The complexity of the social security system is truly mind numbing. Even the method to calculate your eligible benefits involves a series of complex calculations.
In it's simplest terms, your benefits are based on your highest 35 years of averaged indexed monthly earnings (AIME). Social security records your highest 35 years of earnings, indexes them into present day values and then calculates a monthly average.
But they don't stop there. To determine your Primary Insurance Amount (PIA), the monthly benefit you will be eligible to receive at full retirement age (age 66 for most retirees today), they then apply three "bends points" to your AIME in order to calculate your PIA. For example, if your AIME is $9,000 in 2015, in order to calculate your PIA they take 90% of the first $826 of AIME, then 32% of the next $4,154 and then 15% of any amount above $4,980. Wow!
So what's the point of knowing the inner workings of your PIA calculation? Well, if you are a police officer, fire fighter or any other worker (such as some teachers and government workers) who have a social security benefit and also contribute to a non-covered pension then this becomes an important matter indeed.
Social security benefits were designed to replace a percentage of a workers earnings. It was also designed to afford a lower wage earner a higher percentage of their pre-retirement earnings than it does for high wage earners. In general, it is designed to provide lower wage earners with about 55% of their pre-retirement income compared to about 25% for higher paid workers.
However, an inequity in the system arose regarding workers whose primary income was from a job where they didn't pay into social security while still working for a smaller income from a social security covered job. Because their recorded social security earnings were low they were being treated as a low income earner (even though their total combined earnings were high) and, as such, were paid a higher percentage of replacement income from social security than they should be paid.
These workers were deemed to be "double dipping", having an unfair advantage over workers who had the same amount of aggregate income but worked only in a job (or jobs) where they paid into social security on all of their earnings.
As such, in 1983 Congress passed the Windfall Elimination Provision (WEP) to remove that advantage. The WEP in these cases reduces the PIA to create a level playing field between those whose work history includes both covered and non-covered employment and those who work exclusively in covered positions.
Without getting into the complex details of the calculations involved in applying the WEP, one point to note is that the first "bend point" could drop to as low as 40% from 90%. Therefore, the effect of the WEP could reduce an affected worker's social security benefit by as much as $400 per month or more. In addition, it also reduces the amount a spouse would be eligible to receive for spousal benefits affected by WEP. The combination of both reductions could substantially reduce a couples social security benefits in retirement.
Separately and in addition to the WEP, there is yet another provision called the Government Pension Offset (GPO) which also affects these same workers who have social security and non-social security covered wages. The GPO will be the topic of my blog next week but it's impact could be as important or possibly more important than the WEP.
So, is there any way to mitigate the effects of the WEP? Yes, in some cases it may be possible but to do so involves a detailed understanding of the rules and careful planning. If you are a police officer, fire fighter, government worker, teacher or other type of worker who does not pay into social security then it critical to know exactly how your social security benefits may be affected by the WEP. With the assistance of a social security income specialist you may be able to reduce or perhaps even eliminate the impact of the WEP.
The ability to finance what could potentially be a twenty to thirty year retirement is a daunting task indeed. It will involve a great deal of planning and the ability to get the most out of all of your retirement assets. If the stock market holds up, interest rates return to historical averages, you maximize all of your pension options (including social security) and get control of your expenses then hopefully you can afford to retire comfortably. However what could derail all of this careful planning and send your retirement plan into a tailspin would be a severe health event to one or both spouses.
From a financial perspective, premature death is manageable with careful planning and sufficient life insurance. However, the more financially crippling health event could be the need for long term care services. If you had a severe health event (eg. heart attack, an accident or Alzheimer's) that you survived but now need care to assist with the activities of daily living (eg. feeding, bathing, dressing etc.), that can be enormously expensive. Whether you require care in a nursing home, assisted living or at home, the expenses could easily range from $6,000- $10,000 per month.
For most retirees, a protracted health event requiring long term care services could potentially wipe out their retirement savings. Then what? If you don't have private health insurance for long term care and your savings are wiped out then the only government program that will pay for long term care services is Medicaid. It's important to note that Medicare pays for medical expenses (eg. hospital, doctor visits etc.) but not for long term care expenses.
To qualify for Medicaid, however, your net worth has to be depleted to $2,000 or less. So, if a long term care event wipes out your savings down to $2,000 then Medicaid steps in. Or does it? Well it depends. Medicaid also has an income test. In my home state of New Jersey, if your monthly income in 2015 exceeds $2,199 you will not qualify for Medicaid even if you have assets worth less than $2,000.
Unfortunately and ironically, this "Medicaid gotcha" is often the result of receiving social security benefits. If your social security benefits alone, or in combination with other income sources, results in your monthly income exceeding $2,199 then, even though you may meet the $2,000 asset test for Medicaid, you will fail the income test to qualify for Medicaid benefits.
For example, let's say your monthly income is $3,000, your assets are worth $0 and a nursing home costs $8,000 per month. You meet the asset test of having assets less than $2,000 but your income is too high (above $2,199) to qualifying for Medicaid. Unfortunately, your $3,000 monthly income falls short of covering the $8,000 monthly nursing home cost. So now what?
Well, for New Jersey residents (and some other states) there's good news. As of December 1, 2014, New Jersey implemented a significant change to it's Medicaid program which effectively eliminated the income cap ($2,199 in 2015) for purposes of determining an applicant's eligibility for Medicaid. Basically, the way it works is any income you receive above the Medicaid income cap must be paid into a special trust called a Qualified Income Trust (QIT) or Miller Trust. By doing so you will now meet the Medicaid income test and Medicaid will pay for your long term care costs whether in a nursing home, assisted living or at home care. All the money that goes into the trust must be paid to the nursing home or assisted living facility etc. but at least the Medicaid recipient can now qualify for full Medicaid coverage to pay for long term care expenses.
Long term care benefits provided by Medicaid are truly invaluable, especially if you have a protracted long term care event (like Alzheimer's or dementia) in retirement, which is becoming all too prevalent these days. Knowing how to access all your eligible benefits in both the Medicaid and Social Security systems can make all the difference in providing for a comfortable retirement. At least now, the potential "collateral damage" caused by a healthy social security income payment will no longer disqualify someone from receiving Medicaid benefits.
Do you think American's have more outstanding credit card debt or student loan debt? If you said student loan debt you would be correct! In fact, as of April 2014, American's had $1.12 Trillion in student loan debt compared to $854 billion in credit card debt. That's 31% more student loan debt than credit card debt!
It is also important to know however that not all debt is created equal. One important difference between credit card debt and student loan debt is that credit card debt is extinguished in bankruptcy but student loan debt is not. Student loan debt doesn't die until you do!
So what does any of this have to do with social security benefits? Well, as it turns out, if you have delinquent Federal student loan debt, your social security benefits can be reduced until that student loan debt is paid off.
And it is not limited to delinquent student loan debt. There are over 30 Federal programs, in addition to the Federal student loan program, that participate in this Federal debt recapture program of delinquent Federal debt whereby social security benefit payments are reduced until the debt is paid off. Examples of other Federal programs include home loan's owed to the Veteran's Administration (VA) and food stamp overpayments owed to the Food and Nutrition Service etc.
Social Security participates in a program called Benefit Payment Offset or BPO. The Debt Collection Improvement Act of 1996 (DCIA) authorized BPO. DCIA requires Federal-disbursing agencies to offset Federal payments to collect delinquent "non-tax" debts owed to the Federal government. Therefore, delinquent Federal debts, excluding taxes owed to the IRS, are handled by BPO. The collection of delinquent taxes is handled separately by the IRS.
BPO applies when someone who is receiving Social Security benefits owes money to another federal agency. The amount owed to the other federal agency is transmitted to Social Security and it is then withheld from the Social Security beneficiary's benefits. The transfer of funds due is handled by BFS, which is part of the Department of Treasury. They send three letters to the debtor - one 60 days in advance, one 30 days in advance and one when the recovery begins.
BFS determines the offset amount. It is the least of:
a. the amount of the debt; or
b. an amount equal to 15% of the monthly benefit payment (MBP); or
c. the amount by which the Monthly Benefit Payment exceeds $750.
By law, BPO will not reduce benefit payments below $750 per month. Therefore, social security beneficiaries who have been identified by the BPO process as delinquent debtors will still receive a minimum $750/month.
If more than one debt is owed to a Federal agency or agencies, the policy is to collect the oldest debt first. Once the oldest debt is paid off collection will proceed with the next oldest debt and so on until all outstanding Federal debts are collected.
As the Federal government continues to struggle with managing the growing costs of their numerous entitlement programs there is a growing focus to recoup outstanding delinquent debts wherever they may be in the system. With the advent of technology and a focus on debt collection the social security system is just one more mechanism to recoup these debts.
One important way to ensure you receive all the social security benefits that you are entitled to is to ensure you pay off all outstanding Federal debt prior to filing for you social security benefits. For most Americans, the ability to pay for expenses in retirement is challenging enough. The last thing you need is to have your social security benefits reduced due to delinquent Federal debt.
When deciding whether or not to get married the impact of a change in marital status on social security benefits could be financially significant. The effect could be as much as $100,000 or more in lifetime benefits if a couple were married versus single and it could also materially affect survivor benefits.
For example, I completed a social security income maximization plan for a couple who had been living together for the past 20 years and neither had been previously married. Since they only lived together and never got married, as far as social security is concerned, they are both considered single for benefit purposes.
This couple met with me in order to find out how much more, if any, their social security benefits would be as a married couple versus two single filers. Furthermore, they wanted to know if the timing of their potential marriage would affect their social security benefits.
In their particular case the man was age 67, had a near maximum social security benefit and was still working. The woman was age 62, retired and had a social security benefit approximately equal to 70% of his benefit amount. After gathering all the necessary financial and non-financial data I ran multiple possible scenarios as a married couple and also as two single filers.
Two key factors in their particular situation were their differences in age and benefit amounts. I assumed, based on their health status and family history, that they would both likely reach normal life expectancy. However, because of their 5 year age difference and the fact that she is a women we would, statistically speaking, expect that she would likely outlive him by about 7-8 years. Given that likely possibility, the need to consider survivor benefits for the women was very important in this case as we would expect that she would eventually be living on only one social security check as a widow for those 7-8 years. Therefore, maximizing that survivor check would be critical.
The other important consideration would be the difference in lifetime benefits as they live their retirement years as a single couple versus a married couple. As a married couple there are a number of strategies available to co-ordinate spousal benefits, thereby providing additional lifetime benefits, that would not be available if they remained single in retirement.
So, are these differences in social security benefits for this single couples versus married couples material? My analysis showed that as a married couple they would be eligible to receive an additional $160,000 in lifetime benefits as compared to retiring as a single couple! If they exceeded normal life expectancy this additional benefit would be even more pronounced.
Additionally, the impact on the survivor benefit for the woman was also significant. As a married couple her expected survivor benefit, assuming he lived to normal life expectancy, would provide her with over $800/month in additional benefits. This is because his benefit amount was higher than hers and as a spouse she would be eligible to switch to his higher benefit, instead of simply retaining her own lower benefit if he predeceased her. Since she is expected to outlive him by 7-8 years this is a material benefit to her especially since she will be going from living off of both of their social security checks to just her survivor check.
It is also important to note that since women live longer than men they are more likely to need and utilize long-term care services, whether in a nursing home or at home. Receiving additional social security benefits later in retirement can help to defray some of these and other health care costs.
Social security benefits in and of themselves are clearly not a sufficient reason for a single couple to make the decision to get married. However, when couples do their retirement income planning it may be prudent to also look at the implications on social security benefits and other financial assets which are impacted by marital status. The disparity in benefits could exceed tens of thousands or even hundreds of thousands of dollars. For many couples, this could have a material impact on their ability to finance their retirement.
Ash Ahluwalia, NSSA, CCSCA, MBA