Social Security may be your largest or one of your largest assets. How you manage it, by deciding which benefits to collect and when, can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.
I've been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR's website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company's site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.
Today's question is about what Social Security options are open to people with disabilities. It draws on what Professor Kotlikoff has learned about Social Security Disability Insurance over the years.
Question: I was amazed to discover that some 14 million Americans depend on disability payments from Social Security, which dwarfs the 4.3 million getting welfare checks. Would you please share your discoveries about details of disability benefits that may escape notice?
Answer: Social Security has a separate set of equally Byzantine provisions governing disabled workers as it does non-disabled workers.
I want to point out a couple of features of Social Security’s treatment of disabled workers once they reach age 62. I’m answering your question in order to assist those who have a hard enough time as it is. (Full disclosure: I’ve been helped enormously on this column by Jerry Lutz, a former technical expert on Social Security.)
Let me illustrate the options available only to the disabled by considering a disabled worker I’ll call “Joe,” about to turn 62.
First, Joe can continue to collect his disability benefit through full retirement age (66 in Joe’s case) with no reduction in the amount. In contrast, non-disabled workers who apply for their Social Security retirement benefits between age 62 and their full retirement age are forced to take permanently reduced benefits.
Once Joe reaches full retirement age, his disability benefit automatically converts to his full retirement benefit. So disabled workers are, in effect, given their full retirement benefit starting four, gradually rising to five, years before they reach full retirement age. That’s 25 percent more than the non-disabled can get. I’m all for helping the disabled, and I’m glad this feature is in the law.
Second, if Joe has been married for at least one year and his wife is collecting a retirement benefit or she has applied for a retirement benefit, but suspended its collection, Joe can receive an excess spousal benefit between age 62 and 66, though it will be reduced because he’s taking it before his full retirement age of 66.
The excess spousal benefit is calculated as the difference between 50 percent of Joe’s wife’s full retirement benefit and his own full retirement benefit. Assuming this excess is positive, Joe gets 70 percent of this amount starting at the tender age of 62.
If Joe is divorced, but was married for at least 10 years, he can collect a spousal benefit from 62 to 66 even if his ex is already collecting her retirement benefit or has suspended its collection. Moreover, if she hasn’t started collecting or hasn’t suspended, he can still collect an excess spousal benefit on her earnings history if she is over age 62 and they have been divorced for at least two years. (I keep telling you the rules are Byzantine, which is why answers like these can be so hard to write — and to follow.)
By the way, unlike a non-disabled worker, Joe isn’t automatically required to apply for his excess spousal benefit. Social Security calls such applications “deeming.” There is, however, no deeming for the disabled. This is important because, as I’ll explain in a moment, it might be better for Joe not to apply for his excess spousal benefit. Danger lurks.
When Joe reaches 66, he can tell Social Security he doesn’t want to take his own retirement benefit. In Social Security lingo, he will ask to “withdraw” his own benefit. If he doesn’t do so, his disability benefit will automatically be converted to a retirement benefit.
But if he “withdraws” his retirement benefit, Joe’s reduced excess spousal benefit will flip to a reduced full spousal benefit: 50 percent of his spouse’s full retirement benefit, no matter if she’s his wife or his ex. And if he hasn’t taken an excess spousal benefit by age 66, he can still request his full spousal benefit.
Now for that danger-lurks moment. If Joe took his excess spousal benefit starting at 62, the 70 percent reduction factor would be applied to his full spousal benefit. That would mean getting 70 percent of 50 percent of his wife’s or ex-wife’s full retirement benefit.
If the excess spousal benefit is small, taking it would be a mistake for Joe because it will mean not much money before 66 and less money, potentially a lot less money, after 66. In other words, this second option makes sense if the full retirement benefit of his wife or ex is more than double his own full retirement benefit. Since Joe is disabled, she may well have earned much higher benefits. But you can’t assume anything.
So Joe needs to be careful should well-meaning folks at Social Security try to help him, say at age 62, to get the maximum at that age. They might also be helping him forgo higher benefits after age 66.
The advantage to Joe of withdrawing his retirement benefit, of course, is that he can then wait until 70 to collect his own retirement benefit, which will reach its maximum amount at that point, a full 32 percent higher than had he started taking it at age 66. His full spousal benefit, reduced or not depending on whether he took his excess spousal benefit prior to 66, can help facilitate the wait.
Non-disabled workers who take Social Security retirement benefits early are generally deemed to be applying for their excess spousal benefits and then are stuck with those reduced excess spousal benefits for the rest of their lives. They don’t have the ability to withdraw their retirement benefit at full retirement age and flip to their full spousal benefit.
Remember the larger purpose here: for Joe to wait until age 70 to start his retirement benefit and benefit from the Delayed Retirement Credit. At age 70, Joe will get the larger of his own retirement benefit or his full spousal benefit, again hit by the reduction factor that prevailed if and when he took his excess spousal benefit.
The big if here is that I’m assuming Joe has a pretty high maximum age of life – something like 85. Note that I say “maximum age of life” rather than “life expectancy.” Since Joe may make it to his maximum age of life, he should be planning to live that long. He can’t count on dying on time — at his life expectancy, that is. As I regularly emphasize, the greatest danger is outliving your resources. That’s why waiting until 70, with some exceptions — and with Social Security there are always exceptions — is so important, if you can manage to wait.
