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How Social Security Has Tricked Recipients: Larry Kotlikoff

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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. 

What are some more mistakes?

Social Security is running scams. For example, they call up people who are close to age 70 and say, “We’ll give you a check for six months’ benefits retroactive, and you can start your benefits right away.”

What they don’t tell people is that this means their monthly benefits from that point on will be significantly lower than they would be had they waited till age 70 to collect.

Is Social Security doing this to save the Administration money?

I presume to save money, or somebody thought it was somehow going to help people.

My dentist told me that Social Security called him and gave him an extra six months’ benefits. I explained to him that they had actually given him a lower benefit without telling him. 

I called someone I know in management at Social Security and told him. He had no idea this was going on, and he was aghast. 

As far as I know, this is still happening.

Did your dentist have any recourse?

No. He agreed to something over the telephone — but he wasn’t given the full story. That’s the scam. Another way Social Security runs this scam is by sending out letters suggesting how claimants can raise their benefits. However, [as in the above], those steps would actually lower their benefits in the long run. 

Any other mistakes that you uncovered?

A six-year-old was sued by Social Security for receiving child survivor benefit checks after his mother passed way in a car crash. 

They said it was because he was also receiving a child benefit based on his dad’s disability benefit claim. The father had a medical issue. 

The mom and the boy got into a traffic accident, and she died. A cousin took the kid in, as a foster parent; and he received checks for a year or so. The money was used for him. 

Then the cousin gets a bill from Social Security saying they’re going to sue her and the child jointly for what they have to pay back. 

I wrote [a column] about this, and it got fixed. I embarrassed Social Security. This is the only way these terrible things get fixed — by embarrassing them. 

I think the people at Social Security are happy to be embarrassed because they want them fixed. Senior management cares about doing the right thing.

Any other Administration scams afoot?  

This one has defrauded widows and widowers out of tens to hundreds of thousands of dollars in benefits: 

If you file for both a widow’s benefit and your retirement benefit at the same time before age 70, you’ll get the larger of the two for the rest of your life. 

But: If you file only for your widow’s benefit and wait till age 70 to take your retirement benefit, your benefit will be increased because of the “delayed retirement credit.” If you live to be 100, you could end up getting [about] $3,400 monthly. 

The Social Security Inspector General is investigating this one and has found that Social Security underpaid an estimated 13,000 widows and widowers — now over 70 — some $130 million and is underpaying new widows and widowers reaching age 70 about $10 million collectively. 

The investigation recommended that Social Security find these [victims], compensate them and fix the system so it doesn’t happen again. But nothing has been done since the Inspector General’s report came out two years ago.

Who was supposed to have acted on it?

Andrew Saul, the Social Security commissioner who President Biden just fired.

Any other mistake you’d like to discuss?

Social Security decided that the file-and-suspend strategy [earners collect benefits based on work record of spouse who defers receiving own growing benefits] was being abused by rich people and to shut it down. But it was really middle-class and poor people that were benefiting from it. 

Right before the bill was to be voted on, I realized that lot of [middle-class and poor] people’s checks would be reduced. So I wrote a blog about it.

Later that day, Congress put in an amendment to the bill that added two grandfathering clauses [for people already using the strategy to continue to do so].

If I, or another individual, have this kind of influence, something is fundamentally wrong. Social Security put something into law that they clearly didn’t understand. 

They repealed it in a screwed-up way, and then they had to amend the repeal. This suggests gross incompetence. There’s a pattern here. 

Are you personally receiving Social Security benefits yet? If so, have any mistakes been made?

I just turned 70 in January and started collecting. They got it right. 

I applied for it online. In the remarks section at the bottom of the application, I wrote in what I was trying to do so they don’t send me retroactive benefits and give me a lower benefit [going forward]. That’s a scam they’re running right now. 

You must make it clear in black and white exactly what benefits you’re filing for because you need to have proof to show that you didn’t actually do what years later they said you did.