Category Archives: General

General blog discussion

Will the SSA Notify you if you Beome Eligible for Widow(er)s Benefits?

This week’s question comes from Lori.

I claimed social security 3 years ago under my ex-husband’s benefits. I was told when I applied at my local social security office that upon his death, I would get an additional benefit. Will social security inform me of his should it occur? If not, how will I know and will I need to apply for this additional benefit?

Lori, you ask an important question since many people (usually women) find themselves in a similar situation. You were married for at least 10 years and you are not currently married to someone else. Moreover, you stand to increase your social security benefits when your ex-spouse dies by claiming a survivor’s benefit on his or her record. As with many people in your situation, you are no longer in contact with your ex-spouse so you are uncertain as to when to apply for benefits.
Will the SSA notify you of the death of your ex-spouse? In your case, the answer is “yes.” But in many other circumstances, the opposite is true.

You are presently receiving benefits on your ex-husband’s record. Assuming he dies before you, the SSA will let you know when he has died because your spousal benefit will stop. At that point, you can apply for survivor’s benefits. Suppose your ex-husband dies in June and you are notified in July that your ex-spousal benefits have ended. If you apply immediately for survivor’s benefits, you can request that your survivor’s benefits begin in August (with the actual payment made a month later). If your application takes several weeks to process, you will receive a retroactive payment for the months that you should have been paid.

It is different story if you are not receiving ex-spousal benefits. In this case, the SSA does not notify you of your ex-spouse’s death, even though you are now eligible for survivor’s benefits. The burden now would be on you to find out about his death. For many, the easiest way to find out about his death is contact the SSA every few months and ask: “Is my ex-husband still alive?”
If you have reached your full retirement age, you can request retroactive payments for up to 6 months. So, you do not stand to lose anything by checking with the SSA every 6 months.

About me
I hold a doctorate in economics from the University of Wisconsin and taught economics at the University of Delaware for many years.
In 2009, I co-founded SocialSecurityChoices.com, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.

Medicare Premium Alert

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A number of forces have converged to create a situation where some Social Security beneficiaries may experience substantial increases in their Medicare insurance premiums.

This past year, in part because of the lower price of gasoline, the measured change in the cost-of-living index (CPI) that is used to adjust Social Security benefits is negative. This means the following will not change next year:

a) Social Security retirement benefits;

b) The maximum taxable income on which Social Security benefits have to be paid;

c) Medicare insurance Part B premiums for the majority of Social Security beneficiaries who now pay $105/month and have their premiums deducted from their Social Security checks.

Because there is requirement that Medicare cover 25% of expenses from premiums, Medicare recipients who do not fall under the conditions described in (c) above will have to make up the difference to bring the revenues from premiums up to 25%. This means that these other Medicare recipients could experience substantial increases in their Part B premiums. While the numbers have not yet been released, these increases could be around 50%.

Unless there is a change in the law or the Obama administration finds a way around this problem, the following groups will be affected:

A) People who enroll in Medicare in 2016

B) People who pay premiums directly to Medicare. This will include people who have chosen to delay claiming their retirement benefits, but have signed up for Medicare.

C) People who pay higher-income Medicare premiums. These are individuals who have income (MAGI) over $85,000 or married couples with income over $170,000.

While these increases in premiums may last only one year, a new law passed this past spring will increase Medicare premiums in 2018 for higher-income individuals and families. At present, we can only forecast how much these premiums will increase. Projections from the Kaiser Family Foundation can be found here .

We do not recommend changing Social Security claiming strategies based on these possible premium changes. The purpose of this post is to provide an alert to those people who might be affected.

Do Social Security Benefits Really Increase by 8 Percent a Year?

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When talking with clients, I often hear the comment that their Social Security benefits will increase by 8 percent if they delay claiming a year. This statement is true only in one instance: claiming at 67 rather than at 66 increases one’s retirement benefits by exactly 8 percent. (Note: the following applies to those with a full retirement age of 66.)

The actual year-over-year percentage gain for ages 62 to 70 are shown in the following table. Those gains range from 6.5 percent (claiming at 70 rather than 69) to 8.4% percent (claiming at 64 rather than 63).

The confusion arises from the fact that after one reaches age 66, their retirement benefits will increase by 8 percent of their age-66 benefit for each year one delays. But, this is a very different thing from an annual percentage increase.

Claiming Age	Gain from Preceding Year
62	na
63	6.7%
64	8.4%
65	7.6%
66	7.2%
67	8.0%
68	7.4%
69	6.9%
70	6.5%

Social Security Benefits for Same-Sex Married Couples

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According to a recent post on the AARP website, “…legally married same-sex couples can get spousal benefits only if they live in one of the 13 states (plus Washington, D.C.) that recognizes those marriages. They may also be eligible if they live in a state that recognizes civil unions or domestic partnerships and grants those partners inheritance rights if one of the partners dies without a will.”

The SSA is working with the Justice Department to finalize rules for those living in states that do not recognize same-sex marriage. If the SSA follows the IRS, benefits will be available to same-sex married couples regardless of state of residence. With the government shutdown, promulgation of these new rules will undoubtedly be delayed.

The AARP website states the following:

“Experts advise retired same-sex couples living in non-recognition states to still file for benefits, to establish the date of their request. In states that don’t recognize same-sex marriages, you’ll be denied. But if the law changes, couples could petition for back benefits based on their claiming date.”

We want to add a word of caution here. A couple should file for benefits now only if they have decided that their best claiming strategy involves one or both spouses claiming as soon as possible. For many couples, delayed claiming may prove profitable. So, careful thought should be given before filing for benefits now. It may be the wrong thing to do.

It is possible to withdraw a claim once it has been approved. But you must do that within 12 months of the start of benefits. Moreover, it is a one-time option. You may want to save that option for the future.

Need help in figuring out your optimal claiming strategy. We can help with our custom reports. Start here.

Social Security’s Windfall Elimination Provision: How to Quickly Calculate Your Penalty

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For those of you affected by the Windfall Elimination Provision, finding out how much your Social Security benefits will be reduced is no easy matter. You can ask your local SSA office for help, but it may take you weeks to get an appointment to see a representative. Or, you can use the WEP calculator on the SSA website. However, that calculator requires you to enter your entire Social Security earnings history. Tracking down and entering that information may involve significant time costs for some.

In this post, I offer a quick way to calculate the WEP penalty for those with 20 or fewer years of substantial Social Security earnings. Most people with a government (non-SS) pension probably fall into this category.

Note that the following discussion applies to those turning 62 in 2013. If your year of birth is before or after 1951, the numbers shown below represent for you a close approximation for your WEP penalty.

To determine your WEP penalty, you need to compare three numbers:

55.6% of your full retirement age benefit (from your SS Statement); this is your tentative WEP penalty;
$396; this is one of two limits on your WEP penalty (it changes with each COLA adjustment); and
50% of your non-SS government pension; this is the second limit on your WEP penalty.

Once you have these three numbers, pick the smallest one. That is your WEP penalty: that is, the reduction in your full retirement age (FRA) benefit due to your non-SS government pension.

Here are a couple of examples. Suppose your FRA monthly benefit is $800 and your non-SS pension is $500. The three numbers for finding your WEP penalty are:

$444 (= 55.6% of $800)
$396
$250 (=50% of $500)

So, your WEP penalty is $250, which reduces your FRA SS benefit from $800 to $550.

Next, in the above example let’s change the non–SS pension to $1,000, keeping the FRA benefit at $800. The three critical numbers are:

$444
$396
$500 (=50% of $1,000)

In this example, your WEP penalty is $396, which reduces your FRA benefit from $800 to $404.

This WEP-adjusted FRA benefit is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

It is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

Further Detail

The following table provides information on the WEP penalty for all of the relevant substantial-earnings years (for those turning 62 in 2013). The row for “20-or-fewer” years of substantial earnings shows the penalty values used in the above examples. (Note that “Limit #1” changes whenever SS benefits get a COLA adjustment.)

Years with Substantial Earnings	WEP Penalty Rate	WEP Penalty Limit #1	WEP Penalty Limit #2
20 or fewer	55.6%	$396	50% of pension
21	50.0%	$356	50% of pension
22	44.4%	$316	50% of pension
23	38.9%	$277	50% of pension
24	33.3%	$237	50% of pension
25	27.8%	$198	50% of pension
26	22.2%	$158	50% of pension
27	16.7%	$119	50% of pension
28	11.1%	$79	50% of pension
29	5.6%	$40	50% of pension
30	0.0%	$0	50% of pension

Here is an additional example of how to use the above table. Assume you have 25 years of substantial earnings. Further, suppose your FRA monthly benefit is $800 and your non-SS pension is $500. The three numbers for finding your WEP penalty are:

$222 (= 27.8% of $800)
$198
$250 (=50% of $500)

So, your WEP penalty is $198, which reduces your FRA SS benefit from $800 to $602.

This WEP-adjusted FRA benefit of $602 is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

And, again, it is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

Social Security Benefits and the Time Value of Money

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Clients sometimes ask us why we conduct our optimization analyses with discounted dollars (future dollars converted to present-value equivalents), rather than with the actual cash flow of Social Security benefits. After all, they say: “actual cash flows are easy to understand, but ‘discounted’ future dollars is a confusing concept.”

Here is why we discount future dollars: No one believes that $100 to be received 30 years in the future is worth as much as $100 to be received immediately. Our approach is consistent with this universal belief and the behavior that stems from it.

We translate future dollars into present value equivalents, using a 3% “real” discount rate (that is, over and above any inflation). This rate implies, for example, that $100 to be received one-year from now is worth about $97 today. And, a $100 to be received 25 years from now is worth about $49 today. For more discussion on the mechanics of discounting, go here.

Some Social Security optimization programs do not discount; that is, they base their analyses on undiscounted cash flows, treating $100 30-years from now the same as $100 today. So, their approach is totally inconsistent with how actual people think and behave. And, the advice coming from these software packages misleads people into thinking that they should claim benefits later than makes sense from a financial perspective. Of course, many people want to claim sooner rather than later, so giving them misleading advice to claim later than makes sense just causes them to ignore the advice that they just paid for.

Here is an illustration of how the undiscounted cash flow approach seriously tilts the advice toward late claiming. Assume that Andy is single. He is now 60 years old. His SS benefit amount at full retirement is $2,000. His life expectancy is approximately 79.

The naive cash flow analysis suggests that Andy should claim benefits at age 67. In sharp contrast, when we convert future values into present value equivalents with a 3% discount rate, we find that the optimal claiming age for Andy is 62! Discounting really matters, as this example illustrates.

Here is another illustration, for a married couple this time. Let’s use Fred and Ann for our example. Fred was born in 1950, Ann in 1953. His full retirement age benefit is $2,500; hers is $1,500. They both have normal expected life spans: 82 for him and 86 for her.

No Discounting

Using the naive cash flow analysis (no discounting*), the optimal strategy that maximizes that cash flow is:

Fred files and suspends at 66 in 2016
Ann claims spousal at 66 in 2018 ($1,250/mo)
Fred claims retirement at 70 in 2020 ($3,300/mo)
Ann drops spousal and claims retirement at 70 in 2022 ($1,980/mo)
Ann switches to survivor’s benefits in 2033 ($3,300/mo).

By the time Ann dies at 86, this strategy will have yielded $1,090,000 in Social Security benefits. (If this time stream of benefits is discounted at 3%, we get a measure of Social Security Wealth equal to $677,000.)

Our Approach: Discounting at 3 Percent

When we discount future dollars using a 3% discount rate**, we would recommend the following for this couple:

Ann claims retirement at 62 in 2014 ($1,125/mo)
Fred claims spousal at 66 in 2016 ($750/mo)
Fred claims retirement at 70 in 2020 ($3,300/mo)
Ann claims survivor’s benefits in 2033 ($3,300/mo)

By the time Ann dies, this strategy will have yielded $1,071,000 in Social Security benefits, measured on a cash-flow basis. (Converted to a discounted present value of Social Security Wealth, these recommendations produce $685,000–more than the no-discounting recommendations previously discussed).

Notice that by discounting at 3%, we place more emphasis on near-term benefits, which yields recommendations for the couple to start claiming four years earlier than does the naive cash flow analysis.

The naive cash flow recommendations offer a $19,000 advantage over the 24-year time period considered here. But, that approach takes 16 years to gain an advantage over our recommendations, based on discounting at 3%. This point is illustrated in the following graph.

The horizontal axis shows the number of years used in the analysis, from 1 to 25. The vertical axis shows the cumulative losses or gains from following the naive cash flow recommendations versus our recommendations.

By the time the naive cash flow recommendations kick-in (year 5 in the graph), they are already $89,000 behind our recommended approach. And they don’t gain the advantage for another 11 years (year 17 in the graph). And then the advantage is relatively modest ($19,000 received when Ann is about 78 and Fred is about 81, very near the end of his expected life span).

So, by emphasizing near-term benefits over distant benefits, our approach leads to optimal recommendations that typically bring Social Security claimants money years earlier than the naive cash flow recommendations. Moreover, our approach is consistent with how people actually think and behave.

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*In this example, discounting future benefits at any rate below 1.75% leads to the same set of recommendations: claim as late as possible.

**In this example, any discount rate between 2% and 5.5% produces the same recommendations, so there is nothing critical about our 3% discount rate.

Social Security Benefits and the Time Value of Money: An Example

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Occasionally, someone asks me for an explanation of the mechanics of discounting future values to get present value equivalents. In this post, I provide an illustration of those mechanics. You can find some additional discussion on our main website.

Suppose that Mary, a single female, is turning 62. She will receive $25,000 a year if she claims at that age. Over a normal life span, up to age 86, she will receive a total of $625,000 (ignoring any COLAs).

A serious problem with this total amount is that it assumes that the $25,000 received 25 years from now has the same value to Mary today as the $25,000 she will get over the next year. Clearly, these two amounts don’t have the same present value: $25,000 25 years from now is worth a lot less than $25,000 received over the next 12 months.

The conventional method for translating future values into present value equivalents is to discount those future values by a discount rate (or discount factor). For our calculations, we use a 3% real discount rate (that is, 3% over and above any inflation).

So, the present value of $25,000 to be received next year would be calculated as: $25,000/1.03 = $24,272. In other words, at a 3% discount rate, $25,000 received next year is worth $24,272 to you today.

From an investment perspective, discounting is the twin of compounding. If you could invest $24,272 today at 3% (above inflation), you would have $25,000 in one year (= $24,272*1.03).

The calculations for the entire 25 year period used in this example are shown below:

Calculating Present Values

The undiscounted annual benefits ($25,000) are shown in the second column. The appropriate discount rate is shown in the third column. And the discounted amounts are shown in the last column.

Our measure of Social Security Wealth is the sum of the last column: $448,389 in this instance. Compare that amount to the undiscounted amount of $625,000. The discounted amount is about two-thirds of the undiscounted amount. (We have found this two-thirds relationship to be a fairly reliable rule of thumb in many instances.)

One useful way to think about the discounted total amount is as follows: $448,389 invested at 3% above inflation will yield a time stream of annual payments of $25,000, for a inflation-adjusted total of $625,000 by year 25.

Now, you may wonder why we use a 3 percent discount rate. That is an issue for a future post.

T Rowe Price Social Security Benefit Calculator: A Broken Tool

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T Rowe Price recently rolled out a new Social Security benefit calculator. Unfortunately, their calculator is not ready for prime time. In fact, in its current state, it is not ready for any time. It gives incomplete and misleading advice that, if followed, could cost some married couples $100,000 or more.

I will illustrate some of the problems with the T. Rowe Price (TRP) Social Security calculator with data for a hypothetical married couple, John and Mary. I assume John and Mary were born in 1952 and 1954, respectively. John’s life expectancy is 83; Mary’s is 95. John’s Social Security benefit at his full retirement age (FRA) is $2000 a month, while Mary’s is $100 a month.

Example #1

For this example, I selected the following as this couple’s goal: “We want to maximize the survivor benefit and also receive income early, if possible.” (The TRP calculator allows a user to select among several goals.)

Here is the set of recommendations from the T. Rowe Price calculator:

Mary claims retirement benefits at 62, receiving approximately $900 per year.
When John turns 66, he files a restricted application for spousal benefits, receiving approximately $600 per year.
When John turns 70, he claims his own retirement benefits, receiving approximately $31,680 per year.

And that’s it.

Do you see a problem here–a really big problem?

The T. Rowe Price Social Security calculator has failed to include a recommendation that Mary should claim a spousal supplement as soon as John turns 70. At that point, she could pick up an extra $10,800 a year in spousal benefits. These spousal benefits would continue until John’s expected death at age 83, implying that the T. Rowe Price Social Security calculator has mislaid about $140,000 in this case!

That’s an amazing–really, inexcusable–oversight.

Example #2

For this second example, I assume that Mary’s retirement benefit at her FRA is $900 per month. Other personal characteristics remain unchanged.

For the couple’s goal, I assume that John plans to retire at age 66 and that Mary plans to retire at 70.

Here is what the TRP calculator recommends:

John should file for his retirement benefits at age 66, receiving approximately $24,000 per year.
Mary should file for her retirement benefits at age 70, receiving approximately $14,256 per year.

Again, that’s it.

And, again, I ask: do you see a really big problem here?

The TRP calculator fails to mention that Mary can claim spousal benefits at age 66, using a restricted application and letting her retirement benefits grow until age 70. These spousal benefits would equal $12,000 a year, or $48,000 between age 66 and 70 Mary.

I have not yet thoroughly investigated the TRP calculator. But, from what I have seen, it is easy to conclude that this calculator is seriously broken.

For an example of a calculator that actually works, go here.

On Social Security, Birds, Bushes, and Hands: The Time Value of Money

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Many people we encounter are dead set on claiming their Social Security retirement benefits immediately when it becomes available. They often use some variation of the well-known proverb: a bird in hand is worth two in the bush. In citing this proverb, these individuals are expressing a rational preference for money now over money later. A quick web search suggests that the bird in hand phrase dates to the 13th century, so its originator certainly never had to worry about when to claim Social Security benefits. It’s worth thinking about how this proverb applies to the Social Security claiming decision.

Taken literally, the statement suggests an exchange rate of one bird in hand for every two birds in the bush. We can think of this exchange rate between bird in hand and birds in the bush in terms of the “discount rate.”

Instead of birds, let’s talk about something we’d rather have in our hands: $100 bills. Furthermore, let’s assume that $100 bills currently in the bush will be in our hands one year from today. With these assumptions, our proverb becomes: $100 today is worth $200 next year. This represents a 100% discount rate, because it implies that a 100% return on the initial $100 is needed for one to break even. Needless to say, this is a very high rate, and most people would be willing to accept far less than $200 next year for $100 today. So, the bird in hand proverb may not provide the best guidance, at least when taken literally.

When taken figuratively, though, the proverb illustrates the reasonable preference for money now rather than money later. To most people, money received today is indeed worth more than money received next year, because they may wish to spend it now, or if not, they can invest it for a positive return. While almost everyone would give up $100 this year for $200 next year, almost no one would give up $100 this year to receive only $100 next year. The question of how much money one demands next year in order to give up $100 today will elicit different responses from different individuals, even if we ignore inflation, and there is absolutely no risk of next year’s payment not being made on time. Some people might be willing to trade $100 today for $101 next year, while others might demand $110 or more. For our Social Security reports, we settled on $103 as the amount that the typical person would demand next year in return for $100 today, which represents a 3% discount rate. We chose 3% because it is the approximate return on long term U.S. treasury bonds, which are considered to be an extremely safe investment (like Social Security). In our analyses, our 3% annual discount rate accounts for a moderate preference for receiving money in the present.

The discussion gets more complex when one is dealing with multi-year trade-offs. For example, a single person claiming at 70 instead of 62 gives up benefits for years 1 – 8, and then gets a larger payment in each subsequent year. A married couple might have to decide between claiming at 62 or implementing one of many special strategies, which would result in them giving up all benefits for a few years, getting smaller benefit payments for a few years, and then getting larger benefit payments in each subsequent year. Invoking our proverb, we’re now trying to determine whether two birds in hand is worth more than a bird in a nearby bush and a four birds in a slightly more distant bush!

The relative values and proximities of these “birds” will vary from situation to situation, but the takeaway point is that the birds in the bushes are sometimes considerably more desirable than the bird in hand under standard discount rates. By implementing special strategies, it is often possible to get considerably more from Social Security, even after incorporating the discount rate. Some may choose the bird in hand in spite of considerable returns on strategies that involve delayed claiming, but no one should make this choice blindly. Everyone has their tipping point. For example, what those two birds in the bush are geese that lay golden eggs? Do you still prefer that seagull in your hand?

How to Calculate the Social Security Supplemental Spouse Benefit

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A client recently asked me: “Should I claim my modest Social Security retirement benefit early, say at 62, and then switch to my larger spousal benefit later on?” This question shows a serious misunderstanding of the relationship between retirement benefits and spousal benefits.

One can never switch from retirement benefits to spousal benefits. If a person is receiving retirement benefits (or they have filed and suspended receipt of those benefits), then the spousal benefit becomes a supplemental benefit, not a substitute benefit. In other words, when a person is eligible for both retirement and spousal benefits, the Social Security Administration first calculates their retirement benefit, and then adds their spousal supplement. While this distinction may appear trivial, it can nevertheless have significant implications for Social Security claiming decisions, as I will show below.

Just to keep things reasonably simple, I limit the following discussion to those circumstances in which a person claims retirement benefits early and then claims spousal benefits at their full retirement age (FRA). Note that if a person claims retirement benefits before FRA and they are eligible for spousal benefits at the time of claiming, then the SSA “deems” that both benefits are being claimed. So, the case I discuss here applies only to those who could not claim spousal benefits at the time they claim retirement benefits. A person cannot claim spousal benefits unless their spouse has claimed his or her own retirement benefits. (This restriction does not apply to ex-spousal benefits, but that is a topic for another time.)

Let’s look at an example to see how this works. Consider a hypothetical couple: Karen and Burt, who are both 62. Karen’s retirement benefit at age 66, her full retirement age (FRA), is $400 a month. Burt’s age 66 (his FRA) benefit is $2,000. Karen’s maximum spousal benefit is $1,000 at 66 (that is half of Burt’s age 66 retirement benefits). Burt plans to file for retirement benefits at 66, at which point Karen will be eligible to claim spousal benefits.

Karen knows that she can claim retirement benefits early at age 62 and get $300/month (75% of the $400 she could get at her FRA). She also believes that at her FRA she can switch to her spousal benefits and get $1,000. She is wrong on this last count. By claiming spousal benefits at her FRA, she can get the full spousal supplement, but that will not bring her up to $1,000.

Here is how the full spousal supplement is determined. It equals 1) a person’s maximum spousal benefit at their FRA ($1,000 for Karen) minus 2) that person’s retirement benefit at FRA ($400 for Karen). By claiming spousal benefits at her FRA, after claiming $300 in retirement benefits at 62, she gets a full spousal supplement of $600 (= $1,000 – $400). This brings her total benefit, at FRA, up to $900, not the $1,000 she was expecting.

Claiming retirement benefits early results in a significant reduction in those benefits. Karen thought she could claim retirement benefits early and then dodge that penalty by “switching” to spousal benefits. But, that is simply not possible, as the above example demonstrates. The early retirement penalty will stick with Karen until she dies (or until she switches to widow’s benefits— a topic for another post).

A final point: just as early claiming of retirement benefits is penalized, so is early claiming of a spousal supplement. But, just to add to the complexity, the SSA uses different early claiming penalties for the two benefits.

For much more information about benefits available to married couples, go here.