Last week, the Social Security Administration released another audit report explaining how some widows have been underpaid benefits. This is in addition to the errors disclosed last year affecting widows that we wrote about in Social Security Short-Changes 100,000+ Widows. The latest report concerns widows that are dually entitled to a retirement benefit and a survivor benefit. In a sample of those falling into this dually entitled category, 82% were found to be underpaid benefits.
An application for retirement or widow(er)’s benefits is an application for both benefits, unless it is restricted. When a widow(er)’s benefit is higher, claimants may delay filing their retirement application up to age 70 to increase their retirement benefits. Claimants may limit the scope of the application to exclude retirement benefits to maximize the amount of future benefits, including the effect of delayed retirement credits before age 70.
The report states that "SSA employees must explain the advantages and disadvantages of filing an application so claimants can make an informed filing decision. However, the decision to file belongs solely to the claimant. SSA employees must discuss and document any unfavorable filing decisions."
In plain English, if a widow is entitled to both a retirement and survivor benefit, the SSA employee, by previously established SSA rules, is supposed to explain the claiming options and then document the claimant's decision. This report finds that this has not happened in many cases.
Mary just turned 66 and has never collected Social Security benefits. She has a retirement benefit from her earnings history of $1,800/month. She is also entitled to a survivor benefit on her late husband's earnings record in the amount of $2,000/month. First, she cannot receive the sum of both of these amounts. But, she does have options of how the benefits are claimed in combination with one another.
If she gets the incomplete advice, as disclosed in the SSA report, she will apply for benefits in a manner that effectively elects her retirement benefit of $1,800, plus an additional $200 of survivor benefit, for a total of $2,000. So, what's wrong with this? Isn't the result favorable since she is receiving the higher $2,000 amount? The answer is no.
Following the above filing method, which is the "normal" filing method in this situation, creates less income in the long run. Mary will receive $2,000 from now on, that's it, end of story. Actually, she will get whatever cost of living increases (COLAs) happen each year, but let's ignore that momentarily for simplicity sake.
Now, if Mary receives complete advice, she will be told that she can restrict her application to only her survivor benefits. She will get the same $2,000, because that is the survivor benefit amount. The benefit of doing this is she will now earn delayed retirement credits on her retirement benefit between age 66 and age 70. This means at age 70, she can then elect her retirement benefit, which has now grown to $2,376 (a 32% increase in her benefit; 8% for each year she delayed).
The math is pretty simple at this point. Either way, she will receive $2,000 monthly between age 66 and 70, while at age 70 she will receive $376 more under the second method. Also, remember how we ignored COLAs before? Now let's bring that in and make the observation that not only is she receiving $376 more per month, but future COLAs will have a greater impact due to the compounding of a higher number.
In this example, if Mary properly restricts her application, here is the cumulative increase in benefits she will receive if she lives to the following ages assuming 2% annual COLAs:
- Age 80 - $54,905
- Age 85 - $84,100
- Age 90 - $116,334
When we say some social security claiming decisions can mean the difference in tens of thousands of dollars, this is what we mean! Knowing how to file for benefits can make a serious difference.
This doesn't mean the SSA is incompetent. On the contrary, given the size and complexity of the Social Security program, the SSA is actually quite good and one of the more financially well-run government agencies. The issues here are that claiming multiple benefits is somewhat complex, survivor benefits have to be claimed at a social security office and these locations are coming under more pressure with office closures.
The bottom line, as always, is to make sure you are getting the best advice before making a claiming decision. We are always glad to help those in need of this guidance.
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.