Continuing a Conversation on Social Security

By Tara Siegel Bernard, New York Times
July 16, 2009

The rules covering Social Security are so numerous and so complicated that it isn't easy to figure out the optimal time to take benefits. As we recently wrote, this decision is different for each person and depends on a variety of factors: your health, your savings, when you stop working, whether you are married or single, and more.

After receiving a flood of comments and queries from readers, we decided to continue the conversation about Social Security online. Many readers had similar questions, including how going back to work might affect your Social Security check. The market collapse led many people to delay retirement, while some people who had already retired went back to working part time. Several readers also questioned the strength of the Social Security system and wondered how that should factor into their decision-making. Some said they had already made up their minds, deciding that it was best to start collecting the money as soon as possible.

So below, we've tried to answer some of the most popular queries. We also included some helpful tips from readers about little-known rules:

INVESTING EARLY BENEFITS

Q. What if I begin to draw Social Security at 62 and invest the money at a moderate interest rate? Will I always be ahead of those who wait to draw benefits at 66 or 70? What would that interest rate be?

- Rick Edelen

A. Sure, you might come out ahead. Or you might not, as the market crash and subsequent volatility has reminded us.

Anthony Webb, a research economist at the Center for Retirement Research at Boston College, ran the numbers for us. His conclusion: taking Social Security early (at 62) and investing your checks (until full retirement age, now 66, or later) is not worth the risk you need to shoulder to come out ahead.

Consider someone who is set to receive $1,000 a month at full retirement age, or $750 a month at age 62. If he takes the $750 ($9,000 a year) and invests it for four years and earns an inflation-adjusted return of 7 percent, (excluding taxes and investment fees), he would have $41,458 by age 66. If he then draws down that money at the rate of $250 a month, it will last another 40 years, well past age 100, Mr. Webb says. (Remember, you'll add that amount to the $750 you're already receiving for a total payment of $1,000, which you would have collected if you waited until 66) .

But if the money earns 3 percent, it will only last until age 80. If the money earns nothing - better than most people done over the last decade - the money will run out by age 77, he said. "Given that a man who has made it to age 62 has a 57 percent chance of living to 80, and a 20 percent chance of living to 90, there is a very real risk that he will outlive his money," Mr. Webb said.

INSOLVENCY

Q. What about the elephant in the room? Social Security is insolvent as currently structured. Either benefits will have to be reduced, taxes will have to be raised, or perhaps benefits will be means-tested. Ignoring these issues is a trip down fantasy lane.

- David Rapaport, Scarsdale, N.Y.

Q. I read your article in Saturday's New York Times on when to collect Social Security. It was very interesting. However, one thing you didn't cover in your article was the possibility of Social Security running out of money. Because of this, my husband is considering collecting Social Security at 62, earlier than we had previously thought. Can you tell me what your thoughts are on this?

- Francine Rosen

A. Experts say that if you've made it to 62 and the rules haven't changed, they're not likely to change for your generation. And if you don't take benefits at 62, you're unlikely to be penalized if you wait until 70. "I think they would sooner default on government debt than cut Social Security benefits of the elderly," said Laurence J. Kotlikoff, a professor of economics at Boston University who also created ESPlanner, financial planning software. "There are about 48 million of these folks and they tend to vote," he said, referring to people over 60.

Michael J. Astrue, the Social Security commissioner, has said benefits for today's retirees are safe. But unless something is done to reform the system, the trust funds will begin to lose money in 2016 and run out by 2037, though Social Security tax income would be enough to pay about 75 percent of scheduled benefits through 2083, said John Shallman, a Social Security spokesman.

Several financial experts still say that delaying benefits is the best form of insurance you can buy (think of the money you're not receiving as payment) to ensure you'll have a more substantial cushion later in life. "We are still looking at this as the best longevity insurance available, regardless of whether one of the future fixes is an overall benefits reduction," said Lesley Brey, a financial planner in Honolulu, "because it will be applied whether you take it early or take it later."

But if not collecting Social Security right now is keeping you up at night, well, then, maybe you should reconsider. "If you sleep better," Ms. Brey says, "then that's a planning goal, too."

None of this bodes well for younger generations, who will probably end up paying more in Social Security taxes and receive less in benefits. Many younger people don't think they'll get anything at all. "It's more likely that they would reduce the benefits for younger people and go after the next generation some more, which is pretty awful," said Professor Kotlikoff. "But it's the way Congress works all the time."

WORKING WHILE COLLECTING

Q. Does working while you're receiving Social Security reduce your benefits?

A. There is a lot of confusion about this issue. If you haven't yet reached your full retirement age, earning money above a certain threshold will reduce your benefits. But your checks will increase once you hit full retirement age to account for the time your benefits were withheld. (Remember, your full retirement age is different from the day you stop working for good. For people born from 1943 to 1954, the full retirement age is 66, and it creeps up for younger people.)

Not surprisingly, this provision angers many retirees because many people are under the impression that they are being taxed for going back to work. That's not really the case. You do receive a smaller check, but you basically earn credit during the period you did work, much as if you decided to delay taking benefits.

So here's how it works: In 2009, individuals who collect Social Security before their full retirement age will have their benefits reduced by $1 for every $2 earned above $14,160 (wages only; investment earnings don't apply). In the year you will reach full retirement age, your benefits are reduced by $1 for every $3 earned above $37,680. But the month you hit your full retirement age, you can earn as much as you want without any loss of benefits, said Linda Lauria, a spokeswoman for the Social Security Administration.

Say you started benefits at age 62, but then decide to go back to work after a year. Once you turn 66, your benefits will be recalculated: the system will see that you initially planned on taking benefits four years early. But since you worked for three of those years, your check will be permanently higher because you really took benefits only one year early.

If you do go back to work - and you end up having one of your best earnings years - you may be able to get an even higher benefit based on those earnings (it's automatically calculated).

For more information on how this all works, visit the Social Security Administration's Web site (preferably after caffeination).

FREEZING BENEFITS

Q. If you have already starting collecting Social Security, can you freeze your benefits at any point?

A. Some people can. If you are over full retirement age but not yet 70, you can voluntarily suspend Social Security to earn delayed retirement credits, where you basically earn extra credit (and a higher check later) for each month you don't collect benefits. For people born in 1943 and later, you can earn up to 8 percent more a year for each year between your full retirement age and age 70, according to the Social Security Administration. People under full retirement age do not have this option.

Do you wish you never started collecting benefits? There's also the option of paying it all back and restarting the clock. But this gets complicated. You will probably have to pay back more than what you actually received each month, since Medicare premiums and income taxes may have been deducted. Some planners discourage married people from pursuing this strategy - which amounts to a free loan from Social Security - because if the higher-earning spouse dies early, the surviving spouse doesn't have the option to pay the money back in exchange for higher benefits. (There's also the possibility that this option could go away in the future, experts said).

KNOWING THE RULES

Q. In your article on Saturday, you refer to "file and suspend" for the higher earner in a married couple to bump up the lower earner spouse to the spouse benefit. I called Social Security, and they say this is wrong. The higher earner must be collecting (continuously) for the spouse to get the spouse benefit (as long as the higher earner is still alive).

- Phil Bessler, Berea, Ohio

A. You're not the first person to be told that this can't be done. Some of the people who work in Social Security offices are unaware of some of the more complex filing strategies that are completely and 100 percent legal. (Honestly, I can't blame them - I'm not sure that any one person can be well versed in the thousands of byzantine rules that govern Social Security.)

These strategies include paying your benefits back and restarting the clock at a later date, or filing and suspending your benefits so that your spouse can claim benefits while you wait to collect higher benefits later, Also, married individuals who claim a spousal benefit at full retirement age can switch to their own benefits at a later date (again, by waiting, their benefits continue to accrue to a higher amount).

So what's a retiree to do? "If you are doing anything other than plain-vanilla filing, we highly recommend walking into your Social Security office, and ask to talk with the technical expert," said Lesley J. Brey, a financial planner who also teaches members of the National Association of Personal Financial Advisors about the ins and outs of Social Security.

DIVORCE

Q. I didn't see in all the discussion of spousal benefits the impact of divorce. It is my understanding that if a couple has been married 10 years or more, the first (usually) wife will receive (the former husband's) Social Security benefits. I wish that you had said something about this in the article, given the high divorce rate these days, and the fact that so many people remarry, and then live to a ripe old age.

- Anita Robertson, Blackstone, Mass.

A. That's right. If you are divorced but were married for at least 10 years, you can collect retirement benefits on your former spouse's record - as long as you're at least 62 and your former spouse is entitled to or receiving benefits, according to the Social Security Administration. But if you remarry, you generally can't collect benefits unless your second marriage ends (death, divorce and annulments all count).

If your former spouse dies, you can still receive survivor's benefits (as long as you were married for a decade or more). This won't affect any benefits paid to other survivors - as long as you're 60 or older - so you won't have to worry about angering a new spouse. But things can get sticky if you have a child. If you're the surviving divorced parent who has the former spouse's child (under age 16 or disabled) in your care, your benefits will affect the benefits of others on the spouse's record.

Thinking of remarriage? It may pay to wait, because survivor benefits are affected. If you remarry after age 60 (50 if you're disabled), you can still collect on your former spouse's record. Once you are 62, you can get benefits on your new spouse's record if they are higher. (Remarriage doesn't affect any benefits being paid to your children), according to the Social Security Administration.

BENEFITS FOR CHILDREN

Q. There is one other element regarding collecting Social Security that came as a great surprise to me. My daughter is a teenager, still in high school, and I discovered that if I started taking Social Security at age 62, she would get a substantial check every month, too! And her check is based on what I would have gotten at full retirement age. The checks continue until she graduates or turns 19, if still in school. With so many "older dads" like myself, this little known benefit probably affects more people than in the past. And for us, it certainly changes the dollar equation as to when to start receiving benefits.

- Allan, Santa Cruz, Calif.

A. Great point, Allan. Some children are entitled to benefits as long they meet certain conditions. The parent must be disabled or retired and entitled to Social Security benefits, or the parent must have died after working long enough to qualify for Social Security benefits. The child must be unmarried, under the age of 18 (or under 19 if a full-time student in grade 12 or under). Children 18 or older and disabled are also entitled to benefits (as long as the disability began before age 22). You can find more details on the Social Security Web site.

SAME-SEX COUPLES

Q. Your article made it sound as if there are only two groups of people: married and single. In fact, there are others: married couples whose marriage is ignored by the federal government and those who are not allowed to get married at all. Perhaps you could write about the potentially devastating economic effect that lack of federal recognition can have on same-sex couples?

- Robyn Ochs

A. Same-sex married couples are definitely at a disadvantage. They have even more issues to wrestle with since they are viewed as perfect strangers in the eyes of the federal government. The same goes for couples who have had civil union ceremonies or are legal domestic partners.

That means they aren't entitled to spousal benefits, which has many implications. For instance, if the lower-earning spouse stays home to raise the children, he can claim benefits only on his own earning record, if he has one. He won't be able to claim his partner's higher benefits as a spousal benefit. Nor can he collect survivor or disability benefits.

Other than saving more, which is always a good idea but typically hard to do, couples can purchase a term life insurance policy. "If the couple has time to save and can afford it, my own preference is to manage the lifetime mortality risk through cheap term and beef up the savings," said Peter Berkery, author of two books on financial planning for same-sex couples. "There's every chance that, by the time a long-term couple hits retirement, the Social Security survivor benefit may be 'gravy.' "

But if you need your partner's Social Security benefits for living expenses, Debra Neiman, a financial planner in Arlington, Mass., recommends purchasing life insurance to replace the income you stand to lose if your partner dies. So you would essentially figure out how much you need per year and multiply that by the number of years you want that protection (this is hard, though, since nobody knows precisely how long they'll need protection).

So if you expect you'll need to replace $12,000 a year for 20 years, you would buy a term policy worth about $240,000. "This neglects inflation and is a simple illustration," Ms. Neiman said. And "each couple needs to take their medical history and family longevity into account in order to come to the right decision."

Of course, you need to run the numbers to see if this makes financial sense for you. Term insurance is significantly more expensive later in life. For example, a $250,000 policy with a 25-year term would cost a 62-year-old woman about $1,870 a year, while a man would pay about $2,740 annually, according to AccuQuote. (These quotes are for healthy nonsmokers.) A $500,000 policy with a 25-year term would cost about $3,400 a year for a 62-year-old woman and $5,045 for a man.

http://www.nytimes.com/2009/07/16/your-money/16retire.html?em