Social Security Complexity
Social Security supports more than 70 million Americans, ranging from retirees to disabled people and children. But it's also an incredibly complex system, with an operations manual that is 20,000 pages long, covering a tangle of 2,700 rules that can easily trip up claimants and cost them tens of thousands of dollars in lost benefits.
Some of the pitfalls are detailed in a new book, "Social Security Horror Stories," by Boston University economist Laurence Kotlikoff and personal finance writer Terry Savage. In some cases, the errors aren't the fault of beneficiaries, but stem from the Social Security Administration's own missteps. Yet claimants have little recourse for fixing the problem or otherwise protecting themselves.
There's a lot at stake in improving the system, Kotlikoff told CBS MoneyWatch. Social Security is often a person's biggest financial asset aside from homeownership, and the steady stream of monthly income keeps millions of seniors from slipping into poverty. But the program can be opaque and, perhaps unintentionally, encourage certain choices that cause people to lose out on tens of thousand of dollars in benefits, Kotlikoff said.
Retirees Urged to Take Social Security Seriously
Around 20% of retirees rely solely on Social Security as their only source of income, according to retirement expert Laurence Kotlikoff. This highlights the importance of careful planning and research when it comes to claiming benefits. Kotlikoff, who has conducted academic research on Social Security, warns against common mistakes such as claiming benefits too early or following incorrect advice. He also cautions against relying solely on the Social Security Administration for guidance, as their employees have been known to provide wrong or misleading information. Making mistakes in claiming benefits can have long-term consequences and may be difficult to rectify. The Social Security Administration acknowledges the need for improvement in its processes. It is crucial for retirees to understand that they are ultimately responsible for their own decisions regarding Social Security.
Common Mistakes in Claiming Social Security
- Claiming benefits too early
- Following incorrect advice
- Claiming both a survivors benefit and retirement benefit simultaneously
- Overreliance on the Social Security Administration for guidance
Claiming Social Security Benefits Too Early
One of the biggest concerns facing Americans is the decision of when to claim their Social Security benefits. The Social Security Administration allows individuals to start collecting their benefits as early as age 62, which is five years before the full retirement age for most people. However, by claiming benefits early, monthly payments are reduced by 30%.
Alternatively, individuals can choose to wait until they reach the age of 70 to claim Social Security, which results in the maximum payout. At age 70, the payout is approximately 76% higher than at age 62. However, only about 6% of Americans choose to wait until age 70 to claim their benefits.
Economist Laurence Kotlikoff believes that the Social Security Administration may unintentionally encourage individuals to claim benefits early by providing a life expectancy calculator and actuarial tables that show the average number of additional years a person could live. Kotlikoff argues that people should base their decision on the maximum number of years they could live, rather than the average.
Kotlikoff compares this approach to homeowners insurance, where individuals consider the worst-case scenario of their house burning down. Similarly, when it comes to Social Security, people should consider the worst-case financial outcome of living to the maximum age.
In a research paper published last year, Kotlikoff estimated that claiming benefits too early could result in a loss of $182,000 in benefits.
The "widow's scam"
One mistake that can result in lost benefits is what is known as "the widow's scam." This often occurs due to poor decisions when filing for Social Security benefits, which can ultimately lead to lower payments.
One of the 12 types of benefits offered by Social Security is the survivors benefit, which is paid to widows, widowers, and dependents of eligible workers. In the case of widows and widowers, they have the option to file for Social Security payments based on their spouse's earnings, and can claim as early as age 60.
However, there are instances where individuals mistakenly file for both survivor's benefits and their own retirement benefits. The Social Security Administration will only pay one benefit, whichever is higher.
The issue arises if the survivor's benefit is higher because by claiming the retirement benefit at the same time, the widow or widower is essentially locking in their retirement benefit at that age. This puts them at risk of losing out on potentially thousands of dollars in higher benefits that they would have received if they had waited until their full retirement age, or even age 70, to claim.
"You go into Social Security and you say, 'Hey, I want my 76% higher check for the next possibly 30 years,'" explained Kotlikoff. "And they say, 'No, look at our records here. You filed for both benefits, you checked off the box."
Retirement Benefits and the Earnings Test
If you have claimed your retirement benefits more than a year ago, it is not possible to reverse that decision.
The Deception of the "Earnings Test"
There is another Social Security rule that can cause trouble for older Americans, known as the earnings test. This rule states that individuals who claim their benefits before reaching full retirement age and continue to work will face a significant tax if their income exceeds a relatively low threshold.
As of 2023, the earnings test limit is set at $21,240. This means that individuals who collect Social Security before the age of 67 will have $1 deducted from their benefits for every $2 they earn above this limit. This often discourages older workers from continuing to work after claiming their benefits, as they fear losing a portion of their income to this tax.
However, what many people are not aware of is the "adjustment of reduction factor" (ARF), which restores the lost benefits once the claimant reaches full retirement age.
"It is important to understand that losing money to the earnings test can actually be beneficial, as for every dollar lost, you receive approximately $1.20 back in benefits," explained Kotlikoff. "Unfortunately, people are not informed about this, so they mistakenly believe that returning to work is pointless because they think they are only working for the government."
According to economist Laurence Kotlikoff, many individuals over 60 might make different decisions about working if they were aware of the issue of delayed benefits adjustment. While not everyone may have the financial ability to wait until they reach 67 for their benefits to be adjusted, having knowledge of this issue could lead to different choices.
The problem of overpayment
Every year, approximately 1 million Social Security recipients face the consequences of overpayment, as highlighted in a recent report by "60 Minutes." This situation can result in financial hardship and stress for those affected.
The overpayment occurs when beneficiaries receive more funds from Social Security than they are entitled to, often without their knowledge. Years later, they receive a letter from the Social Security Administration demanding repayment, even if the mistake was not their fault. The fault often lies with the Social Security Administration itself, as revealed in a 2022 report by the agency's Inspector General. The report found instances where employees entered incorrect information or miscalculated benefits.
Unfortunately, recipients are still required to repay the overpaid amount, as "60 Minutes" reported. Appealing the decision can be a lengthy and uncertain process, with no guarantee of a favorable outcome.
Why Keeping Records with the Social Security Administration is Important
It is crucial for individuals to maintain careful records of their interactions with the Social Security Administration. This includes keeping track of any information sent to the agency. Additionally, it is recommended that people regularly check their Social Security history to ensure that the agency has accurate earnings history on file.
One way to do this is by creating a "My Social Security" account on the agency's website. Through this account, individuals can review their past income to verify its accuracy.
In response to these concerns, the Social Security Administration stated, "We continually strive to improve stewardship of our programs and reduce improper payments. While staffing losses and resource constraints have challenged our service delivery, our payment accuracy rates remain very high."
The agency also emphasized its responsibility to taxpayers and the need to be good stewards of the trust funds that hold money for its programs. It acknowledged that each person's situation is unique and that overpayments are handled on a case-by-case basis.
Economist Laurence Kotlikoff advised individuals who discover they are being overpaid to set that money aside, as the agency will eventually request it back. With approximately 1 million people being overpaid each year and around 70 million Social Security recipients, the likelihood of being affected by overpayment is significant.
