Widows are losing millions because of a wrong choice on Social Security.
In February, the Social Security Administration’s inspector general wrote a report admitting that widows and widowers haven’t received as much money as they should from the federal program.
The inspector general’s office estimated that 9,224 folks older than 70 were underpaid by $131.8 million, according to a random sample of 50 beneficiaries. Ongoing underpayments, the report said, may affect 1,899 more people over 70 annually, to the tune of an estimated $9.8 million each year.
The reason for the underpayment is complex, so I asked Bill Meyer, CEO of Social Security Solutions in Leawood, Kan., to walk me through it.
This is the kind of big financial decision thing that nobody younger than 60 generally knows anything about but that everyone 60 years and older suddenly needs to (and does) get obsessed with.
To understand the specific issue, you have to know three initial facts about Social Security. First, delaying the year you begin taking benefits increases your monthly Social Security payout. Second, husbands and wives generally are eligible to claim monthly spousal benefits as a fraction of the primary breadwinner’s payment.
Widows can also do this and, in fact, can begin receiving their payments earlier than other retirees — at 60 instead of 62. Third, you can claim your own Social Security benefit or you can claim your spousal benefit, but never both.
Taking spousal benefits can come at a cost, especially if the deceased spouse was older and eligible for full benefits before the surviving widow.
Let’s say a beloved husband dies, leaving behind his 60-year-old wife. The dearly departed was 66 and eligible for the full monthly benefit payment of $2,000. The widow’s lifetime earnings were significantly lower, making her eligible for $1,100 when she turns 66 in six years.
The widow has two options, neither of which is great considering she’s losing her husband’s income. She can claim her spouse’s benefit six years early at 71.5 percent of $2,000 a month, or $1,430, for life. Or she can work another two years and retire at 62 with 75 percent of her full benefit at $825 a month and then switch over to her husband’s full benefit of $2,000 a month when she turns 66. Which is better? I’ll admit this all sounds quite a bit abstract without a spreadsheet to look at alongside the words, so let’s be concrete: The second strategy will make the widow $100,800 richer if she lives to 89, when compared to the first strategy.
But knowing about the different options — and the long-term effect of one option versus the other — is the big problem here.
Embedded in Meyer’s recommendation is the idea of longevity. The widow’s optimal strategy assumes she lives a long time after her spouse dies. Were she to die as early as age 74, the two options break even. The longer she lives, the more it would be to her benefit to have chosen strategy two.
As Meyer points out, Social Security employees are supposed to provide information and scenario analysis, but they cannot generally make specific recommendations.
The report notes that Social Security employees, in most cases, didn’t point out the clear advantages of certain strategies to widows and widowers. In fact, fully 82 percent of the beneficiaries in the sample examined had done the wrong thing when it came to maximizing their benefits. Hopefully the inspector general’s findings will spur changes in the way Social Security employees address this issue.
Vulnerable people were left poorer simply because they didn’t know or understand how to optimize their potential benefits.
For many of us, Social Security payments represent the biggest financial stability of our lives. You don’t want to get this wrong in retirement years. Don’t assume Social Security employees will alert you to your optimum strategy. You have to selfe ducate and self-advocate. You may not ever be (I hope) a widow or widower, but there are myriad little things to know about how to maximize your Social Security benefits.
Some of this depends on making an educated guess about how long you can live, what your specific tax situation will be throughout retirement, and whether delaying payment will be to your advantage.
Social Security officials can’t necessarily determine your specific scenario for you, and therefore their advice tends to be generic to the larger population, rather than specific to you.
It seems like a situation in which paying someone a bit of money to calculate your best strategy could be worth a lot of money in the long run.
Michael Taylor is a columnist for the San Antonio Express-News and author of the upcoming book “The Financial Rules For New College Graduates.” michael@michaelthesmartmoney.com