(This article is excerpted from Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security by Laurence J. Kotlikoff, Philip Moeller and Paul Solman.)
Hidden deep within Social Security’s Handbook and Program Operations Manual are lots of “gotchas” that can reduce your Social Security benefits forever. And some of the “gotchas” have only gotten worse since President Obama last year signed into law new Social Security rules for married couples as part of the Bipartisan Budget Act of 2015.
Here are five of the “gotchas” — you can find another 35 in our newly revised book, Get What’s Yours. Take a look at them if you want reassurance that you aren’t falling into any of the Social Security system’s traps. Forewarned is forearmed.
If you take, or are forced to take, your retirement benefit when you take your spousal benefit, you’ll lose your retirement benefit if your spousal benefit is larger.
1. If you take two benefits at once, you lose one of the two.
Social Security won’t pay you two different benefits at the same time. Instead, it will pay you the larger of the two benefits (or something pretty close to this amount).
Specifically, what you’ll get is the sum of your reduced retirement benefit plus the difference between the reduced excess spousal benefit, defined as half of your spouse’s full retirement benefit minus 100 percent of your full retirement benefit augmented by any Delayed Retirement Credits (the extra amount you get for each month you wait to claim Social Security beyond your Full Retirement Age, up to age 70). Full Retirement Age is age 66 for those born between 1943 and 1954 and between 66 and 67 for those born after.
For example, if you are married and take, or are forced to take, your retirement benefit when you take your spousal benefit (the full spousal benefit equals one-half of your spouse’s retirement benefit), you’ll lose your retirement benefit if your spousal benefit is larger.
Social Security won’t say it has eliminated your retirement benefit. Instead, it will claim it’s giving you your retirement benefit plus the difference or excess between the two. But, in reality, it has used the spousal benefit to wipe out your retirement benefit.
Spouses and qualified divorced spouses who were 62 before January 2, 2016, can take just their spousal/divorced spousal benefits starting at Full Retirement Age and their retirement benefit at 70. Those spouses who were widowed before taking their retirement benefit can take their widow(er) benefit before or after they take their retirement benefit. The same holds true for qualified divorced widow(er)s.
2. If you are forced to take your retirement benefit at the same time as your spousal or divorced spousal benefit, your retirement benefit will generally wipe out your spousal or divorced spousal benefit.
The Social Security formula that takes your Average Indexed Monthly Earnings and turns it into your Primary Insurance Amount (PIA)— your Full Retirement Benefit — is highly progressive. Benefits paid to lower-paid workers are a much higher percentage of their pre-retirement incomes than is the case for highly paid workers.
Consequently, even if you’ve earned relatively low covered wages during your working years, taking your retirement benefit will likely mean never receiving a spousal benefit because 1) taking your retirement benefit keeps you from ever taking another benefit by itself and 2) spousal benefits are at best only half of your spouse’s PIA, so your retirement benefit will likely exceed your spousal or divorced spousal benefit and, therefore, wipe it out.
Stated differently, excess spousal benefits or divorced spousal benefits are generally zero or very small if we’re talking about two spouses or two ex-spouses who earned even modest wages.
3. Being deemed before age 70 (meaning being forced to take certain benefits early at a very big cost) leads to permanently reduced retirement benefits.
Generally, if you take your Social Security spousal benefit, you are deemed also to be filing your retirement benefit regardless of whether you are under or over Full Retirement Age. In other words, you are forced to take your retirement benefit, too. Social Security will then give you your retirement benefit plus what they call your excess spousal benefit (which is often zero). This pretty much comes down to your getting the larger of the two benefits.
Typically, being deemed whether before or after your Full Retirement Age but before age 70 forces you to take your retirement benefit earlier than 70, which means your retirement benefit will permanently fall below its value were you to start it at age 70. Furthermore, if your excess spousal benefit is zero, you’ll receive only your reduced retirement benefit.
Yes, you can undo some of the damage by suspending your retirement benefit at Full Retirement Age and starting it up again at 70 at a 32 percent higher real (after inflation) level. But this 32 percent kicker coming from the Delayed Retirement Credit will be applied to your reduced retirement benefit, not to your full retirement benefit. So once this gotcha gets you, you are gotten for life.
4. You can contribute to Social Security your entire working life and receive nothing whatsoever in extra benefits.
Suppose you start working at age 16 and continue working through your Full Retirement Age. Every week, you and your employer pay 12.4 percent of every dollar you earn in Social Security payroll (FICA) taxes. Also, suppose you earn relatively little in absolute terms and also relative to your spouse. Then you may do best to wait to collect your spousal benefit starting at Full Retirement Age (spousal benefits don’t increase after Full Retirement Age), assuming your partner has filed for his or her retirement benefit and you were 62 before January 2, 2016.
At age 70, you file for your own retirement benefit, but now you get hit by Gotcha No. 1: If you take two benefits at once, you lose one of the two. And if your spousal benefit exceeds your age-70 retirement benefit (that is, inclusive of the Delayed Retirement Credits), your total payment will continue to equal just your spousal benefit.
Yes, Social Security will describe your total check as consisting of your own age-70 retirement benefit plus your excess spousal benefit. But the sum of these two components will just equal your spousal benefit. So you’ll get nothing in extra benefits for all the years you contributed.
Furthermore, when your spouse dies, you’ll collect a survivor benefit based on their earnings record, which will be even larger than your spousal benefit, which is larger than your own retirement benefit.
5. Suspending your retirement benefits can cost you big bucks.
This gotcha pertains to those whose auxiliary benefit is larger than their retirement benefit even inclusive of the maximum amount of Delayed Retirement Benefits that can be accumulated. (Auxiliary benefits are all the benefits beyond the retirement benefit that might be paid on a worker’s record.) For these people, the amount by which their auxiliary benefit exceeds their retirement benefit is treated by Social Security as their excess auxiliary benefit.
Now suppose you are in this boat and you decide to suspend your retirement benefit and restart it at 70. (Suspending your retirement benefit means you tell Social Security to treat you as having filed for your retirement benefits, but to put them on hold until you restart them.) Under the new law, you can’t collect any excess benefit of any kind during the period your benefit is suspended. So you get nothing whatsoever until you reach 70.
At 70, you restart your retirement benefit only to find the total payment is no larger than you would have received during the suspension period had you not suspended. Yes, your retirement benefit is larger thanks to the Delayed Retirement Credits. But, given our assumption that your excess benefit at 70 is still positive, this excess benefit is lower by exactly the amount by which your retirement benefit is larger.
Hence, suspending in this situation is simply a decision not to take benefits for the period of suspension. It does nothing to raise your total future benefit payment.
In other words, you would have suspended for nothing, losing potentially thousands of dollars in lifetime benefits. If you realize you made a mistake in suspending your retirement benefit (and seeing no change in your monthly payment is the clincher), you may be able to undo the mistake and recover all your suspended benefits. But, it appears, only if you suspended before April 30, 2016.