Hidden deep within the 2,728 rules in Social Security's Handbook and the thousands upon thousands of explanations of those rules contained in its Program Operating Manual System are a number of very nasty Catch 22s. My company's software program -- Maximize My Social Security -- was developed to make sure people neither get caught in Social Security's traps or leave huge sums on the table because they don't understand its Byzantine provisions.
Here is my list of Social Security's worst gotchas. I want to be clear that the system, not the people in Social Security, is generating these gotchas. No one in Social Security is intentionally trying to get any of us to make the wrong decisions or end up with lower benefits than possible. But over the years, the rules governing benefit determination have become so convoluted and indecipherable that even the people working at the local Social Security offices routinely get things wrong.
1. Social Security's website gives the impression that your spousal benefit is half of your partner's primary insurance amount (PIA), also called your full retirement benefit. But this is true only if a) you don't qualify for a retirement benefit on your own or b) you reach full retirement age having never filed for Social Security and, at that point, apply only for your spousal benefit.
Otherwise, your spousal benefit is actually your "excess spousal benefit" defined as half of your partner's primary insurance amount (full retirement benefit) less your primary insurance amount after it's been adjusted for any delayed retirement credits you may accrue.
Moreover, if you apply for your retirement benefit early, you'll be forced to also apply for your spousal benefit early if your partner has already filed for his/her retirement benefit. If your partner applies a month after you apply, you're in the clear. You don't have to take your spousal benefit early and you can wait until full retirement age to collect an unreduced spousal benefit.
But, and here's the extra gotcha of this first gotcha, if you time your partner's application right and aren't forced to take your spousal benefit early, you'll still get stuck with the excess spousal benefit, not the full spousal benefit (equal to one half of your partner's PIA). To be precise, your total benefit will equal your own reduced retirement benefit plus your unreduced excess spousal benefit. And the sum of these two pieces will be less than one half of your partner's primary insurance amount.
To summarize, if you take your retirement benefit early and aren't able to time things right with respect to when you and your partner apply for retirement benefits, you'll end up having to take your excess spousal benefit early. And if you are able to time things right, you'll end up after full retirement age collecting in total, less than half of your partner's full retirement benefit.
2. If you and your ex-husband reach full retirement without either of you having filed for your retirement benefit, both of you can collect spousal benefits equal to half the full retirement benefit of the other provided you just apply for your spousal benefit and wait, say, to 70 to collect your retirement benefit.
But if you are married, there's a gotcha. Only one of you can collect this "free" spousal benefit. In short, the Social Security rules are encouraging you to get divorced. If you do this at least two years before reaching full retirement age, you can both get "free" spousal benefits. You can, as far as Uncle Sam is concerned, continue to live in sin, and get remarried at 70. And if you get divorced after age 60, this won't affect your survivor benefits if one of you dies. For some couples, where both have had significant earnings, getting this extra "free" spousal benefit can be worth as much as $60,000. A no-fault divorce can cost less than $500. So, ...
3. Suppose you drop dead before you start collecting your retirement benefit and before you reach full retirement age. Further assume that you have a low-earning spouse. She/he will be able to collect a survivor benefit equal to your full retirement benefit.
But suppose you started receiving your retirement benefit right before you died. In this case, there's a gotcha for your surviving spouse. Her/his widow's benefit will be permanently reduced because it will equal your retirement benefit with the early retirement benefit reduction applied. To make matters worse, if your spouse takes the widow's/widower's benefit early, she/he will get hit by the survivor's benefit reduction fact. Together, these two reductions could reduce your spouse's widow/widower's benefit by as much as 47.5 percent.
4. Suppose you work your entire life and pay Social Security taxes week in and week out, but you earn relatively little in absolute terms and also relative to your spouse. You'd think that you'd get something back, at the margin, for all those years of paying, in combination with your employer, 12.4 percent of every dollar you earn. In fact, you may get not a penny more back in exchange for all the taxes you paid to Social Security, grueling work week after grueling work week, year and year.
Furthermore, your neighbor who works not a day for her/his entire life and pays no taxes whatsoever may end up with higher benefits than you because her/his spouse earned more than your spouse.
Getting you to pay taxes you entire life, pretending in its benefit reports that you are actually getting something back for all those taxes, and then giving you nothing extra back is well described as a gotcha.
5. Say you're 62 and your wife is 66 - at her full retirement age. You'd like her/him to be able to collect "free" spousal benefits for four years and wait until 70 to take the highest retirement benefit possible. So you apply for your retirement benefit. When you hit 66, your wife is 70 and is collecting her retirement benefit. So now you say, "Gee, I can apply to get an excess spousal benefit on my partner's earnings record and suspend my own retirement benefit and start it up again at 70." So you apply for your spousal benefit and suspend your retirement benefit.
But you're in Medicare Part B and you don't think about paying the Part B premium via a separate check since you're used to Social Security deducting the premium from your Social Security check. My understanding is that if you don't pay this check out of your own pocket, your retirement benefit at age 70 will be no larger than when you suspended it. I.e., you would have given up a positive retirement benefit for four years for absolutely nothing.
Pretty good gotcha. But here as in all its provisions, the folks at Social Security can provide reasonable justifications for their rules. But again, the problem is not whether the rules are reasonable. The problem is that no reasonable person can understand the rules and that it's unreasonable to expect them to.
6. If you are married 9 years, 11 months, and 31 days when you get divorced, neither you nor your spouse will collect a dime in spousal or survivor benefits. But if you wait one more day - just stick it out with the hate-of-your life for 24 more hours, you and your spouse can qualify for these benefits. For those who don't stay married for the full ten years, but get close, and divorce not realizing the value of waiting it out, this is a real gotcha.
7. If you did stick it out for 10 or more years and finally divorced the hate-of-your life and then meet the true love of your life and marry that person, you will lose your spousal benefits from spouse 1 and your survivor benefits from spouse 1 if you remarry before age 60. Here, again, we have Social Security getting into our love lives. You meet Ms. Perfect, you are at the jewelry store picking out the ring or about to put it on your finger and say, "Stop, I can't do this. This will cost me divorcee benefits." Or if Mr. Perfect is about to put the ring on your finger, you say, "Stop, we need to wait five years until I'm 60 so at least I don't lose my divorcee survivor benefits from my ex who will surely die from grief the minute I remarry." For divorcees who remarry just short of age 60, losing their divorcee survivor benefits is a gotcha.
8. If you do remarry, having been married once before to a much higher earner, and you get divorced from your new spouse, you can collect divorcee benefits on the first spouse. For those in this boat who don't get divorced, this is a gotcha compared to those who do.
9. If you are single and can find someone else single to marry and you have both been pretty good earners, you only need to be married for one year in order to qualify your spouses for spousal benefits. So two single people can marry at, say, 64, and then one can file and suspend at full retirement age - currently 66 and get the other "free" spousal benefits. Both, in this scenario, would wait until 70 to collect their largest possible retirement benefit. At that point you and yours could get divorced because the "free" spousal benefit would be over.
If you've been following the above, what you've learned is that for some people Social Security has pretty strong incentives to get married. For others it has strong incentives to get divorced.
10. If you work for a government or other organization that is exempt from Social Security, so it doesn't send in Social Security tax payments based on your earnings, you will face lower benefits from Social Security - both retiree, spousal, and survivor from subsequent or former work under which you were are will be covered by Social Security. Again, this is perfectly justifiable. But do people know it when they work, say, for as a teacher in Massachusetts. If not, the rules of Social Security, not the folks at Social Security, can produce a nasty gotcha.
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