Dina Milne: Welcome to another episode of the The Adviser You Can Talk To Podcast. My name is Dina Milne, and I’m an account executive here at Adviser Investments. I work with clients in a relationship capacity. We’re very pleased to bring you the third and final episode of our three-part podcast series all about Social Security. You can find parts one and two linked to the description below.
Dina Milne: Part of my role is answering my clients’ questions about Social Security and helping them navigate their Social Security benefits. I’m joined today by Alec Rosen, who’s a Certified Financial PlannerTM and also our resident Social Security expert. We’re both really excited because today Alec and I get to answer all your questions about Social Security. Alec, now let’s get to the fun part.
Alec Rosen: Hi, Dina. We want to first and foremost thank everyone for sending in all their questions. We had much more than we thought we would get, and while we can’t cover them all here today we did notice some common themes we’d like to address in today’s episode. Dina, with that said where should we start this conversation?
Dina Milne: I thought we might start with a rather straight-forward question that was prompted by our last podcast regarding spousal benefits. Quite a few listeners were surprised to hear that a spouse who had never contributed to Social Security may be eligible to receive benefits just because she or he is married. Equally, as many listeners were just as surprised that a divorcee could also take benefits equal to half of the ex-spouses. One listener even commented saying, “It sounds like free money to me.”
Alec Rosen: Funny. Well, the good news here is our listeners are right. To answer this question simply: Yes, if you have been married for more than one year and are still married and have attained the age of 62 you can take spousal benefits even if you’ve never paid a nickel into Social Security. For a divorcée, the criteria is a little bit different, you need to have been married for 10 years. You also need to be 62, but you cannot have been remarried prior to age 60. The same applies for those folks.
Alec Rosen: The best part for a divorcée is, your ex-spouse doesn’t need to have applied for their benefit the way that they would for a normal spousal benefit and it can be done in private. Yes, free money.
Dina Milne: It’s questions like these that really are a big part of why we wanted to do this entire series. There’s so many nooks and crannies as it relates to Social Security, and there are many opportunities just like these spousal benefits that folks don’t know about. I might also add that similar free money opportunities can arise with death benefits, and the ability for a spouse to take their deceased full benefit amount upon death. All of these should be investigated if the situation deems necessary.
Alec Rosen: That’s absolutely right. Let’s keep the ball moving here. Another topic we received a number of questions on revolved around pensions, especially for those that may have worked in the public sector. I’ll just read this question, it was from a listener in Ohio. She wrote, “I’ve worked in the school district of my local town for the last 30 years and I know I’m eligible for a pension through work. I understand that this will reduce my Social Security benefits. My husband is retired and receives a larger benefit than I do. If he predeceases me, am I eligible for his full benefit as a survivor?”
Dina Milne: This is a great question, and honestly there’s a lot to it here. I think we break it up and address it in parts. To answer, let’s focus first on how the pension will affect her Social Security benefit and then we can discuss the death benefit. If you receive a pension from work in the public sector, including some teachers, and you do not pay FICA taxes, your Social Security benefits may be reduced. This is called the Windfall Elimination Provision, or WEP for short. What it says in simple terms is that, if you’ve not been paying into Social Security and you’re eligible for a pension any Social Security benefits you might be eligible for will be reduced based on the size of your pension.
Alec Rosen: Let’s take a pause here, because there’s some moving parts inside of this. A natural question will be, “How can I be eligible for a Social Security benefit if I’m not paying taxes to the government from my paycheck?” Well, let’s make sure that we understand that folks may have had a job before their work in the government sector or as a school teacher, and those are the people who will have a benefit that could indeed be affected and reduced by this WEP principle.
Dina Milne: That’s right, Alec. We’re working with a client right now who has just retired. She started her career working in the corporate world. She contributed to Social Security. Midway through her working life she decided she wanted to become a teacher, and she switched careers. Now she’s retiring. She was not contributing to Social Security while she was teaching. However, when she was working in the business world she had been contributing.
Alec Rosen: So she has the benefit, right?
Dina Milne: She’s entitled, yes. She’s entitled to a reduced benefit. Yes.
Alec Rosen: That makes 100% sense. I think many of our listeners are scratching their heads and asking themselves, “Why would the government reduce my Social Security benefits that I paid in just because I have a pension?” Well, think about it from the other side of the coin here. The government instituted this reduction with the idea that those that have a pension from the government shouldn’t also be able to get a full Social Security benefit from the government. Therefore, they reduce your benefit based on that pension amount like Dina said. I think the next logical question is, “How do I know if my pension will be reduced?” Or, “How will I know if my pension will reduce my Social Security benefits?”
Alec Rosen: The first place you should look is you should understand if you’ve paid into Social Security, like Dina mentioned, into that FICA tax. You can find that either on your paycheck, or by checking your Social Security statement, and you’ll be able to understand how much has been paid into the system.
Alec Rosen: If you are paying into Social Security, you are likely considered “covered” and your benefit will not be reduced. If you are not paying into Social Security, you are likely “non-covered” and your benefit will be reduced. If you can’t find it on either statement, your HR department should be able to help you as well. That was a mouthful.
Dina Milne: It was. Now that we understand what happens to the listeners own benefit, we can tackle the next question, which is around survivor benefits. If her husband should predecease her, would she receive his full benefits since they are larger than hers? Sadly, the answer is no. She might not be eligible to receive the normal survivor benefit if she’s non-covered or hasn’t paid into Social Security, and that benefit will be reduced by two thirds of the pension amount.
Dina Milne: The reasoning is that since she didn’t contribute to Social Security and the pension is used to offset that, the same would apply to the survivor benefit.
Alec Rosen: That’s right, and the government calls this Government Pension Offset, or the acronym is GPO. The idea is the same as WEP. If you have a pension from the government, your survivor benefits will be reduced by that pension amount. GPO doesn’t affect your own benefits the way that WEP does, so we see it less often. Again, like Dina said at the beginning of this, all of these situations should be investigated so you know what’s coming down the road.
Dina Milne: Sounds good. Let’s change gears a little. We received a few questions around file and suspend and restricted application. These were two generous benefits that enabled people to defer their own benefits while claiming a spousal benefit. Now, the Bipartisan Budget Act of 2015, specifically Section 831. I love the name—it’s called “Closure of Unintended Loopholes.”
Alec Rosen: Very direct, yes.
Dina Milne: It changed everything, so the file and suspend option was made no longer available after April 29, 2016. The restricted application benefit is available for anyone born in 1954 or earlier, and it’s meant to be phased out by 2023.
Alec Rosen: That’s right. For the purposes of today’s conversation let’s focus on restricted application because that’s the one our listeners can use today. For those of you who are 65 years or older, you may have the opportunity to use this strategy. Put simply, the idea is that you file for your spousal benefits now, but you can restrict your own application and allow your benefits to grow at that 8% a year up to age 70. Now again, this only works if your spouse is taking your benefit today, and we don’t see it very often but it’s very savvy for those that are eligible and it can make a lot of sense.
Dina Milne: Sounds good. We’ve covered a lot but we’ve also had some other questions that are quicker to answer. Alec, let’s make it fun and head into a new segment we like to call, “Rapid Response,” where we ask each other quick questions on a topic related to financial planning and investing.
Dina Milne: Alec, are you ready?
Alec Rosen: I am ready. Let’s do it.
Dina Milne: Okay. Where and how do you apply for Social Security?
Alec Rosen: There are three ways: You can do it online. You can do it by phone at 1-800-772-1213, or you can do it in person. We recommend setting up an appointment.
Alec Rosen: Dina, what is the Social Security tax limit?
Dina Milne: Up to 85% of your Social Security may be taxable depending on your total income.
Dina Milne: Alec, what if I take Social Security early but still have earned income. Will I be penalized?
Alec Rosen: The short answer is yes. It’s more of a withholding and it depends on your income limits, but certainly be aware of this if you’re making money and you’re filing before your full retirement age.
Alec Rosen: Dina, once I file for Social Security, when will I receive my check?
Dina Milne: Payments are based on your date of birth, and they’re made on the second, third and fourth Wednesday of the month. For instance, if you were born on the 1st to the 10th of the month, you’ll receive your check on the second Wednesday. The 11th through the 20th, you’ll get it on the third, and so forth.
Dina Milne: Alec, how many people are receiving Social Security today?
Alec Rosen: 61 million.
Dina Milne: Wow.
Dina Milne: Well, that was fun. We covered a lot today: We talked about spousal benefits and free money, as well as divorce benefits. We talked about how pensions might reduce your benefit. We also talked about restricted application for folks who are born before 1954.
Alec Rosen: We also did a fun lightning round.
Dina Milne: That’s right; we did—how could I forget? Alec, do you have anything else to add before we wrap up?
Alec Rosen: Just one more item, and I know we’ve mentioned this in our prior podcasts. At the risk of sounding like a broken record, we just want to continue to encourage our listeners to seek help when it comes to these more complicated situations we covered today. The fact of the matter is, what we keep hearing from our clients and listeners alike is that, Social Security doesn’t always provide the most sound answers. Furthermore, when you call in there can be long wait times, and the training is unfortunately just a few weeks long for those on the frontline. If you do need help obviously we’d love to answer any questions that you have. Again, we recommend setting up an appointment at your local Social Security branch and meeting with them face to face.
Alec Rosen: The last thing I would add: We’ve included some additional resources here in the description of the podcast that might be helpful for our listeners if they want to learn more.
Dina Milne: Well, thank you. This has been Alec Rosen and Dina Milne from Adviser Investments. Thank you for listening to another The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can also check us out at AdviserInvestments.com/podcasts. Your feedback is always welcome, and if you have any questions or topics you’d like us to explore, please email us at info@AdviserInvestments.com.