Q&A: The idea here is not to cheat public servants

Dear Liz: Thanks for your column about Social Security claiming strategies. Here’s a further complication you didn’t address. If the surviving spouse is a teacher in many states, access to survivor’s Social Security benefits is further restricted (if not entirely blocked) by a misogynistic, anti-teacher ruling dubbed the windfall elimination provision, which perhaps was a backlash against the women’s liberation movement of the 1970s and 1980s.

Any clarification on the windfall elimination provision’s inconsistent application and its impact on my widow’s fixed income will be greatly appreciated.

Answer: The explanation is actually a lot more prosaic.

The windfall elimination provision and a related measure, the government pension offset, were not designed to rob public servants of benefits other people get. Instead, the provisions were meant to keep those who get government pensions from getting significantly bigger benefits than people in the private sector.

The provision that would reduce and possibly eliminate your spouse’s survivor benefit is actually the government pension offset. The offset, like the windfall elimination provision, applies to people who get pensions from jobs that didn’t pay into the Social Security system. (Some school systems, as well as other state and local government employers, have opted out of Social Security and provide their own pensions instead.)

If both you and your spouse had only Social Security and no government pensions, one of your two Social Security checks would stop at your death. After that, your spouse would get one check — the larger of the two checks the household received — as a survivor benefit.

If the government pension offset didn’t exist, your widow c​ould receive two checks: a survivor benefit equal to your Social Security benefit, plus her pension. She potentially would be getting a lot more from Social Security than those who paid into Social Security their entire working lives.

The windfall elimination provision, meanwhile, applies to people who have government pensions but also worked in jobs that paid into Social Security.

When people don’t pay into the system for several years because they have jobs with government pensions instead, their annual Social Security earnings for those years are reported as zero. Because Social Security is based on ​workers’ 35 highest-earning years, those zeros make it look like they have lower lifetime earnings than they actually did.

That’s a problem because the Social Security system is progressive, replacing more income for lower-earning workers than for higher-earning ones. Without adjustments, people with pensions would look like lower earners than they actually were. They would wind up with bigger Social Security checks than someone who had the same income in a private-sector job that paid in a lot more in Social Security taxes.

These provisions are complicated and hard to explain, which is part of the reason some people jump to the conclusion they’re being denied something others are getting. In reality, the provisions were meant to make the system more fair.

Q&A: What’s better, collecting Social Security early or blowing through retirement savings?

Dear Liz: I am married and six months away from my full retirement age, which is 66. I have not filed yet. My wife started collecting Social Security at 62 but does not get very much. We are both in excellent health and have longevity in the genes. We don’t own a home. I have around $960,000 in diversified investments. I take out around $7,000 to $8,000 a month to meet my monthly expenses. Fortunately, the markets have been good, helping my portfolio, but I am not counting on that to continue at the same pace.

Doesn’t it make more sense to be taking less money out each month by starting Social Security now? I know I would receive less money than waiting until 66 or later, but between my check and the spousal benefit my wife could get, I would reduce my annual living expense withdrawals from my account by close to 50%. This would give my portfolio more opportunity to grow, since I will not be taking out so much every month.

I wish I could cut my expenses or could earn more income but cannot at this point. I am shooting for not taking more than 5% a year out of the portfolio going forward.

Answer: You’re right that something needs to change, because your withdrawal rate is way too high.

You’re currently consuming between 8.75% and 10% of your portfolio annually. Financial planners traditionally considered 4% to be a sustainable withdrawal rate. Any higher and you run significant risks of running out of money.

Some financial planning researchers now think the optimum withdrawal rate should be closer to 3%, especially for people like you with longevity in their genes. Chances are good that one or both of you will make it into your 90s, which means your portfolio may need to last three decades or more.

So even if you start Social Security now, you’ll need to reduce your expenses or earn more money to get your withdrawals down to a sustainable level.

Generally, it’s a good idea for the higher earner in a couple to put off filing as long as possible. The surviving spouse will have to get by on one Social Security check, instead of two, and it will be the larger of the two checks the couple received. Maximizing that check is important as longevity insurance, since the longer people live, the more likely they are to run through their other assets. Your check will grow 8% each year you can delay past 66, and that’s a guaranteed return you can’t match anywhere else. In many cases, financial planners will suggest tapping retirement funds if necessary to delay filing.

But every situation is unique. Your smartest move would be to consult a fee-only financial planner who can review your individual situation and give you personalized advice.

Q&A: How Social Security survivor benefits work

Dear Liz: Will my wife, after I’m gone, be able to claim one half of my Social Security benefits because she is the surviving spouse? I am concerned and confused, because her monthly Social Security benefit is much larger than mine. Does that affect this aspect of the available benefit?

Answer: If by “gone” you mean “dead,” then no, that’s not how survivor benefits work.

When one member of a married couple dies, the surviving spouse does not continue to get two benefit checks. The survivor is given the larger of the couple’s two benefits. If she’s already receiving much more than you, then she will continue taking her own benefit and your checks will end.

The “one half” benefit is the spousal benefit, which is paid out while the primary earner is still alive. Typically when married people apply for Social Security, the retirement benefit they earned is compared with their spousal benefit, which is up to one half of what the other spouse has earned. (The amounts are reduced if the person applies for benefits before his or her own full retirement age.) The applicants get the larger of the two checks.

Spousal benefits also are available to divorced spouses, if the marriage lasted at least 10 years.

Monday’s need-to-know money news

Today’s top story: How to help your partner’s credit without harming your own. Also in the news: Why Millennials can count on Social Security after all, 3 smart ways to supercharge your travel rewards, and the worst financial mistake a grandparent can make.

Help Your Partner’s Credit — Without Harming Your Own
Start by talking about it.

Millennials Can Count on Social Security After All
Good news!

3 Smart Ways to Supercharge Your Travel Rewards
Spend strategically.

This is the worst financial mistake a grandparent can make
No matter how well-intentioned.

Thursday’s need-to-know money news

Today’s top story: 5 pieces of popular tax advice that are actually baloney. Also in the news: VW aims to plug into nostalgia with the electric bus, Social Security is underpaying thousands of widows and widowers, and 33% of Americans don’t have more savings than credit card debt.

5 Pieces of Popular Tax Advice That Are Actually Baloney
Popularity doesn’t make them true.

VW Aims to Plug Into Nostalgia With Electric Bus
We’re going back to the 60’s.

Social Security underpays thousands of widows and widowers
Claiming a larger benefit.

33% of Americans do not have more savings than credit card debt
A third of the country is in trouble.

Q&A: Credit freezes complicate setting up online Social Security accounts

Dear Liz: You’ve recently written about protecting ourselves by establishing online Social Security accounts. Social Security prevents me (or anyone else) from creating an online account because I have credit freezes in place. As I understand the process, Social Security uses the credit bureaus to verify my identity. With a freeze, there’s no identity verification. In other words, in order to set up a fraudulent online account, someone besides me would have to unfreeze my credit report first. Is that correct?

Answer: Pretty much. Another way to establish an online account is to go into a local Social Security office with proper identification. But most hackers are unlikely to take the trouble to do either.

You may still want to create an online account to monitor your Social Security earnings record and promptly correct any mistakes or spot employment fraud (someone using your number to get work).

You could make a trip to a Social Security office or temporarily lift your freeze with the bureau that’s providing identity verification services. Currently, that bureau is Equifax — and yes, that’s the bureau that suffered the massive database breach that started this discussion.

Tuesday’s need-to-know money news

Today’s top story: How to live below your means without feeling deprived. Also in the news: How to dodge the drama of family loans, the launch of Apple Pay Cash, and using Social Security benefits to plan your retirement income.

How to Live Below Your Means Without Feeling Deprived
It doesn’t have to be a slog.

Family Loans: How to Dodge the Drama
Coping with one of the touchiest subjects.

Apple Pay Cash Launches: How It Stacks Up
A new money transfer app.

An almost perfect retirement income source
Using Social Security benefits to plan your retirement income

Q&A: Here’s a way to fight Social Security fraud

Dear Liz: To make us less likely to become victims of fraudulent activity, years ago I froze our credit bureau files. I assume the Social Security Administration could be hacked as well. Can those files be frozen?

Answer: No, but you can create an online account to track and monitor your Social Security records — and it’s probably a good idea to do so. Fraudsters are creating such accounts and using them to divert benefits onto prepaid debit cards. If you created yours first, this fraud will be harder to pull off. If someone has already created an account in your name, you can find out and start the process of taking back your identity. The place to set up your account is www.ssa.gov/myaccount.

Friday’s need-to-know money news

Today’s top story: How to mend holes in your budget with a little needle and thread. Also in the news: Understanding online loans, the cybersecurity best practices for small businesses, and a 2% boost is on the way for Social Security in 2018.

Mend Holes in Your Budget With a Little Needle and Thread
Easy repair measures.

Understanding Online Loans
Reading the fine print.

Cybersecurity Best Practices for Small Businesses
Protecting your digital assets.

Social Security benefits to get 2% boost in 2018
A small raise is in the future.

Q&A: Starting Social Security benefits early will cost you

Dear Liz: I started getting Social Security at age 62. I would have only gotten $327 a month based on my work history, but they gave me $666 based on my husband’s work history. He gets $1,966 but your article said I should get half. Should I be receiving more?

Answer: Probably not.

Your spousal benefit would have been half of your husband’s “primary benefit amount” only if you’d waited until your own full retirement age to apply. Because you started several years early at 62, your check was reduced by 30%.

His primary benefit amount is what he would have received if he started benefits at his own full retirement age. Full retirement age is currently 66 and will rise to 67 for people born in 1960 and later.