Author Archives: jmiller

Social Security and the Fiscal Cliff

As negotiations have continued to avert the ‘fiscal cliff”, there have been attempts to balance increases in taxes with reductions in projected entitlement payments. Press reports indicate that the Obama has offered to change the way that Social Security cost-of-living adjustments (COLAs) will be measured. The projected savings from using an alternative measure of inflation are projected to save the government substantial outlays over the coming decades.
AARP and other organizations have objected strongly to these changes since they could bring down benefits that seniors will receive in their retirement. These organizations are also correct in arguing that Social Security’s long-term financial problems can be fixed with less radical changes.
An important consideration in evaluating these arguments is whether the changes that are being proposed are fair to seniors who have paid their Social Security taxes and have been promised reasonable benefits from Social Security when they retire.
Economists generally agree that the present cost-of-living measure that is used by the government in adjusting Social Security benefits and other government programs overstates the actual changes in the cost-of-living. They have adopted a different measure called a chained-index which better represents the changes in the cost-of-living. This chained-index is what Obama has now agreed to use for calculating benefit increases in the future. So in this sense the change in the inflation measure seems fair to seniors.
There is a basic problem, however, with using either of these measures. These inflation measures are based on the consumption profile for the average American urban wage-earning household. To the extent that seniors consume different goods and services than the average urban American household, the proposed adjustments to Social Security might overstate—or understate–the rise in the cost- of- living for seniors or put their future finances in jeopardy. If the COLA adjustments understate the cost-of-living, our oldest seniors would be the most vulnerable since they would suffer repeated annual loses in their purchasing power.
When people retire, financial planners generally suggest that household expenses will be about three-quarters of what was needed before retirement. This calculation alone suggests that the items that seniors consume could be very different from what non-retirees purchase. Increased need for healthcare and the different housing situations seniors generally face suggest that these two elements of their ‘market basket’ could be quite different from younger people. Energy price changes also have a smaller effect on seniors since they drive less. (The recent COLA adjustments to Social Security benefits have been very erratic due to energy price spikes.)
What is needed, therefore, is an inflation measure which is based on the goods and services that seniors actually consume and uses the new chained-index methods for calculating price level changes. Then the adjustments to Social Security would be fair.

How Important are Social Security Spousal Benefits?

Many people do not know about Social Security spouse benefits. There may be a good reason for this. There is no mention of spousal benefits in the Your Social Security Statement that the Social Security Administration is again sending out annually to people 60 and over.

Spousal benefits are important for just about everyone who is married or, in the case of divorcees, has been married for more than ten years. Spousal benefits provide additional income for families where one spouse does not qualify for benefits on their own record. If the person claiming spousal benefits waits until full retirement age (66 for most people claiming benefits now), the spouse will receive half the full retirement benefits of the working partner. Thus a family, where one person worked and the other did not, can receive 150% of the retirement benefit of the working partner (if they both claim at full retirement ages)

There are three aspects of the spouse benefit that are important to remember: (1) To claim a spousal benefit, the working spouse must claim their retirement benefit first. (2) Claiming a spousal benefit has no effect on the benefits received by the working partner. The working partner will still receive a benefit which will depend on when they claim their benefit. This benefit will increase every year between 62 and 70. (3) The size of the spousal benefit only depends on when the spouse claims a benefit. The spousal benefit will increase every year between 62 and full retirement age. Unlike the retirement benefit of the working partner, the spousal benefit does not increase after full retirement age so there is no reason to delay claiming spousal benefits beyond full retirement age.

These same general conditions apply to divorcees who have been married for ten years and are not presently married to someone else. A divorcee can claim a spousal benefit based on the earning record of their ex. Claiming a spousal benefit on the record of your ex will have no effect on their retirement benefit or, if they have remarried, the spousal benefit of their new spouse, Indeed, several people can claim benefits on the earnings record of one person, if that person has been married several times. The present spouse and every ex-spouse who was married to that person for ten years and is not presently married to someone else can claim a spousal benefit. Unlike the situation for a married couple, a divorcee does not have to wait for their ex to claim their retirement benefits before claiming a spousal benefit, but their ex has to be 62 before a spousal benefit can be claimed.

Spousal benefits can also increase the income of couples where both work. For a discussion of the strategies that duel earner couples can use to take advantage of the spousal benefit go to our discussion of Secret Strategies. We also provide a custom analysis for married couples so they can best exploit these strategies.

Can I Double My Monthly Social Security Benefit by Claiming at 70?

Answer: Maybe

In a recent posting on Reuters, Lynn Brenner writes about an example provided by T Rowe Price’s Christine Fahlund where someone who claims at 70 can double the monthly benefit that they would have received if they had claimed at 62. This is a surprising result. The usual calculation is that the difference between claiming at 62 and 70 is 76%. This calculation reflects the fact that at 62 a person will get three quarters of the benefit at 66 (full retirement age) and a benefit 32% higher at age 70.

Where then does the idea come from that the benefit can double when someone waits until 70? Ms Fahlund uses The Social Security Quick Calculator to get her result. The reason that the benefit doubles is that the Quick Calculator assumes that claiming occurs at the time a person stops working. Since the benefit at any age depends on work history, continuing to work from 62 to 70 can increase the benefit that someone claiming at 70 will receive.

The calculator does this calculation for a hypothetical person. It does not know the actual work history for any particular individual. How much your benefits will increase from 62 to 70 will depend on your actual work history. Because your work history is almost certainly different from the work history of a hypothetical person, the increase in your benefits will be different from the calculation provided by the Social Security Quick Calculator. So your benefit may double if you work until 70 and then claim, but then again it may not.

Fortunately, it is not hard to find out what your situation actually is. Social Security does a similar calculation in Your Social Security Statement. (If you do not have a statement you can go either go to www.ssa.gov/estimator/ or www.socialsecurity.gov/mystatement and get the same information.) Look at what the statement says about the benefits you will receive at 62 and 70, respectively. Divide one into the other and you will see whether your benefit will double. Mine is 86% higher.

Whatever the increase, you may not want to wait as long as 70 before claiming your benefit. Every year you wait, you will lose benefits that year. To determine the best strategy for you and your wife, order a report from www.socialsecuritychoices.com. Our calculator takes these trade-offs into account so you can determine the best time to claim your benefits.

New Online “Your Social Security Statement”

On May 1st the Social Security Administration announced that you can now get “Your Social Security Statement” online.

To get your own personal statement you can go to:    www.socialsecurity.gov/mystatement

To obtain your statement you must first set up an account. This can take some time as it requires filling out some personal information and verifying some information that the vendor, Experian, has about you. The Social Security Administration acknowledges that some people may not be able to get access to their accounts this way, in which case you can request a paper copy or go to your local Social Security Office to get a statement. Once you set up your account, you can access your statement by using an id and password.

Social Security recently suspended the sending out of Social Security statements, but in February started sending out statements again to people 60 and over and people 25.

The statement has important information for you. It provides estimates of the benefits you can receive if you claim at different ages and the benefits that survivors in your family may receive from your Social Security account. What is still missing is an estimate of what spousal benefits your spouse might receive if he/she claims spousal benefits based on your record. This is a significant omission since there are strategies using spousal benefits which can greatly increase your benefits from Social Security. See our discussion of these Secret Stratagies

Other valuable information that can be found on your statement is your salary history. This history plays an important role in determining your Social Security benefits. You should verify that this information is correct so that you receive all the benefits which you have earned.