Why Baby Boomers Are Making the Wrong Social Security Moves
By Larry Kotlikoff
Boomers don't make the right decisions about collecting Social Security because the present often takes precedence over the future. Photo courtesy of Flickr user Leenata Bankhele.
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.
Larry Kotlikoff: I've taken of late to asking myself a broader Social Security question before answering your specific ones. This is my academic economist side coming out. We dismal scientists are trained to focus on the big picture, especially when the big picture is bad. And, from everything I can tell, the vast majority of the 10,000 baby boomers retiring every day are making the wrong Social Security decisions.
Social Security, as I've belabored, is an impossibly complicated system, forcing most new retirees to consider thousands of options to find the one that maximizes their lifetime benefits.Getting this exactly right requires using software that solicits the right inputs and that's extraordinarily precise under the hood.
But only a handful of retiring boomers -- 500 a day is my guesstimate -- seem to be using Social Security-maximizing software. Those that are using software appear to be using programs like AARP's free software, which provides wrong answers, even ignoring the calculations under the hood. (Full disclaimer: My small software company sells Social Security maximization software, but also offers a free version, available on this page.)MORE FROM LARRY KOTLIKOFF: Gen X and Y, It's Time to Make Your Social Security Retirement Decisions
The calculators that are dangerous are those that ask for too few inputs to generate the right answer. In addition, the inputs they solicit are the wrong numbers. For example, the AARP calculator asks for either your current salary or sends you to a Social Security calculator to recover your monthly full retirement benefit. But your current salary, even if you are working full time, may have very little connection to your actual earnings history, which one needs to determine the right Social Security maximization strategy.
And the Social Security Administration's calculator, which is based on your earnings record, assumes the economy will experience what it has not experienced for well over a half century: zero inflation and zero economy-wide real wage growth. Social Security makes these assumptions in order to produce low-ball benefit estimates for workers out of fear that workers won't save enough on their own if they think their future benefits will be as large as they actually will be.
The bias in the Social Security estimate depends on the age of the person using the calculator. So a husband and wife who are, say, five years apart, will have differentially wrong Social Security benefit estimates, which can seriously impact the optimal strategy if, and this is a huge if, AARP is calculating everything correctly under the hood. Their casual treatment of inputs does not instill much confidence.
Other retiring baby boomers are relying on non-specialists at Social Security, either those available on the phone or those in the local offices, for Social Security benefit collection advice. As my recent columns suggest, the last people you want to ask for Social Security advice are the very conscientious, but very poorly trained folks at Social Security.
There are brilliant current and former Social Security technical experts (like Jerry Lutz, who double checks my responses to your questions every week), but there are far too few of them to serve 10,000 people per day. Nor can even the best technical expert run thousands of comparisons in his or her head.
(Jerry, by the way, thinks I'm being too harsh on many of his former Social Security colleagues. Maybe. But I get emails every few days from people who have been steered the wrong way, some extremely badly, by the good folks at Social Security.)
Yet other baby boomers are relying on the advice of financial planners. But most planners are giving advice from their hip pockets. Two weeks back, I spoke in Florida at a conference for financial planners specializing in giving advice to prospective and current retirees. To check their knowledge of Social Security's provisions, I asked the roughly 75 planners if any of them were aware of Social Security's option to suspend your retirement benefit upon reaching full retirement age and start it up again at a permanently larger level at or before age 70.
(If, for example, you suspend at 66 and wait until 70 to restart your retirement benefit, it will start at a 32 percent larger value after inflation.) Not a single financial adviser was aware of this option. And their questions after my talk suggested they too had very little knowledge of Social Security's other provisions.
There are also many baby boomers who are living hand to mouth and have no option but to "take the money and run" -- to take whatever they can get as soon as they can get it.
But many boomers do have choices, like waiting until 70 to take benefits that will be 76 percent higher adjusted for inflation than the benefit available at age 62. Yet fewer than 2 percent are waiting this long. Again, this may be ignorance -- folks using bad calculating tools or receiving bad advice. But I think there is a deeper, darker explanation that comes from the economics of behavioral finance that might loosely be called economic schizophrenia.
We like to think of ourselves as being one person -- one self. But an alternative view is that we are one body comprising multiple selves -- one for each future period or year. And these multiple selves are duking it out inside our brains to protect their living standards. But the current self is in charge, and if it doesn't care enough about the future selves, it will try to over-consume today and let the future selves fend for themselves later. Taking Social Security retirement benefits early is ignoring your fiduciary responsibility to care for your future self.
Telling baby boomers to save for their futures hasn't succeeded in getting them to save. Perhaps, the trick is to get boomers to think of their future selves as their own children, whom they need to protect, which in this context, means spending the effort to get Social Security right and putting the concerns of tomorrow ahead of the demands of today.
Christine -- Los Angeles, Calif.: I was married in 1994 and divorced in 2004. Does this make me married for 10 years, or does it have to actually be Jan. 1, 1994 to Jan. 1, 2004 to qualify as 10 years of marriage in order for me to be eligible for ex-spouse's higher benefits?
Larry Kotlikoff: Unfortunately, you need to last it out a full 10 years before becoming divorced to be eligible to collect spousal or survivor benefits. If you are even one day short of the 10 year threshold (say you get divorced the day before your 10th anniversary), you get nothing. This is a very nasty Social Security gotcha. I'm not sure when this provision was put in place (perhaps the Stone Age), but it is something this Congress should change. (It used to be worse. Before 1979, you had to be married for 20 years to collect divorcée benefits.)
Plenty of spouses stay home to rear their children, which is as important a job as there is, and then get divorced before the 10 years is up. Now it's true that their alimony decree might involve a payment from the working parent to the stay-at-home parent that takes into account that the former will collect Social Security benefits based on his or her labor earnings, whereas the child-rearing parent will not. But I doubt the alimony settlements are taking this into account.
If you were within one year of having divorced your ex, you could remarry him for the extra months needed to reach the 10-year threshold. But if you remarry him now, the clock starts from scratch. The marriage would be treated as if you are marrying a different person when it comes to determining your divorcée benefits. In other words, you'd need to be married to him for another full 10 years before calling it quits again.
Clarice Sowders -- Afton: If my spouse collects a certain amount of Social Security and he passes away, how much of it would the spouse receive even if she is on Social Security?
Larry Kotlikoff: If your husband were to pass away, you would receive the larger of either your survivor or your own retirement benefit because you have already filed for your own retirement benefit. If your survivor benefit exceeds your own retirement benefit, the difference or excess will be paid to you. This is true even if you are between full retirement age and age 70 and have suspended your retirement benefit. Once you file for your own retirement benefit, you are eligible for an excess spousal benefit (when your husband is alive) or an excess survivor benefit (after he passes away). In addition to having your survivor benefit zapped in this manner, it may also be reduced if you take it before your full retirement age.
The amount of the survivor benefit will determine your excess survivor benefit. The survivor benefit will be your husband's current retirement benefit if he filed for his retirement benefit after reaching full retirement. If he filed for his retirement benefit before full retirement age, your survivor benefit will be the larger of the reduced retirement benefit he was receiving or 82.5 percent of his full retirement benefit. This assumes you aren't taking your survivor benefit early.
If he took his own retirement benefits early and you are taking your survivor benefit early, the calculation of your survivor benefit gets even more complicated. Social Security orders, from lowest to highest, three benefits. The first is your reduced survivor benefit, calculated assuming that your husband, counterfactually, collected his retirement benefit at full retirement age. The second benefit is 82.5 percent of his full retirement benefit, and the third, is the actual retirement benefit he was receiving when he passed away.
Which of these benefits is then used as your survivor benefit for subsequent transformation into an excess spousal benefit that is then subjected to a early survivor benefit reduction (because you are, I'm now assuming, taking your widow's benefit early) will depend on the precise low-to-high ordering of the three benefits. And depending on the ordering, either the lowest or middle benefit will be used. For more specifics, take a gander at this nifty chart.
Alex -- Massachusetts: How would you compute the divorced spouse's benefit with an ex-spouse's earnings record? You would need to know how to compute the Primary Insured Amount (PIA), then use that to determine the spouse's benefit. Do you have a program outside of the Social Security Administration system that can do this? It seems that the detailed earnings record wouldn't help someone plan retirement accurately since the computations for a PIA are fairly complex (for the average person).
Larry Kotlikoff: You'd compute the divorced spousal benefit as either the full or excess spousal benefit based on whether the divorced spouse has filed for his or her own retirement benefit. Then you'd reduce the full or excess spousal benefit if the divorced spouse is taking spousal benefits early. You'd use the ex's earnings record to figure out his or her full retirement benefit, which is the benefit used to calculate both the full and excess spousal benefits. A good starting place for help with calculations is my free software, available here.
Gerald March -- Seattle, Wash.: I am 65 and have been on Social Security Disability Insurance for 20 years. My wife is 66 and took early Social Security benefits at 62. Can she get my spousal excess benefit?
Larry Kotlikoff: Possibly, but if her full retirement age benefit (i.e. Primary Insurance Amount) exceeds half of your disability benefit amount, she would be ineligible.
Question: Is it true that I can only claim half of my ex's Social Security benefit? I live in Texas and we were married for 37 years. I have not remarried.
Larry Kotlikoff: The truth may be worse than this. If you ever filed for your own retirement benefit, even if you suspended it after reaching full retirement age in order to start it up at a higher value later, you won't get the full spousal benefit, which is half of your ex's full retirement benefit (not what he actually collects as a retirement benefit, which can be larger or smaller than his full retirement benefit). Instead, you'll get an excess spousal benefit equal to your full spousal benefit (i.e., half of his full retirement benefit) minus 100 percent of your full retirement benefit if you filed at or before full retirement age or your actual retirement benefit if you filed at or after full retirement age.