Kotlikoff: Congress Took a ‘Meat Cleaver’ to Social Security Claiming Rules

You mentioned "do-gooders." Such as?

Alicia Munnell, a professor at Boston College, who's a friend of mine, was quoted a great deal in the press as saying that people were pointing out strategies for how to maximize their lifetime Social Security and that that would cost the government over $10 billion in people taking advantage of the system. She said the [file-and-suspend strategy] was a game only the rich can play and that they were being opportunistic — so let's wipe it out. But she was conjecturing. There was no evidence to support that. By the way, she herself took advantage of that strategy — but then she didn't want others to. The authors of the new law "operated on Social Security's rules with a meat cleaver, not a scalpel," you write.

I don't think a single member of Congress had any idea what those provisions meant [for the middle class, poor and disabled]. But now, because of the law, those people will be influenced to do exactly the wrong thing – take benefits earlier and not maximize the benefits they could otherwise get.

In the revised book, you spotlight several more "gotchas" — Social Security traps — resulting from the new law, which can reduce earners' benefits forever. The April 29 deadline obviously was one. What are others?

The file-and-suspend strategy isn't available to the disabled as it is to the non-disabled. I view that as pure discrimination. When we wrote the first edition, disabled people could engage in that strategy if they took the steps we [laid out]. Not too many had used it before. So when, on our recommendation, they started doing it, suddenly the [government] rewrote the rules to prevent them from doing so. That was pretty nasty.

Another gotcha under the new law?

"Deeming" was extended through age 70. This involves being penalized for taking your spousal benefit early. Extending that to 70 is bad news, but the good news is that being aware of it can keep people from making a mistake that will cost them money.

Social Security rules are very much focused on marital status. What's one way that is reflected in the new law?

The Congress is supposedly family-oriented, but part of the law is a huge incentive for some couples to get divorced, live together in sin and then get remarried when they're 70 because that can give them as much as $120,000 more. The new law made it much more financially attractive to do this. Provided they were married for 10 years or more, if each spouse is 63 and they divorce at 64, they both can collect divorced spousal benefits on each other's record. That's the kind of lunacy that this administration and the Congress produced.

Any other gotchas?

For the year 2016, if disabled children earn more than $13,560, they can lose their right to collect Social Security disabled benefits for the rest of their lives. For children who are blind, the limit is $21,840. This is just terrible because a lot of parents try to get their kids jobs just so they can feel good. They pay someone to pay the kids, or they hire them in their own company and pay them. But if they're paid more than those amounts, suddenly the child is out disabled child benefits and child survivor benefits for the rest of their life.

Medicare is interconnected with Social Security benefits. What's a gotcha there?

Medicare stuff is nasty. Here's one Medicare gotcha of enormous proportion: If you're working for a small employer, you have to [sign up for] your benefits at age 65. If you do it later, you face major penalties for the rest of your life. That's incredibly outrageous. The Social Security Administration monitors your column closely. Does anything good for consumers ever come as a result?

If I write about someone who's been poorly treated by a number of people in a Social Security office and name that office, the person gets a phone call from a supervisor, and things get fixed up.

What's the future of Social Security?

It's absolutely broke. It needs to be frozen so that we don't take anyone's benefits away, but nobody should accrue any new benefits under this terrible, incredibly user-unfriendly system. We should immediately move to a new, simple system, which I call the Purple Social Security Plan [compulsory saving]. There's a way to get to a modern Social Security system that doesn't have this craziness.

How does the present system stack up on a global basis?

There's nothing that says democracy requires this kind of insanity. Other countries do it simply. New Zealand's system is: You reach 65, you get a check — and it's the same [size] check for everybody. Our institutions — Social Security, the tax system, banking system — are overly complicated solutions to real problems.

What do you think of the just-released Department of Labor fiduciary standard rule for financial advisors who take care of retirement accounts?

Any 1,000-page regulation is a travesty, a sign of terrible government. You could just say, "If you provide advice, charge a fee. If you sell product, you can't provide advice at the same time." That would take about a paragraph to write. Brokers who provide advice aren't giving independent advice.

For instance?

Annuities — which can be so complicated that I, a trained economist, can't figure them out. [Brokers] hype things, then get somebody who's exhausted to sign up — and they end up getting screwed. Unfortunately, that's the way the industry has been working for a long time.

— Related on ThinkAdvisor:

• Kotlikoff: 5 Tips to Navigate Social Security Filing
• To Delay Social Security Claiming, Offer Lump Sum Benefit: Report
• Popular Social Security Claiming Strategy Gutted in Budget Bill