How Social Security Has Tricked Recipients: Larry Kotlikoff

The Social Security Administration is misleading and mistreating Americans by “running scams” and “tricking them” into making claiming choices that cheat them out of benefits to which they’re entitled, argues Laurence Kotlikoff, Boston University economics professor, in an interview with ThinkAdvisor.

One such injustice he calls “a terrible hoax [that] may be the worst public policy this country has ever run.”

There are, alas, 2,728 “crazy, byzantine rules” in the Social Security handbook. 

The Administration “built this Rubik’s Cube that nobody can follow,” Kotlikoff contends.

But Social Security seems to operate on a version of caveat emptor: They say that “the overarching rule of Social Security is if a mistake is made, it’s your fault even though Social Security made it. You’re supposed to know all the provisions,” says Kotlikoff, who for years has been drawing attention to the nightmares that can emerge from SSA’s maze of rules.

He is founder and president of a financial planning software firm, Economic Security Planning. It offers the online tools Maximize My Social Security and MaxiFi, which calculate claiming strategies and can help prevent being stiffed by the rules that Social Security keeps shrouded in opacity.

In the interview, Kotlikoff cites six horror stories, including a scam that scares people in their early 60s from going back to work after they’ve started collecting Social Security benefits. 

Another one that he points out has been “defrauding” widows and widowers for decades.

The bestselling author has a new book for release on Jan. 4, 2022: “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life” (Little, Brown Spark). It provides a framework for making financial decisions to enhance living standards and lifestyles.

Named by The Economist one of the world’s 25 most influential economists, Kotlikoff is director of the Fiscal Analysis Center, a Research Associate of the National Bureau of Economic Research and served on President Ronald Reagan’s Council of Economic Advisers.

He has also been a consultant to the International Monetary Fund as well as to Merrill Lynch and Fidelity Investments, among other firms.

ThinkAdvisor recently interviewed the professor, who was on the phone from the Boston area. 

“I write about egregious Social Security cases in my blog for Forbes. Social Security reads about them and fixes them.

“I think the people at Social Security are happy to be embarrassed because they want [these things] to be fixed. Senior management,” he says, “cares about doing the right thing.”

Here are excerpts from our interview:

THINKADVISOR: What’s your overall view of how Social Security determines benefits?

LAURENCE KOTLIKOFF: We’re talking about 13 benefits. You could not take 13 benefits and make a more complicated system! 

There are 2,728 rules in the Social Security handbook and hundreds of thousands of rules in the Operations Manual System that determine what these crazy byzantine rules, which nobody can follow except the experts, mean. 

It’s the ultimate bureaucratic fantasy!

Researching your upcoming book, “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life,” you came across numerous mistakes Social Security has made or is still making that mistreat earners. What’s one of them?

Social Security is [perpetrating] a terrible hoax to get people not to work. It may be the worst public policy this country has ever run. For decades, it has led people to stop working or to not go back to work. 

What does it entail?

You’re in your early 60s, and suppose, because of the pandemic you lost your job and started collecting Social Security. But then you’re called back to your job or you want to get a new one. 

But you think that would mean losing your Social Security benefits because of what’s called the “earnings test,” which is a fictitious tax system Social Security has. 

However, Social Security doesn’t tell you [upfront] that whatever you’ll lose in benefits, you’ll get back later. In 95% of cases, when you reach full retirement age, they’ll raise your monthly benefits to compensate for what you lost. It’s like a tax that they rebate. 

But they don’t tell you that. And that’s the terrible charade they’re engaged in: systematically tricking Americans in their early 60s to stop working and to leave the labor market. There’s no sensible reason for it except that it might affect the government’s cash-flow revenues.  

What’s another mistake you’ve found?

A woman who was on disability wrote her first book, and it became a bestseller. For 10 years she kept calling Social Security saying, “I’m getting royalty payments. Can I still collect my disability?” 

They told her that because it was royalty income, it was fine. 

But after 10 years, they sent her a bill for $309,000, saying, “You got royalty payments; but you gave some talks at libraries promoting your book, and therefore we have to call the royalty income ‘labor income’ [earned income].” 

This was outrageous! She appealed, but they said, “Even though it’s our mistake, it’s your mistake because the overarching rule of Social Security is: If a mistake is made, it’s your fault even though Social Security made it. You’re supposed to know all the provisions.” 

Then they told her that there was a possibility they could let her off the hook if she was sufficiently in need: “Hand over all your documents showing what you’re spending money on,” they said. 

These included the cable TV bill for an expensive plan because she [was disabled] and could do nothing else except sit in front of the TV. 

But the judgement said: “You have an expensive cable TV plan; therefore you can’t be in need.”

I don’t know how the case turned out. Ultimately, it can get to a federal judge outside the Social Security system — and presumably, sanity might set in.