Kotlikoff: Help Your Clients Avoid Social Security Clawbacks

Financial advisors are missing a great opportunity for wealthy clients by not helping more to establish their correct Social Security benefits. Laurence Kotlikoff, Boston University economics professor and Social Security expert, argues this and other positions in an interview with ThinkAdvisor.

"Social Security is the second- or third-largest financial asset, and [clients] may not be optimizing it. [Advisors] need to double-check that every client is getting the right benefits. That's part of their fiduciary responsibility," Kotlikoff says.

Kotlikoff was interviewed by Anderson Cooper of "60 Minutes" on Nov. 12 about victims of Social Security's clawback abuse, detailing the agency's sending out 1 million letters annually demanding the return of its miscalculated overpayments.

"Their basic rule is: 'Our mistake is your problem,'" Kotlikoff says.

Indeed, the bestselling author's new book is "Social Security Horror Stories: Protect Yourself from the System and Avoid Clawbacks" (K&S Productions-Nov. 2, 2023), co-written with financial journalist and RIA Terry Savage. Cooper interviewed Savage on the segment with Kotlikoff.

The book covers the Social Security clawbacks plus 17 of what the authors term as the administration's "scams," such as The Retirement Trap Scam and The Take-Your-Benefits-Early Scam.

Then it sets forth ways for consumers to protect themselves and avoid costly traps.

"If a client has been overpaid by Social Security for years, the liability might in some way fall on the financial advisor. So they need to understand that there's a risk here," Kotlikoff warns in the interview.

The clawback letters are terse, unexpected demands for repayment of overpayments and threaten to cut future benefits if recipients don't comply, he says. Many try in vain to have the claims waived.

"Basically [Social Security claim advisors] are being told to turn down everybody," Kotlikoff maintains.

The professor, who was on President Ronald Reagan's Council of Economic Advisers, produces a newsletter and podcast, both called "Economics Matters." He is founder of Economic Security Planning, a firm that markets a software tool for calculating the correct benefits for Social Security recipients.

In the recent interview with Kotlikoff, who was speaking by phone from Boston, he argues that the Social Security Administration has welcomed his criticisms over the years. It "help[s] them find their worst abuses … and fix their wrongs," he says. "Basically, they think I've been helpful."

Here are excerpts from our interview:

THINKADVISOR: What is Social Security's M.O. for clawing back benefits it's mistakenly paid out?

LAURENCE KOTLIKLOFF: They allege something and claw back any amount they want. It's beyond terrible; it's horrific.

I just got an email from a lady who's 55 and has been disabled her entire life. She got clawed back for $120,000 [in Social Security disability payments].

They said that in 1993, she seemed no longer disabled. Meanwhile, they're paying her the whole time, and now they want $120,000. It's beyond the point where she can appeal. She doesn't know what to do.

In your new book, you argue that Social Security is "our great national Ponzi scheme" that it "hides" from "clear sight" and that "the system has hidden malevolence." In previous books, you've made similar statements. Does Social Security criticize you for making these accusations?

On the contrary, the people at Social Security use me. They're happy when I write things. They follow my columns and then try to fix things I write about.

Basically, they think I've been helpful.

For seven years, I had a "fixer" at Social Security, Michele Sanders. If I came across one of these terrible clawback cases, for instance, I'd email her about it, and she could get it fixed the next day. This happened many times.

So Social Security was happy to use me to help them find their worst abuses, fix their wrongs and fix the way they were running the system.

Do you think that financial advisors should get more involved with clients' Social Security matters?

Yes. They're missing an opportunity for their rich clients. Social Security is the second- or third-largest financial asset, and they may not be optimizing it.

Why aren't they?

Sometimes advisors don't want to be put in the position of answering questions they don't have the answers to. Social Security is complicated. But it's not that complicated.

There's a way for you to bone up without too much trouble.

How should advisors specifically go about helping clients with Social Security?

They need to double-check that every client is getting the right benefits. That's part of their fiduciary responsibility.

If a client has been getting overpaid by Social Security for years, the liability might in some way fall on the financial advisor. So they need to understand that there's a risk here.

What exactly should advisors do, then?

Get all their clients who are collecting Social Security back to their office to double-check the benefits using our software, which is the only software that's going to get it right.

Why does Social Security get the benefit amount wrong and then suddenly claw back the money?

It's impossible for them to do their job. It's a mess. For one thing, they need to know on a monthly basis if, say, you're working non-covered [not paying into the Social Security system] as a teacher and have a pension or a 403(b) plan, for example.

But even if you go into Social Security and tell them that, they won't necessarily put it into the system.

The checks start rolling in, and you figure you're all set; and then 15 years [or more] later, you're looking at a $10,000 bill.

You said in your "60 Minutes" interview with Anderson Cooper that unless someone is very, very poor, they won't stop trying to claw back the money. How poor do you have to be?

There are 10,000 claim advisors who get to decide whether or not to waive a claim. If you end up with someone who's nasty, you may be treated differently than if you end up with someone who's nice.

Basically, they're being told to turn down everybody. So then you have to appeal; and if you're turned down again, you have to wait a couple of years to see an administrative law judge, who'll say that two things have to be true in order for them to waive the claim:

One: "You have to prove that this is [Social Security's] mistake, not yours." Of course, very few people have every recording of their interactions with Social Security.

And secondly, you have to be poor.

Are they saying it's the recipients' mistake for not telling them that they might be getting overpayments?

They say you should have known to tell us [initially], and you were getting these checks. Or you should have known that we decided you were no longer disabled, for example.

Maybe they sent a notice to an old address or an email [that went astray].

They've clawed back people for benefits they got when they were children [paid to their parents].

What can be done to fix this situation?

There needs to be a statute of limitations of 18 months if they haven't fixed or found [the] mistake. People need to notify members of Congress and get [their representatives] to understand.

Please elaborate on your statute of limitations recommendation.

Congress should say tomorrow, "We're going to put an 18-month statute of limitations on [these cases]."

That's "equity in good conscience" [fairness], which is the overarching legal position.

What's stopping that from happening?

The people running Social Security are afraid of their own shadow. They're worried that if they don't collect all this money from poor or rich people, they would somehow be in violation of the law, and it would come back to haunt them personally.

At the end of the "60 Minutes" segment, Cooper said that Social Security waived the clawbacks on all three cases that were featured on the show. That was surprising. What prompted them to do that?

They were embarrassed. The "60 Minutes" producers had gone to Social Security and told them: "We're going to do this story on these people." And then, bingo! They were waived [days before the show was broadcast].

It was too embarrassing for them.

Why had they sent them clawback letters?

Their allegation was that they had a legal obligation to go after this money, which is clearly not true since they took about two seconds to waive the clawbacks.

They also took two seconds to waive a clawback of a 6-year-old that I had written about in a column in Forbes. His case concerned survivor benefits of a child.

They didn't want that to be in a Forbes column every single day, which is what I was going to do.

How long have you been an expert on Social Security?

Thirty years. When I started my company developing a software planning tool, we needed a code to cover Social Security. But [the provisions] were like a foreign language.

People told me, "That provision doesn't mean what you think it does. Here's how to read it."

I had to train myself in the language so I could tell my software guys how to code the program.

The current Social Security Operations Manual System [used to process claims] is more than 20,000 pages long!

Pictured: Economist Laurence Kotlikoff