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.
Today I want to show you how a widow’s collection decisions can be critically impacted by the special RIB-LIM widow’s benefit formula that comes into play when a deceased spouse takes retirement benefits early. (I discuss this formula in “Why many widows lose nothing from taking benefits early.”)
My example involves Jill, who just turned 60. Her husband Sam died last year at 65. Jill retired last year. She worked as a librarian and ended up with a $30,000 salary. Sam also retired at 60, earning $182,000 his last year. Both Jill and Sam started working at 22 and experienced a steady 3 percent annual growth in their pay. Let’s assume, to begin, that Sam died without having taken his retirement benefit.
Jill’s been told she can collect her widow’s benefit starting at 60 — in other words, right away — and her retirement benefit starting at 62. She’s been reading anthologies of Roman poetry rather than my weekly column. Consequently, her plan, which she follows, entails taking her widow’s benefit now and her retirement benefit at age 62. This strategy produces lifetime benefits of $614,062.
This is a very bad game plan. It will leave $116,527 on the table compared to the optimal strategy of Jill’s taking her retirement benefit at 62 and her widow’s benefit at 66 — her full retirement age — when it’s as large as possible.
But now suppose that Sam had actually taken his retirement benefit before he died. Indeed, suppose he took it starting at age 64. In this case, Jill’s best option is to still take her retirement benefit at 62, but to take her widow’s benefit at 63, not at 66. Doing so will produce $32,625 more in lifetime benefits than taking her retirement benefit at 62 and widow’s benefit at 66. And this optimal strategy beats what Jill plans to do — take her widow’s benefit now and her own retirement benefit at 62 — by $57,865.
Why does the fact that Sam took his own retirement benefit early make it optimal for Jill to take her widow’s benefit early? Jill is getting nailed by one of Social Security’s nastier gotchas, called the RIB-LIM special widow’s benefit formula. This formula applies for decedents who took their own retirement benefits early.
If Sam hadn’t taken his retirement benefit early, Jill’s lifetime benefit, based on the optimal collection strategy, would have equaled $730,589. But because Sam did take his retirement benefit early, Jill’s new optimal collection strategy generates only $671,827 in lifetime benefits. So Sam’s decision to file early cost Jill close to $60,000 — assuming she does what the software suggests.
Why should what amounts to a life insurance policy that’s being provided to Jill based on Sam’s lifetime of Social Security FICA contributions depend on when Sam took his retirement benefit? I can’t say. To me this is just another outrageous, capricious, unjust and incredibly opaque element of a Social Security System that should be redesigned from scratch. But whatever you or I think about it, the fact remains that thanks to RIB-LIM, there is no gain for Jill to wait beyond age 63 to collect her widow’s benefit; in other words, her widow’s benefit will not be larger if she waits longer to collect it.
You won’t learn this point by reading Social Security’s Survivors Planner and reading about survivor benefits. There is no mention of the RIB-LIM formula. Instead, you get the strong impression that taking widow(er) benefits before full retirement age always means permanently lower benefits.