Facts on SS spousal benefits

[NW-Bound]

For single persons, it seems to me file-and-suspend is a you-can't-lose move, because you can change your mind and retroactively claim the benefit.

However, as a couple, I do not think I can file-and-suspend my own benefits, while claiming spousal benefit off my wife. Or can I?

 

[pb4uski]

This whole thread is why when we are 61 we will pay the $25-$75 to have socialsecuritysolutions.com or some other service evaluate our options for us. I'll also DIY and have my own view but will pay for a pro to assess our best choices as well.

The numbers and cost of a poor decision are too significant to cheap-out on something like this.

 

[athena53]

Hi, Rothman,
We did discover that her Medicare cost more because I was making too much money at the time and will continue to be so until after we file taxes next time even though my income is greatly reduced this year. Her Medicare payments are being deducted from her SS payments, so she has been getting less than she was hoping for net.

In some cases you can appeal the Medicare premium surcharge (IRMAA, or Income-Related Monthly Adjustment). When I retired last year at 61, DH was 75 and filed for Medicare. (He'd been on my employer's policy till then.) They hit him with an IRMAA based on our 2012 income which was a peak earning year for me. Since I'd quit my job, it constituted a change in circumstances so we got the IRMAA reduced after filing the appropriate papers.

 

[Ed_The_Gypsy]

Wow! Thanks, athena! We will do that first thing Monday morning!

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[rayvt]

This whole thread is why when we are 61 we will pay the $25-$75 to have socialsecuritysolutions.com or some other service evaluate our options for us.

Keep in mind that the government can change the SS rules at any time. So the deal you decided upon at 62 may not still be the same deal when you hit 70.

The numbers and cost of a poor decision are too significant to cheap-out on something like this.

Actually, no. On net, the difference between the best and poorest decision is a trivial amount of dollars. The SSA went to a great deal of trouble to set things up to be actuarially neutral. The optimal decision depends on your age when you die --- and that's the great unknown.
All that changes between the different decisions is the shape of the income stream, not the net amount. More money per month, later, for fewer years, or less money per month, earlier, for more years.

--------------------

The SSA rules for spouse and survivor are very complex. I recently started to incorporate these details into my spreadsheet. It's still a work in progress, but you can take a look at it, the "SSA deferral table" and "srvr rules" tabs. All the rules and reductions are there. And some initial examples of a few scenarios.
https://www.dropbox.com/s/gebanzrbr3g33qf/My SS breakeven calc.xls?dl=0

For spousal, in a nutshell she will get somewhere between 50% of his benefit and 100% of her own benefit. Never less than half of his, and never more than 100% of her own. No double dipping! Much of the confusion about this is due to the very complicated way they state it.

For survivor, basically she steps into his shoes and takes over his benefit. But she doesn't get both his and hers--only the larger of the two.

 

[pb4uski]

Keep in mind that the government can change the SS rules at any time. So the deal you decided upon at 62 may not still be the same deal when you hit 70. .........

Perhaps they can but they never have changed SS for those near to FRA. If you think they have, please cite one or two instances where they have changed benefits that impacted people 60 or older. I would love to learn of them but I believe it is urban legend.

 

[ERD50]

Perhaps they can but they never have changed SS for those near to FRA. If you think they have, please cite one or two instances where they have changed benefits that impacted people 60 or older. I would love to learn of them but I believe it is urban legend.

https://www.fas.org/sgp/crs/misc/RL32552.pdf

Social Security provides monthly cash benefits to retired or disabled workers and their family members, and to the family members of deceased workers. Those benefits were exempt from federal income tax, but in 1983, Congress approved recommendations from the National Commission on Social Security Reform (also known as the Greenspan Commission) to tax the benefits of some higher-income Social Security beneficiaries. Beginning in 1984, up to 50% of Social Security and Railroad Retirement Tier I benefits were taxable for individuals whose provisional income exceeds $25,000. The threshold is $32,000 for married couples.

In 1993, the Omnibus Budget Reconciliation Act (OBRA) increased the share of some Social Security and Railroad Retirement Tier I benefits that are taxable. That law taxes up to 85% of benefits for individuals whose provisional income exceeds $34,000 and for married couples whose provisional income exceeds $44,000. ...

I'm pretty sure that applied to everyone receiving SS. Taxing is just an indirect way to reduce the benefits.

-ERD50

 

[pb4uski]

rayvt said that they could change the "SS rules" at anytime. I said that they have never changed SS for those near to FRA. Changing the amount of SS benefits that are included in taxable income doesn't change SS, but it does change taxes. Essentially, you're barking up the wrong tree.

Interestingly, if a married couple had the maximum possible SS retirement benefits of $84,000 and no other income, their tax return income would only be $5,000, their taxable income would be zero and their tax would be zero.

 

[Running_Man]

Plenty of countries and even US states have changed government benefits over time, the idea that Social Security will not be changed is most likely wishful thinking, there is too many payouts and not enough paid in to not have changes in the future. As millennial power continues to grow social security will be affected I believe, part of the entire Greek issue is cutting of Greek Government pensions. Trying to predict what that will be is hopeless however so I just continue to plan on taking SS at 70 in my case.

 

[samclem]

Again?

The optimal decision depends on your age when you die --- .

Absolutely not. The "retrospective optimized amount of payed benefit" depends on when the person dies, and can only be known in retrospect. The "claiming strategy that is likely to result in optimum utility to the claimant in the future" is something entirely different.

All that changes between the different decisions is the shape of the income stream, not the net amount.

Sure, if I happen to be 10,000 randomly selected people. But if I am just one person (or a couple) and I've got spending of an unknown duration to fund--maybe "averages" are of limited relevance to my decisionmaking. "Honey, I've got great news! I used this FIRECalc program, and we can spend 11.5% of our savings the first year of retirement and adjust that up for inflation every year! I thought it would be smaller, but when I put in our average lifespan and set it for an historic success rate of 51% (average!), it gave me this result. Average is good enough, right?"

And even if (for some unfathomable reason), we wanted to only consider the simplistic "break even" calculation rather than the more important utility question: Does SS consider the gender of the applicant when computing the difference between the age 62 benefit and the age 70 benefit (men should get a higher differential for delaying than women do)? Do they adjust the delayed benefit every few months for changes in available real interest rates? Because (as mentioned before), there's no way that SS is truly "actuarilly neutral" for an individual if SS doesn't adjust for these things (and they don't).

 

[pb4uski]

Plenty of countries and even US states have changed government benefits over time, the idea that Social Security will not be changed is most likely wishful thinking, there is too many payouts and not enough paid in to not have changes in the future. As millennial power continues to grow social security will be affected I believe, part of the entire Greek issue is cutting of Greek Government pensions. Trying to predict what that will be is hopeless however so I just continue to plan on taking SS at 70 in my case.

While I have no doubt that SS will be changed, my only point is that it is unprecedented for changes to be made to benefits for those near to retirement. Changes will most likely impact current workers in the form of higher SS taxes, or increasing the maximum so more SS taxes are collected, or increasing the retirement age for people in their 20s or 30s. It would be unprecedented for current retirement beneficiaries or those near retirement to have benefits changed and it is so unlikely that it isn't an important consideration in one's SS strategy.

 

[ERD50]

rayvt said that they could change the "SS rules" at anytime. I said that they have never changed SS for those near to FRA. Changing the amount of SS benefits that are included in taxable income doesn't change SS, but it does change taxes. Essentially, you're barking up the wrong tree. ...

You can call it semantics if you want, but my wallet doesn't know the difference between 'changing SS' and 'changing the taxation of SS'. The end effect is the same, it's a very real reduction, and that's all that matters to me. A buck is a buck. And they didn't say "these tax increases will only affect people not yet taking SS", so it was a change to those near to (and beyond) FRA.

-ERD50

 

[tulak]

Regarding the government changing SS benefits for those close to FRA, this has to happen through a legislative change, right?

If that's the case, then couldn't you go down your local SS office and apply before the legislation becomes law?

If that's the case, then I'm puzzled why people would use this reason to take SS early to lock in their benefit. This seems like a non issue to me, but I'm curious if I'm missing something.

 

[pb4uski]

You can call it semantics if you want, but my wallet doesn't know the difference between 'changing SS' and 'changing the taxation of SS'. The end effect is the same, it's a very real reduction, and that's all that matters to me. A buck is a buck. And they didn't say "these tax increases will only affect people not yet taking SS", so it was a change to those near to (and beyond) FRA.

-ERD50

You're the one calling it semantics... I think it is a silly rationalization to justify a tin foil hat fear that SS benefits will be changed. Besides, in the rayvt post I was responding to its pretty clear that he was not thinking of the tax attributes of SS benefits changing, but rather SS benefits themselves being changed.

Also, I see you conveniently ignored the fact that even under the current income inclusion rules that if a couple has the maximum SS retirement benefits and no other income that they pay no tax.

So let me ask you this... do you think that SS retirement benefits will be changed for current SS retirees or for people near retirement age?

 

[rayvt]

Regarding the government changing SS benefits for those close to FRA, this has to happen through a legislative change, right?

Yeah, we thought so. Right up until a recent Supreme Court case, where it was determined that an agency, like the IRS for example, can re-interpret a law.
And in 2010 the SSA itself unilaterally changed the "withdraw-and-reapply" option --- with no change of legislation.

If that's the case, then couldn't you go down your local SS office and apply before the legislation becomes law?

It wouldn't make any difference. Often (but not always) a change is made effective retroactive to the first date they considered the change, not the date when it becomes law. Especially it means a large amount of extra money for the government.
SSA didn't do this in the withdraw-and-reapply case because that strategy was more hype than actual value.
IRS did this for a number of tax increases, made a mid-year increase effective as of the first of that year.

If that's the case, then I'm puzzled why people would use this reason to take SS early to lock in their benefit. This seems like a non issue to me, but I'm curious if I'm missing something.

What you are missing is that you are assuming that there is a significant financial advantage in taking SS at any particular age. There isn't.
When properly figured (that is, when you take into account the time value of money) the NPV is only trivially different whether you file at 62 or at 70 or any age between.

People aren't taking SS early to "lock in their benefit". They are taking it early because there is no net financial reason to prefer one age to any other age -- so no reason to _not_ file early -- and because it is more convenient to them to start early.
It's like ice cream flavors. Some people take vanilla, some people take chocolate. But neither flavor is right or wrong, they are the same in and of themselves, its just a matter of taste preference.
Arguing that 70 is better than 62 is like arguing that chocolate is better than vanilla. It isn't, it's neither better nor worse, just different.

 

[rayvt]

You're the one calling it semantics... I think it is a silly rationalization to justify a tin foil hat fear that SS benefits will be changed. Besides, in the rayvt post I was responding to its pretty clear that he was not thinking of the tax attributes of SS benefits changing, but rather SS benefits themselves being changed.

When you starting assuming that people who disagree with you are tin-foil hat people, it's a pretty good sign that it is YOU, not them, who needs to re-examine their position. (Of course, sometimes they are tinfoil hat people, but it's highly unlikely.)

Financially, increasing the tax on SS benefits is identical to reducing the benefit. Semantics does not change that. The IRS itself, in tax cases, has an official stance of looking past the words to the effect, when they nail somebody who tried to cleverly lower their tax by semantics.

While you are looking into possible changes in SS benefits, be sure to google "Social Security means testing". 14 million hits.

 

[pb4uski]

Withdraw and reapply wasn't in statute... it was a policy that had been established based on SSA's interpretation of the statute that inadvertently created a loophole that they judged was being abused by a small minority of wealthy people ending up with a result that was inconsistent with what SSA believe was Congress' intent, so they changed the policy to close the loophole. As you correctly point out, it was more hype since so few people had the means to utilize the loophole.

The IRS did not make tax changes retroactive as you state... Congress did and the President signed it. As you well know, the IRS does not make law, they sometimes lobby for specific changes to the law and sometimes they win and sometimes they lose.

You're wrong in assuming that because SS benefits are designed to be actuarially neutral for a single person that for a couple that 62 or FRA or 70 doesn't make a difference. It is much more complicated than that.

For example, lets say you have a married couple where one spouse is 55 and the other is 62, the older spouse was a high earner and the younger spouse didn't work enough to get in 40 credits. The younger spouse is in great health and the older spouse has significant health issues and close family have died in their 70s. The couple has some resources but SS is significant to them. Do you still think that 62 vs FRA vs 70 makes no difference?

 

[pb4uski]

....While you are looking into possible changes in SS benefits, be sure to google "Social Security means testing". 14 million hits.

Yes, and UFO has 71 million hits... so does it make them true too?

 

[pb4uski]

When you starting assuming that people who disagree with you are tin-foil hat people, it's a pretty good sign that it is YOU, not them, who needs to re-examine their position. (Of course, sometimes they are tinfoil hat people, but it's highly unlikely.)....

Well, for one, I never called you or ERD tin-foil hat people. I said that any realistic concern of SS retirement benefits being changed for near or current retirees is a tin-foil hat view.

I have no problem with people who disagree with me. In fact, over the years forum members have convinced me of their views on a number of issues.

I have problems with people who disagree based on a paranoid view that the government is out to get them.

 

[MichaelB]

This thread is interesting and very useful to most members, hopefully we can respect each other's opinions and keep it friendly.

 

[ERD50]

This thread is interesting and very useful to most members, hopefully we can respect each other's opinions and keep it friendly.

Thanks. My follow up post was going to move towards calming this down, but I'll take it to heart with that.

.. I think it is a ... rationalization to justify .. fear that SS benefits will be changed. Besides, in the rayvt post I was responding to its pretty clear that he was not thinking of the tax attributes of SS benefits changing, but rather SS benefits themselves being changed. ...

Regardless of the intent of rayvt's response, the taxation changes did happen, and did affect people at (and beyond) FRA. Again, my wallet does not care if the reduction as through increased taxes or a straight reduction in benefits, so I see no point in making a distinction.

Do you see a difference between one store offering a product for $80, or another offering the product at $100 with a 20% discount at the register (assuming any sales tax applies to the $80)? You can say there is a difference, but your wallet won't see it.

Also, I see you conveniently ignored the fact that even under the current income inclusion rules that if a couple has the maximum SS retirement benefits and no other income that they pay no tax.

I didn't ignore it, it just wasn't part of your question. I was attempting to answer your question about whether benefits ever changed for anyone at/near FRA. I found two occurrences of taxation changes which did effect the 'in-the-pocket' benefit of SS for some at/near FRA. I didn't comment one way or the other on the magnitude of those changes, or whether it wouldn't affect you if you had no other income, because that wasn't part of your question. You can say they were relatively minor, but they did happen. And I will have other income, so it is important to me.

So let me ask you this... do you think that SS retirement benefits will be changed for current SS retirees or for people near retirement age?

I don't have a crystal ball. I would not be surprised, and I'll go as far as saying I pretty much expect that taxes will be increased on SS benefits over the next 25 years. I think many people will look at it like you are, 'reducing SS benefits' is viewed as worse than increasing taxes on them, even if the end result is the same (or worse!).

-ERD50

 

[NW-Bound]

... 'reducing SS benefits' is viewed as worse than increasing taxes on them, even if the end result is the same (or worse!)...

That is because raising taxes on SS will be viewed as having a larger effect on people with other incomes, the people who already have "too much". If people see that there are others with more money getting taxed more, they will take it as consolation.

Raising taxes has the same effect as means testing, although it cuts off SS gradually rather than abruptly at a certain threshold.

 

[Bestwifeever]

People can be pretty adept at working the tax system to their advantage (millionaires qualifying for ACA subsidies, for example, and moving into Roth IRAs when at a lower tax rate), and more power to them, but they cannot manipulate a "pure" reduction in benefits. So I think there is probably a big difference in the results re taxing the benefits vs reducing the benefits--doubtful there would be a flat tax, not income-based and no exceptions or exemptions, instituted but that would imo be the only thing comparable to a reduction in benefits.

I could see some changes made in the spousal options (the thread topic)--the option to take spousal at FRA and suspend one's own til age 70 (as suggested to me by a SS agent) probably is not actuarily equivalent, for example. Or the survivor benefit could be capped at the FRA amount vs the age 70 amount for those who wait until then to claim it. Not sure how much $$ streamlining thr spousal benefit process would save, of course, or if it would politically be an issue to put changes like this into effect for people already collecting (how many people really plan the survivor amount around age 70 if most take SS before FRA anyway).

 

[pb4uski]

.....I don't have a crystal ball. I would not be surprised, and I'll go as far as saying I pretty much expect that taxes will be increased on SS benefits over the next 25 years. I think many people will look at it like you are, 'reducing SS benefits' is viewed as worse than increasing taxes on them, even if the end result is the same (or worse!).

-ERD50

I don't necessarily view one as being worse than the other and I agree with you that there is some chance that SS benefits may be taxed differently, but for most people that difference in taxation won't have a huge impact on the 62 vs FRA vs 70 decision and in most cases any claiming strategy analysis is done pre-tax.

But lets go back to the origins of the dispute. I said:

This whole thread is why when we are 61 we will pay the $25-$75 to have socialsecuritysolutions.com or some other service evaluate our options for us. I'll also DIY and have my own view but will pay for a pro to assess our best choices as well.

The numbers and cost of a poor decision are too significant to cheap-out on something like this.

and rayvt responded:

Keep in mind that the government can change the SS rules at any time. So the deal you decided upon at 62 may not still be the same deal when you hit 70.....

In both cases we were referring to SS benefit options and income taxes were not part of the picture. My point to rayvt was that since it is unprecedented for benefits for retirees or those near retirement to change that his concern about the deal being changed wasn't really relevant to the decision on claiming strategies.

Beyond that, I'll agree to disagree with you ERD. Not the first time and I'm sure not the last.

 

[Tadpole]

I want to weigh in on why taxation of benefits is, IMO, a reduction in benefits. From the Social Security's own website (bolding my own):


http://www.socialsecurity.gov/OACT/ProgData/taxbenefits.html

Under legislation enacted in 1983, the Social Security Trust Funds receive income based on Federal income taxation of benefits. The funds receive taxes on up to 50 percent of benefits from single taxpayers with incomes over $25,000 and from taxpayers filing jointly with incomes over $32,000.

Legislation enacted in 1993 extended taxation of benefits. The legislation increased the limitation on the amount of benefits subject to taxation from 50 percent to 85 percent for single taxpayers with incomes over $34,000 and for taxpayers filing jointly with incomes over $44,000. All additional tax income resulting from the 1993 legislation is deposited in Medicare's Hospital Insurance Trust Fund.

The tax on the first 50% does a U-turn back to the SS fund. The tax on the next 15% is SS money laundered through some retirees to the HI fund. They could have modified the bend points but that would have been more noticeable since everyone's projected benefits would have decreased. This way only current retiree money is recycled to current and/or future retirees. Tongue-in-cheek, perhaps they should collect it pre-tax and then just tax all it when it is income.