>Kiplinger’s magazine, to which I subscribe, is not always useful since it seems to concentrate on stock tips, and I rarely buy common stocks. Recently, they have run a series of articles that are aggravating and infuriating to me, because they broadcast some very lucrative loopholes that can allow people to obtain much larger social security benefits than must have been intended in the program as conceived. Let’s take a look at them:
This article describes a scheme where a married couple has both earned a social security benefit by working and earning enough credits to qualify. Normally, both spouses would probably retire and take the benefit around the same time, and obtain the retirement benefit that they’re entitled to based on their wage history. Kiplinger’s, on the other hand, advises that one partner should take the retirement benefit early (you can take it as early as 62 years old, but the benefit is reduced) with the other spouse claiming the spouse benefit. This would allow the other spouse to delay claiming their own benefit as long as possible, increasing its amount.
Clever, but I find this scheme distasteful. The spousal benefit was not a part of the original 1935 Social Security Act (added in 1939), and was intended for the non-working spouse or minor children of the family’s sole breadwinner, not a spouse who had earned a benefit through their own work.
Even better is this article, which describes the “Social Security do-over”. It’s typical for people to think about taking the retirement benefit as early as 62 because they are concerned about a short life expectancy. Taking the benefit this early can reduce the benefit by as much as 30 percent. However, someone that survives their early retirement years and has other financial means can “reset the clock” as late as age 70 by paying back all benefits received to date, without interest. Then, you get to recalculate your benefit based on your new retirement age, which can increase your benefit by about 50% over the benefit at age 62.
So people wealthy enough to fund 8 years of retirement out of pocket can take an interest-free loan from the government. For typical benefits, we’re talking about “borrowing” $100,000 or more interest-free that doesn’t have to be paid back if the retiree dies during that 8 years. After that, it’s as if it never happened and the retiree can take the maximum benefit for the rest of their life. The specific example given in this article involves a benefit that starts off at $1200 per month, and increases to $2100 after the “do-over” for a payback of $130,000. To buy a comparable increase in benefits as an annuity, the article states that would set you back $190,000. The annuity doesn’t automatically increase for inflation and have a spouse benefit, either, so the government is giving the retiree an interest-free loan and benefit package worth more than $60,000. There is no clear policy justification for this loophole. I would modify this one by requiring interest on the loan, equal to the rate on the T-bills the government has had to issue to borrow the money in the meantime.
The last one involves a retired gentleman who has remarried and has a 4-year old child with his new wife. He recently discovered that his young child is eligible for a benefit equal to half of his benefit, and has received a $40,000 retroactive payment for the 4 years she should have been receiving payments. The money is being invested for her college.