Will Social Security Tell Me If I'm Leaving Benefits on the Table?
by Laurence Kotlikoff
July 22, 2014
Here’s my question to myself for today. It’s based on an actual couple’s experience, which made me want to ask, how does a couple know if there are benefits they’re not taking but could be? Will Social Security tell them?
Answer: No, Social Security will absolutely not inform you. Let me illustrate this with an example. Mark and Joan just celebrated their 62nd birthdays by unadvisedly rushing over to their local Social Security office and signing up for their retirement benefits. They both realize they can live to 100, but their broker convinced them that he can make more money for them with their reduced Social Security benefits checks now than if they waited to collect higher Social Security benefits later.
What Mark and Joan don’t fully realize is that their broker is promising them not just a higher, but also a lower return than Social Security. Come again?
Well, it depends on the future. In some situations, the broker could indeed deliver a higher return than Social Security. But in others, he’ll underperform Social Security. The Social Security Administration sets Mark’s and Joan’s retirement benefits to 76 percent larger values, after inflation, if they start collecting them at 70 rather than at 62. By picking the right benefit collection strategy, Mark and Joan can jointly optimize both their retirement and spousal benefits. This optimization will, in general, not entail their both waiting until age 70 to file for their retirement benefits.
But their broker is Mark’s first cousin and best friend. So they followed his advice. When they sat down with the Social Security staffer, named Clair, at the local office, Joan, who was a much lower earner, asked if she could file for a spousal benefit too. Clair said not only could she file for a spousal benefit, she had to file because of what’s called Social Security’s deeming provision.
Clair did some quick calculations and said, “Ok, here’s the deal. You, Joan, can and must file for a spousal benefit, but you earned too much to get one, so your spousal benefit is zero.”
Joan said, “You’re kidding, I thought I was going to get my retirement benefit plus half of Mark’s retirement benefit?”
Clair smiled and said, “There is a lot of misinformation out there. We at Social Security know the rules, and what I’m telling you is what our computer system is telling me. You can file for your spousal benefit — in fact, you have to file for your spousal benefit, but it’s zero, so there is no spousal benefit. The reason is that you get what is pretty much the larger of the two benefits when you file for both. And your retirement benefit exceeds your spousal benefit.”
“Ok,” Joan said, “If that’s the case, that’s the case. Please give me whatever you can.”
What Social Security didn’t tell Joan is that she could wait until full retirement ageand collect half of Mark’s full retirement benefit and wait until 70 to collect her own 76 percent higher retirement benefit. Instead, Clair from Social Security said, “It’s good you are taking your benefits early. You can never tell when you’ll die.”
Now let’s slow forward to three months from now when Mark is offered a very high-paying job if he’ll come out of retirement. Mark’s been a good upper-income earner but no superstar. Now he’s been given a new job that will pay him more than the covered earnings ceiling – a job he can do as long as his brain’s ticking. What’s the job? He’s going to serve on a corporate board that pays board members large annual amounts for their service.
Mark realizes that going back to work will cost him his Social Security benefits through full retirement age due to the system’s earnings test. But he’s done his homework and knows that thanks to Social Security’s adjustment of the reduction factor, any benefits he loses between now and full retirement age will be made up by Social Security in the form of a permanently higher benefit starting at full retirement age.
Now fast forward 23 years. Mark and Joan are 85. They are in perfect health. They are sure they can make it to 100. They’ve had stress tests, total body scans, knee and hip replacements, colonoscopies up the wazoo, and they’re avid golfers, entertainers, travelers and readers. And one thing Joan keeps reading about are spousal benefits. She’s learned enough to realize that because Mark has made more money ever since age 62, and since his full retirement benefit has been and continues to be recomputed each year based on his additional covered earnings, her spousal benefit may now exceed her own retirement benefit. Furthermore, she realizes that if she now qualifies for her spousal benefit, she probably qualified last year and for many years before that.
Joan is right. She now qualifies for about $3,000 (in today’s dollars) per year in extra or excess spousal benefits over and above her retirement benefit. And, though this excess spousal benefit was smaller in the past, it became positive when Joan turned 70. All told, Joan’s excess spousal benefits since age 70 amount to over $30,000 — and that ignores the interest she could have earned on the money had she received it.
Joan’s upset. She marches over to the local Social Security office. There, to her great surprise, is Clair, looking a little older, but still very happy to help. Joan demands all her past spousal benefits that she had originally asked for but never received. Clair smiles and says, “There is a lot of misinformation out there. I can give you spousal benefits back six months, and from here on out. But that’s it.”
Joan screams, “What? I asked for my benefits when I was 62. I filed for them. You didn’t give them to me once they became positive. This is grossly unfair.”
Clair smiles. “There is a lot of misinformation out there. When you didn’t quality for a positive spousal benefit back at age 62, we treated you as not having filed. In order to have received your excess spousal benefits you needed to come in and apply again for them when they became positive.”
“But you never notified me when they became positive,” Joan exclaims.
Clair smiles again. “That’s not our job.”
Don’t expect Social Security to tell you anything about what it owes you. Use very accurate software that shows you your annual benefits in all future years, and take special notice if a benefit that is initially zero becomes positive in a future year. When that happens, go in, find Clair, and smile.