"We’re talking about one of the most complicated bureaucracies in the world. There’s 2,708 rules, there’s hundreds of thousands of rules about those basic rules in their program operating manual system. The staff are poorly trained, underpaid, a lot of them are new, they’re overworked, there’s too many people and they’re underfinanced as a bureaucracy so they can’t hire enough people.” - Laurence Kotlikoff
Today we hear from NY Times Best Selling author Laurence Kotlikoff about Social Security and divorce. He is going to give us just a taste of how complex social security is, and he shares his vast knowledge on the subject. This episode you’re going to want to listen to more than once!
To Learn More:
by Laurence J. Kotlikoff and Philip Moeller
Maximize My Social Security Software
20 reasons why I think Social Security is sexist by Laurence J. Kotlikoff
This transcript has been edited for clarity.
Shawn: Today on the show I have with me Larry Kotlikoff. He is a Professor of Economics at Boston University, and also the author of Get What’s Yours: The Secrets to Maximizing Out Your Social Security. Larry, welcome to the show.
Larry: Thanks for having me, so much.
Shawn: Larry, I thought divorce was tough until I read your book about social security. Why don’t we start with some basics for the listener audiences? What is social security?
Larry: Social security is a program to try and provide income to people in retirement and also for disabled people, and people that are survivors. It’s form of social insurance and it’s a compulsory form of social insurance where we force people to pay in taxes, and then we give them back benefits when they’re retired, when they are survivors, widowers, surviving children, or when they get divorced, if they were married for ten years or more you can get divorce benefits, spouse benefits and widower benefits. Partly it’s a for saving system and partly, it’s a forced life insurance system, and partly, it’s a forced disability insurance system. If you become disabled, you can also collect disability benefits. It’s forcing us to make sure that we buy insurance. I think the rationale for all is that we’re all concerned about each other at some level. We’re all altruistic, so therefore helping our fellow man is really a public good, it’s something we all get pleasure from. We don’t want to see large numbers of starving older people or large numbers of disabled people that are eating cat food. By having the government organize this we get around the free riding problem where it’s easy for one person to say, “Well, let Joe over there take care of Frank who is disabled.” And Joe over there says,” I’m not going to take care of him, you take care of him.” And Frank doesn’t get taken care of. That’s why economists see this as a situation where you need to have the government involved in forcing people to contribute so that somebody like Frank who does become disabled actually has money to eat with. It’s a defense system. We wouldn’t think that Joe should go build his missile. He won’t build it. He’ll say “Well let the guy over there build the missile, and defend me with his missile.” And the missile will never get built. When you really get down to the essence where social security is coming from, it’s coming from the fact that it’s a public good. That’s one quick thing to say about social security.
Another important thing to say is that the system has been run or financed on a pay as you go Ponzi scheme method. I actually call it, “take as you go” because what’s happened is that through the years we’ve continued to raise the benefit levels paid out to older people, and we’ve taken money from younger from older people and said, “Don’t worry you’ll get yours. You’ll be able to take your money from the next generation when you’re older.” That’s very much of a Ponzi scheme, that’s a chain letter. It’s a corrupt way of financing and it’s an immoral way of financing a policy like this.
Social security is terribly indebted in the sense that it’s got an unfunded liability of about 32 trillion dollars, it’s about 33% under financed. We’ve got Medicare which cannot pay for its spending through time. It’s terribly under financed, Medicate the same thing. These social insurance programs have been run on the cheap and at the risk of our children, and at the cost to our children. The whole country at this point is fiscally broke. Bankrupt, really is the right term to use because of these programs and other spending that the government does that it hasn’t paid for, including defense spending.
Shawn: I think that makes a lot of sense. So let’s bring it back for a second. The way that people on everyday basis pay for social security is through FICA? Is that right? How does that work?
Larry: Yes. Everybody pays through FICA. Most of Medicare’s cause for being covered, not by FICA taxes, or by Medicare part b premiums or by part d premiums, but by general revenues. Medicare, which is a part of social security, that the (HI) Heal Insurance, or Hospital Insurance part of social security, that is being paid by general revenues to a large extent. Social security itself, we have general revenues coming in there too. We have taxation of social security benefits and that taxation appears on our federal income tax returns, and those tax dollars go over to the social security system.
Shawn: When you say taxation of social security benefits, that means when someone starts receiving social security that gets taxed as income?
Larry Kotlikoff: Yeah. If your income is too high, it doesn’t have to be that high, you start having 50% of your social security benefits included in your taxable income or what’s called your gross income. Then, if your income gets a little bit higher it becomes 85%. So in the limit, 85% of your benefits can be fully taxed under the federal income tax. Through time that’s going to happen to our kids. The thresholds beyond which our incomes are subject to social security benefit taxation, those thresholds are not indexed for inflation. Through time as all the prices rise and wages rise and social security benefits rise, and the other source of incomes rise, we’re going to have everybody above the thresholds, above the second threshold, the 85% threshold. Everybody will have 85% of their benefits subject to federal income taxation. That’s another way in which we’re expropriating our kids; leaving our fiscal time bombs for our children. Some of these new Medicare high income taxes, also the thresholds, are not subject to taxation. Everybody will be facing them.
Another example here is Medicare part b premiums. There’s a premium for people with low income and then there’s a premium for people that have high income. The threshold beyond, you have to pay that much higher Medicare part b premium, that’s also not indexed for inflation. All this stuff is kind of stuck in the tax code in a way to come back and bite people, and it’s going to most bite our children. It’s being put in by older people because they don’t have to pay the bill, and they’re happy to leave it to the kids. They know full well that they’re doing this when they do it.
Shawn: I think that makes sense. It’s definitely a lot to think about. You mentioned earlier divorce, and there’s different types of social security benefits. Given that this is the Divorce and Your Money Show, why don’t we discuss some of the divorce benefits? Just starting with a basic question, what types of benefits are there for people who are divorced? You mentioned something about a ten year rule.
Larry Kotlikoff: First of all, you have to have been married for ten or more years to be eligible to get any divorcee social security benefits. You can be married ten years and one day that’s just great. You don’t have to live with the person. You can, for example, get separated after ten years, whether formally separated or informally in two different countries if you wanted. As long as you’re legally married, social security will think that you’re legally married and accept that you are. You’re doing nothing illegal. Then, on your tenth anniversary you go and get divorced. For anybody who is close to ten years into a marriage, five or more years into a marriage, they should think many times over before they get divorced, especially if their partner is a high earner or a much higher earner than they are, whether it’s in the last couple years or likely to be a very high earner in the future. It could be that you’re married to a dental student and you’ve been married for eight years and then he runs off with his hygienist. You’re angry, you want an immediate divorce but it’s much smarter potentially if you’re a school teacher and he’s going to be earning several hundred thousand dollars a year. It’s potentially much smarter for you to just cool it for two years and live apart and formally go and get divorced, then you’ll be eligible for divorcee spousal benefits, and when he passes away you’ll be eligible for divorcee survivor benefits, widow benefits.
Shawn: So what is the divorcee benefit in general that you’d be able to have if you’re married over ten years?
Larry Kotlikoff: Let’s say you were somebody who earned no money on their own and you’re married to somebody who does have a social security earnings history of at least forty quarters of coverage, and is fully covered by social security. You reach your full retirement age that’s currently 66 going up to 67, you can collect half of your ex’s full retirement benefit. Not half of what your ex actually collects but half of what your ex would have collected had he started his or her full retirement benefits at his retirement age. If you take your divorcee spouse benefits earlier at 62 you would get 75% of half of his full retirement benefits. You would get a reduction in your divorce spousal benefit. A third point is that if you wait beyond your full retirement age, there’s no advantage because your divorce spousal benefit won’t get any bigger. If you take it before retirement age it will be smaller. So there’s a reason and advantage to waiting to collect it, but no advantage after full retirement age.
A fourth point is that under the new law that was passed in November of 2015, anybody that was under 62 on January 2nd 2016, they’re not grandfathers, so what’s going to happen then is whenever they go and try to collect their divorce spousal benefit they’ll be forced to take their own retirement benefit and that’s called deeming. No matter if they take their divorce spousal benefit at 52 or 63 or at full retirement age or even at 68, whatever age they do this they’ll be forced to take their retirement benefit as well. What social security will do is give them essentially the larger of the two benefits. It’s not exactly that formula but it’s close to the larger of the two benefits. If you’re somebody that had earned a lot of money, then your divorce spousal benefit will basically be worthless because you’ll never collect it. You can go and apply for it but you’ll then be forced to take your retirement benefit, it will be larger and then they’ll just give you that. If you try and deal with this early, your retirement benefit will be reduced, so you’ll get your reduced retirement benefit as opposed to waiting till 70. Right now if you wait till 70 relative to taking your benefit at 62, the benefit is going to be 76% higher because the retirement benefit is reduced if you take it at 62, but also if you wait between 66, full retirement age right now, and 70, it’s increased by 32% due to something called the “delayed retirement credits”. So these delayed retirement credits apply to your retirement benefit but not to your divorcee spousal benefits or to widower benefits.
Under the new law if you’re a pretty good earner compared to your ex, have just lost all your potential divorce spousal benefits based on this new law that comes thanks to the combination of the democrats and the republicans getting together with no discussion or debate, and passing this without anybody getting to see the bill. Really it was part of the budget act of 2015, and we can discuss the reasons for why it was initiated and passed. Anyway, even that person who is not going to get divorcee spousal benefits, may still get divorcee survivor benefits, widow or widower benefits, because the benefit there is 100% of what the ex was receiving in their check. With one exception, the form is somewhat different if the ex took their benefit before full retirement age. That part aside, let’s assume that the ex took their benefit at 70 at the highest possible level, and you were married to that person for ten or more years, when that person dies you can start collecting a windows benefit as early as age 60, and if you’re disabled, as early as age 50. If you take it at 60 it will be reduced by about 30% relative to taking it at full retirement age. In that case, it could be that this divorce widows benefit or widower benefit exceeds your own retirement benefit. Unlike with the divorce spousal benefit, when we are talking about a divorce widow or widower benefit, there’s no deeming. You can take your divorce widow or widower benefit first at age 60 for example, and then take that for ten years till age 70, and then take your own retirement benefit.
Shawn: So it sounds like there’s some tricks to maximize that benefit if you’re smart about it.
Larry Kotlikoff: Or you could flip it. You could take your retirement benefit at age 52, that’s the earliest date you can take your retirement benefit. Take that up to full retirement age and take your widows benefit or widower benefit, or again, if your ex took his or her retirement benefit before full retirement age, then you would want to take your divorce widow or widower benefit before full retirement age, maybe a year or two before. You have to use advanced software to figure out exactly when to do it to maximize your benefits because this other formula kicks in that determines the divorce widow or widower benefits in the case that the ex takes their retirement benefit early. It’s pretty complicated and only a really sophisticated computer software can figure out how to help you and advise you here.
I did want to mention that the purpose of this discussion is not for me to hawk any products but I do have a software company, so I do want to tell people about the software that’s available, because it will help them. It’s very inexpensive, it’s only $40 and I personally don’t get any money from my company. I run it from my perspective as a non profit and have been for two decades. I’m not personally benefiting. If we make more revenue, I’ll be able to give my great employees a raise but that’s the only thing that I’ll see happen if we get more revenue in. Here we have a program that’s called Maximize My Social Security. It’s maximizemysocialsecurity.com. If you have your ex’s earning history you can plug that in, if you don’t you can just plug in the full retirement divorce benefit and the program will understand what the divorce widower benefit is from that information. You’ll also enter your own earning history which you can grab from the social security website, and cut and paste it into our program. We describe how to do that, or you can in some cases just tell us what benefits they told you you’d get at full retirement age. Within about a minute or half a minute the program will come back and say “We’ve looked at 20/30 thousand different strategies for you and here’s the optimal thing to do with respect to taking your benefits.”
If you’re old enough to have met this grandfathering deadline that was part of the 2015 new law, the program will know that because of the questions it asked you, and will figure out the best thing to do given that you’re grandfather. If you’re too young to have been grandfathered it will know the best thing to do in that circumstance. If you’re widowed it will know what to do. Anyway there’s this great tool, maximizemysocialsecurity.com, tens of thousands of people have used it. I think it’s the most accurate software around and it handles people that are disabled or have disabled children, or young children as well. There’s that tool available to them.
Shawn: When we think about all these calculations, while you’re still married or in the divorce process and maybe want to use a tool, Maximize My Social Security and you start to get a handle on this information, what should people be thinking about? What information will they need that they should probably start gathering today while they have access to everything? For some people it might be 20 or 30 years in the future before they start thinking about these things and for others it might be a year or two around the corner. What kind of information does someone need to gather right now?
Larry Kotlikoff: Well, I would keep a track of my social security earnings history because who knows what the Russians will do at some point in terms of wiping out all the records electronically that social security has. I would print out my social security earnings history and keep doing that every year. If you can get that for your ex, do that as well, and give them yours because your ex can collect on you just like you can collect on him or her. Assuming you’re both married ten years formally.
Another resource, I have a co-authored book called Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security, you mentioned that at the top of the hour there, or top of the show. This book became a New York times best seller, it sold about a quarter million copies so far. It was revised because of the change in law in 2015. It’s an easy read and kind of a fun read. We’re not too kind to the social administration when we describe how they’re processing or helping people. One of the reasons you might want to read that is to learn about it. If you are divorced it tells you about the benefits, we just talked about. It also tells you about whether or not it will make sense to remarry or when you might want to get remarried. That question comes up when we’re talking about social security in divorce. If you are 63 and you’re collecting a pretty good size divorce spousal benefit because maybe you didn’t have much of an earning history, maybe you stayed home and watched the kids and your husband was a high earner and was just more economical for you to stay home with the children, than to go out and hire an au pair and get a low paying job. So anyway, you have a low earnings history and the divorce spousal benefit is significant. If you get remarried it’s going to go away, so many you don’t want to get remarried, or if you are remarried, maybe you want to get divorced. Maybe remarried at 50, now you’re 62, well you could get divorced and start collecting on your ex as a divorced spouse, assuming again that your own retirement benefit was small or relative to the divorce spouse benefit.
Another point is that while you can now collect a divorce spousal benefit if you remarry, you can collect a divorce widow or widower benefit if you remarry, but you have to wait till age 60 in order for you to be able to do that. For people that remarry after age 60 they can still collect on their ex when their ex dies, or if their ex has already died, they can collect on their ex. If that ex is still alive they cannot, if they remarry, collect. If you think about this Shawn, it’s pretty nasty treatment of divorcees and it was set into place at a time where men earned a whole lot more than women. Men still earn more than women on average in the US, but the difference is smaller. Think about it, back then these men who decided social security rules decided that “Gee, if my wife walks out on me before ten years, I’m going to screw her. I’m going to say no social security benefits for you.” So this was punishment on women who left their husbands. I’m quite convinced this is where it came from. Male chauvinism at play. Then if you think about why it is that they’re going to force somebody to wait till they’re 60 to remarry before they can get widow or widower benefits on their ex, again, it’s a form of punishment. If my ex wife marries when she’s still young and attractive, I’m just putting words into their mouth here, I wasn’t there when they wrote this but this is what I conjecture, “I’m going to punish her.”
If you think about it, why is 10 years some natural number. If we’re setting this system up from scratch in modern society today, would we decide that somebody who gets divorced after 9 years is ineligible to collect benefits, but someone who gets divorced after 10 years is? No I don’t think so. I think we’d say from day one, if the husband is out working and the wife is at home watching the kids, the wife should be entitled to something. We’d split the account so they both have an equal sized benefit in retirement. While they’re still together they’d get equal credits during that period. A lot of what you see in social security divorce rules are really the result of sexism and I think there’s probably ten or fifteen things that I’ve written about in a column. I’m not sure exactly when I wrote it but if you googled my last name Kotlikoff and searched security and sexism it will probably come up. There’s a long list of provisions that are reflection of sexism.
Shawn: I think that’s fascinating. What I’ll do in the show notes is I’ll include a link to that article so people can find it easily. So Larry, one more time, this was great information, really helpful and an extraordinary amount for people to think about. What are the resources, the best places for people to learn more, and why don’t you give out the software one more time?
Larry Kotlikoff: So the software is maximizemysocialsecurity.com. It’s $40 and just go to that site, buy it and use it. It will give you the best suggestions for maximizing your lifetime benefits, regardless of whether you’re married or divorced, disabled, or whatever your situation is –grandfather or not grandfather. Another good source to get general knowledge is this book that you can probably get from Amazon, well forget Amazon, it’s better to use a local bookstore as they need your money more than Amazon. It probably costs $15 in a local bookstore, and it’s called Get What’s Yours: The Revised Secrets to Maximizing Your Social Security. The authors are myself, Larry Kotlikoff, Paul Solman, he’s a PBS news hour economics correspondent, and Phil Moeller he’s a longstanding personal finance columnist. Those two tools will put you in good shape with dealing with social security. You do not in general want to be asking questions of social security because I think about half the time you get the wrong answer from social security.
Shawn: You mean the agency?
Larry Kotlikoff: From the agency, from talking with them on the phone or going to their office I’ve heard and written about so many horror stories, it’s truly unbelievable. We’re talking about one of the most complicated bureaucracies in the world. There’s 2708 rules, there’s hundreds of thousands of rules about those basic rules in their program operating manual system. The staff are poorly trained, underpaid, a lot of them are new, they’re overworked, there’s too many people and they’re underfinanced as a bureaucracy so they can’t hire enough people. They tend to be too often very arrogant. “I know the answer, you don’t. This is it, goodbye.” I’ve called them on behalf of people on occasion and had somebody yell at me for half an hour and I say “Look, I just want to know that I have your name spelled right because I’ll be writing about you in PBS news hours, on their website tomorrow on Forbes.” And they hang up, and five minutes after they call back and they apologize, “Oh, I double checked and I was wrong, you were right.” After screaming at me for half an hour telling me I was wrong
Shawn: Wow. Larry, that’s a lot to say about a lot of things you have in there. We’re out of time for today. Thank you so much for coming on to the show.
Larry Kotlikoff: My great pleasure. Thank you.
Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching and a full transcript of this episode. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.