Social Security's labyrinth of 1,728 rules written in gobbledygook and riddled with nasty traps is duping Americans out of retirement benefits that they've earned — in some cases, amounting to hundreds of thousands of dollars.
So says Social Security expert Laurence J. Kotlikoff, Boston University economics professor and president of financial planning software company Economic Security Planning. He has served as consultant to the U.S. Department of Labor, Merrill Lynch and Fidelity Investments, among other institutions globally.
Kotlikoff's newest book, "Get What's Yours: The Secrets to Maxing Out Your Social Security" (Simon & Schuster), is an often humorous — that's right, humorous — guide on how to triumph over Social Security's gotchas and what the professor calls a deeply flawed system, which has thousands of other rules stemming from those basic 1,728. "Danger lurks," Kotlikoff writes.
Financial advisors should find the detail-packed volume a godsend to help clients navigate the confusing maze.
In an interview with ThinkAdvisor, Kotlikoff stresses that it's higher income earners, with millions of dollars in benefits at stake, who stand to be the biggest winners from getting Social Security-savvy and avoiding serious mistakes, like when to start benefits and what benefits to take.
Co-authors Philip Moeller, who writes about retirement for Money magazine, and Paul Solman, a PBS NewsHour business and economics correspondent, helped Kotlikoff to elucidate the system's "windfalls and pitfalls."
The three also quote verbatim several truly bizarre Social Security rules, like this one: "If you are a minor convicted of intentionally causing your parent's death, you may be denied survivor benefits on the earnings of your parent."
Kotlikoff pulls back the obfuscating Social Security curtain by also explaining auxiliary benefits, such as those based on the work records of an ex-spouse. He hammers home the key concept that an individual is entitled to receive only one benefit at a time: If you apply for two at once, he writes, one "effectively vanishes."
Kotlikoff, who has provided expert testimony to congressional committees, insists that Social Security has concealed penalties, "devious rules," hidden benefits for the disabled and on top of all that, employs personnel who all too often supply earners with the wrong information.
ThinkAdvisor recently caught up by phone with Kotlikoff, who has consulted to The International Monetary Fund and The World Bank. He believes that to a degree the U.S. government has deliberately made Social Security rules excessively opaque and complicated as a way to save money and reduce benefits. Here are highlights of our conversation:
ThinkAdvisor: You write that Social Security is a maddening system with perverse and seemingly crazy rules. That's some gift you're giving Social Security on its 80th birthday this year!
Laurence Kotlikoff: I'm coming from outrage. The way it treats people is disgraceful. Most people aren't getting the right answers. Very few are doing the right things. And most folks probably have no idea that they can suspend or withdraw benefits. Can't the Administration help them make the right decisions?
About 40% of the time, Social Security people are giving the wrong answers. They're very, very poorly trained and aren't supposed to give advice. But they are routinely giving advice and telling people they can't do things when in fact they can.
Should wealthy investors care about receiving Social Security benefits?
Higher earners have the most to gain from getting this right. But a lot of them think that Social Security is a poor person's program.
You write that Social Security should be viewed as an insurance policy rather than as an investment. That's an enlightening notion.
A lot of people, especially those in the financial industry, think Social Security is like investing in stocks and bonds. But it's not at all, because you can't think about it on a break-even basis, like, if I take benefits early vs. later, maybe it's a break-even. Nobody evaluates homeowner's insurance that way. First and foremost, Social Security is longevity insurance, and you have to evaluate it the correct way.
You point out that an individual may have to pay federal taxes on up to half their benefits. Wow.
The government gives and takes. There's a lot of nasty stuff. For most people, Social Security is their key financial asset, so they need to manage it properly. It's certainly worth it.
You mention 25 Social Security gotchas. What's the worst?
The biggest trap is the deeming provision [penalty for filing before full retirement age if eligible for both retirement and spousal benefits]. Your benefit is permanently reduced because you took it early, never realizing that you were being forced to do this.
What's Gotcha No. 2?
The minute you file for retirement benefits, you're thrown into Excess Benefit Hell, because once you do that, you can never take an auxiliary benefit by itself.
What are some auxiliary benefits?
Spousal benefits, divorced spousal benefits, widow's benefits, divorced widow's benefits, survivor benefits, divorced survivor benefits.
I'm sure most people don't know much about those. What's your advice?
The thing is not to wait and take everything at the last minute because one benefit will wipe out the other since you can get only the larger of the two. So take one benefit early, and let the other grow.
One thing most people probably do know is that if they wait to take Social Security until the maximum-benefit age of 70 instead of at 62, they'll get more money each month. Is that worth doing?
