Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Social Security is a key component of most retirement plans, but there's still a fair amount of confusion about the ins and outs of the program. Joining me to discuss some common myths and pitfalls of the Social Security program are Doug Nguyen and Andrew Salata of the Social Security Administration.
Gentlemen, thank you so much for being here today.
Doug Nguyen: Well, it's great to be here, Christine.
Andrew Salata: Thank you.
Benz: You are on the front lines with individuals who are receiving Social Security benefits, and you've bought with you some of the common myths, misconceptions, and pitfalls associated with Social Security. One, and I know this has been a hot topic among some of our Morningstar.com users, it's this idea of a do-over. It had been a very generous provision in the past; that's changed though. Doug, let's talk about that.
Nguyen: Right. Christine, you're exactly right. It was a very popular thing when people were taking benefits and withdrawing at about every other year, and we were seeing people treating Social Security like it was an interest-free loan and that is not what the benefit was designed to do.
Benz: So, the basic idea, though, is that you can start your benefits, then restart them at some later point down the line at maybe a more advantageous point. As long as you payback those previous benefits, that's an OK maneuver. How has it changed though?
Nguyen: Right. Back in December 2010, we began restricting the number of times that an individual can withdraw an application and reapply. They can now withdraw once in a lifetime, and they have to do it within 12 months of the first month that they become entitled to benefits.
Now, there are some things that are closely tied to that. We have to get consent statements from all the auxiliaries that are on the record. All the benefits must be repaid including Medicare benefits, and the auxiliary benefits that we paid to the dependents have to be paid back. And then they can reapply and start over again at a higher benefit rate.
Benz: Now, when you say you need consent statements from all the auxiliaries, what does that mean?
Salata: With Social Security benefits, we always think of Social Security as just the retirement benefit, but it is a family benefit. So, if you are receiving Social Security benefits, you may have a spouse who's eligible for benefits or even children under the age of 18, still in high school, or special needs children on the record. If you're withdrawing your application, we're not going to be able to pay your dependents, the spouse or the children. So, we would need to have a statement from them, acknowledging that they're also returning the benefits, as well.
Benz: OK, so there is a much more restrictive do-over provision. Another stumbling block for some people you say is this concept of full retirement age. I think we all have the number 65 burned into our brains as the year when retirement starts and maybe Social Security starts. That has changed for younger people. What is the new full retirement age?
Nguyen: Right. The full retirement age, Christine, has been slowly moving up from 65 to 67. Now, the age at which people can get a 100% of their retirement benefits is going up. It's age 66 for people who were born between 1943 and 1954; for younger workers who were born in 1960 and later, it's now 67 as their full retirement benefits.
People can still apply for retirement benefits as early as 62, but they need to realize that it could be a permanent reduction of anywhere between 20% and 30% of their benefits, if they take it early.
Benz: So, if you don't wait until that full retirement age, you need to know that you will have some reduction in your benefits. Andrew, let's talk about why else that full retirement age number is such a critical number, when it comes to looking at your total Social Security package.
Salata: The first reason for the importance of the full retirement age is that's when it is 100% of the benefit. So, if you do take a retirement benefit earlier than your full retirement age, there is a reduction for age, and it's by the month. But if you did go as early as 62, as Doug had mentioned, it's a 75% of your benefit [compared with] those with the full retirement age of 66.
One thing to really consider, really remember, is it's a permanent reduction. Some individuals may think, "I'll take the benefit at 62 and receive 75%, and then when I reach my full retirement age, I'll have my 100%." Unfortunately, we're not that generous. If you do take it early for up to those four years earlier, that reduction does stay with you after full retirement age. So, that's the important part, and that's what we really want decisions to revolve around, that full retirement age. [We want retirees to know how] taking it early is going to impact your benefit as well as family benefits.
And then if you do delay retirement, because that's the other part of it when we look at the other side of full retirement age, there is an 8% increase for each year after full retirement age. So, if you wait until 70, the maximum you can delay, that could give 32%, or almost one third, more than what you'd receive at 66.
Benz: So, that start date is very important; it affects the size of your benefit over your whole lifetime. Andrew, you also noted that that the concept of spousal benefits and how two partners can together employ Social Security is a big source of confusion among people receiving benefits. Let's talk about how those spousal benefits work and how those partners can think about maximizing their lifetime benefits.
Salata: I'll start with how spousal benefits came about. That was one of the first actual adjustments to Social Security when we added more than just retirement. We decided that spouses to cover both parts of the family is important. So, a spouse can receive up to 50% of the working spouse's benefit at their full retirement age.
However, now I guess what we have is with more households with two incomes, individuals may have a choice or have a higher Social Security benefit on their own work, and that kind of leads into some misconceptions, as well.
People have heard that there is a family maximum; the most that the SSA can pay out on one record is for the working spouse as well as the spousal benefit, so it's about 150%. Well some individuals think that if both worked, are they both going to be able get their full retirement, or is there that family spousal maximum? And in this situation, if a couple both worked and received their own Social Security benefits, they're going to have that full 100% on each end without it interacting.
Benz: So, for couples with, say, roughly equal salary histories over their lifetime, in their case it's probably just best to each take their respective benefit and not bother with the spousal benefits?
Salata: Correct. I mean there are some issues where they could look at spousal benefits, but generally speaking if you are filing prior to full retirement age, you have to take the higher of the two benefits, and that generally is your own retirement. But if you wait until past full retirement age, then you have some options of taking a spousal benefit, which is lesser, to let you wait for your delayed retirement like I mentioned earlier that waiting until age 70 kind of gives you that extra amount.
Benz: Right. So, another source of confusion relates to people who are divorced. And obviously this is a large part of the population, so it's an important question. People wonder how their benefits work if they become divorced. Do they still receive the spousal benefit? Do they not? Let's talk about that?
Salata: Well, one thing is with that divorce decree, there is no way to cancel out Social Security benefits to your ex-spouse, unlike if you have a private pension or anything else. Social Security is a benefit that we pay out to spouses or ex-spouses because anytime there is a dependent benefit, it doesn't reduce your own worker benefit. It doesn't affect you in any way if we pay out a spouse or ex-spouse.
The other part about it is, going back to that divorce decree, you do have to have a marriage that lasted at least 10 years prior to the finalization of divorce. So, if you were married, lived together for a year, legally separated for nine years, and then divorced in that 10th year, it counts because we only look at the date of marriage to the actual divorce date. So if it's a 10-year marriage, you are eligible.
A lot of times what people look at or ask us about is, "I am getting remarried? How is that going to affect my ex-spouse?" Well, with Social Security since, again, it's a spousal benefit and it doesn't affect you as the worker, if you have a current marriage, your current marriage will not affect your ex-spouse's benefit, as well. So, we could be paying both the next spouse and a current spouse on your record.
Benz: Doug, last question for you, we're coming up on the tax-filing deadline, April 15. I'd like you to talk about the common mistakes that you see Social Security recipients making around this time of year.
Nguyen: Sure. I don't know if it's the top mistake, but we certainly see it a lot. We see individuals who marry or divorce, and they forget to change the name with our Social Security office or their employer. That's very important for tax-records purposes.
For people who are getting benefits currently, we've been mailing out the Social Security benefits statements, the 1099, through the end of January. If they didn't get one, they can request for a replacement benefit statement online at socialsecurity.gov. If they're an employer, we encourage employers to file their W-2s online electronically. They can print out the W-2s for their employees if they file the W-2s electronically.
And of course, we encourage everyone to come online and sign up for a My Social Security account so that they can double check their name and their Social Security number and all of the data that's on their personal records to make sure that it all matches with their cards.
Finally, if you're an individual getting total income, including Social Security, of $25,000 or more or if you're a married couple earning $32,000 or more in total income, part of your Social Security benefits could be taxable, and [the recipients] need to work it out with their accountants.
Benz: So, don't assume that it's always a tax-free benefit.
Nguyen: That's right.
Benz: Doug, Andrew, thank you so much. A lot of important material here. I am glad we got through some of it. Thank you for being here.
Nguyen: Thank you, Christine.
Salata: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.