Seems that economics professor Laurence J. Kotlikoff spilled a few too many secrets in the No.1 bestseller he published last year about getting the most out of Social Security.
Upshot? Deeming it a boondoggle for the rich, the government killed off one of the most gainful claiming strategies he spelled out — a “secret” that was hiding in plain sight among Social Security’s whopping 2,728 rules.
The Bipartisan Budget Act of 2015, in fact, changed or did away with several strategies that, implemented correctly, could boost Social Security claimants’ benefits. Kotlikoff, a professor at Boston University who has consulted to the U.S. Department of Labor, Merrill Lynch and Fidelity Investments, discussed the new law and its ramifications in a recent interview with ThinkAdvisor.
The most significant change eviscerated the file-and-suspend strategy, which lets an earner collect benefits based on the work record of a spouse who has deferred receiving their own growing benefits until a future date.
But the new law hasn’t stopped Kotlikoff, who has also served as a consultant to the International Monetary Fund and the World Bank, from letting out even more “secrets”: He’s published a new edition of his New York Times bestseller, “Get What’s Yours – Revised and Updated: The Secrets to Maxing Out Your Social Security” (Simon & Schuster), again co-authored with Philip Moeller, who writes about retirement for Money magazine, and Paul Solman, a PBS NewsHour business and economics correspondent. Moeller is author of the upcoming “Get What’s Yours for Medicare: Maximize Your Coverage; Minimize Your Costs.”
In the Social Security update, Kotlikoff, president of financial planning software company Economic Security Planning – run as a philanthropy — teases out more useful strategies from the thousands of rules the U.S. government has set forth in complex, obfuscating prose, examples of which he presents verbatim, such as: “The regulations that require a notice for an initial determination contemplate sending a correct notice. We consider that an initial determination is correct even if we send an incorrect notice.”
According to Kotlikoff, Social Security is a broke, deeply flawed system with vile traps, concealed penalties and “gotchas” galore. To make matters even more wretched, he says, Social Security personnel supply erroneous information to earners seeking help in negotiating the intricate maze.
Kotlikoff, who made a fleeting third-party bid for the U.S. presidency in 2012, bemoans the new law, which, he says, hurts middle-class and poor people who could have increased their benefits had, for example, file-and-suspend remained an option.
ThinkAdvisor talked with the professor — whose company, Maximize My Social Security, helps consumers and advisors make Social Security decisions — about the new law’s consequences. He stressed that the most significant gains still come from waiting till age 70 to begin collecting benefits. Here are highlights of our conversation:
What’s the worst part of the new law?
It gutted the file-and-suspend strategy for spousal benefits. Now family benefits can’t be paid on your work record while your retirement benefits are suspended and growing. Nor will you be able to get retroactive benefits if you want to take all your suspended benefits in a lump sum. To what extent have the wealthy been using file-and-suspend? In a ThinkAdvisor interview with me in March of last year, you stressed that higher income earners stand to be the biggest winners from learning about Social Security strategies.
They don’t give a damn. The rich are taking their money early and trying to make a killing in the stock market. For them, this is penny-ante money.
But the administration chiefly painted the new law as eliminating strategies for the rich that were wasting government money, especially file-and-suspend.
The idea that it was a big game for billionaires, and everybody else was unable to take advantage of it — and therefore let’s shut it down — is a fantasy. Even if the rich – a small fraction of the population – had been using it slightly more than others, that doesn’t mean you should take away a lot of money from middle-class and lower-income people. [To be fair], you’d want to limit it for the rich but not wipe it out for the poor. But in the long run, the file-and-suspend strategy, per se, won’t be around.
The deadline to implement file-and-suspend was April 29, 2016. Is there a grace period?
I think there’s a strong legal case that the actual deadline is four months after April 29. So people might be able to take this to court and pursue it all the way to a federal judge – and they’d probably win.
What were the conditions to be met, under the new law, to use that strategy?
You had to be 66 to suspend, and your spouse had to be 62 by Jan. 1 of this year. So, if [she or he] were born a nanosecond too late, forget about it – they’re out as much as $50,000. That was an extremely unfair aspect.
Do you think anyone running for president of the U.S. is aware of the new Social Security law and its repercussions?
I think they have no knowledge of it. The two Democratic candidates have gone on record saying that Social Security benefits are too low and should be raised. [At the same time], this law from a Democratic administration was viewed as [nothing more than] giving the rich a ride.
You write that the Social Security Administration told you that your book last year prompted Congress to kill file-and-suspend and make other changes in benefits, and that a column you wrote after reading a draft of the bill changing Social Security rules caused Congress to amend it by adding two grandparenting clauses. Originally, checks would have stopped for those already employing file-and-suspend.
Right. Our intention with the book was to help people, but it backfired: it was so popular that do-gooders felt they had to undo what we were trying to help provide people with.
What’s your reaction to having such sway with the government?
I was shocked. I’m not particularly proud of it. An academic shouldn’t have much influence over policymaking. Congress should understand what the hell they’re doing. If the Social Security system is that complicated to understand, there’s a big problem.
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.
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.
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