Bogleheads on Investing with Mike Piper – Episode 7

Rick Ferri: Welcome to Bogleheads on Investing episode number seven. Today we have a special guest, Mike Piper, the Oblivious Investor. Mike is an author and a CPA who has written many books, and today we’re talking about social security.

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Rick Ferri: Hi everyone. My name is Rick Ferri and I’m the host of Bogleheads on Investing. This podcast is brought to you by the John C. Bogle Center for Financial Literacy a 501(c)(3) corporation.

Today my guest is Mike Piper, CPA, who is the author of several personal finance books and the blog Oblivious Investor. Mike also wrote the Open Social Security Calculator, which is a free online tool at Open Social Security.com. Mike has a lot of great insights for us on Social Security. Let’s get right to it.

Please welcome Mike Piper to the Bogleheads on Investing podcast. Welcome Mike.

Mike Piper: All right. Thank you.

Rick Ferri: Well thanks for being with us. I’ve wanted to get you on the show because you have become the de facto go-to expert on Social Security, with your books, some of your lectures at  the Bogleheads meetings and also your Social Security calculator which has become very popular, and the best part about it is it’s free, which we all like. [Laughter] So before we get started, you’re a CPA but could you tell us a little bit more about yourself and how you got involved in finance and particularly how you decided to write the Social Security book and do the calculator.

Mike Piper: So I’m a CPA like you mentioned. My background originally was tax accounting but I haven’t done any tax preparation, any client work for I guess about ten years. All of my income comes from books. I have a series of books on an assortment of financial topics, various tax topics, investing, retirement planning and Social Security. No client work, it’s just research and writing. As far as how I decided to write a book about Social Security, it was just that people asked me to. I had written a book about managing an investment portfolio in retirement, it’s called Can I Retire and I focused exclusively on the investment portfolio side of retirement planning,and some people asked me to delve more deeply into Social Security. I figured that’s the thing I could probably do given my background in taxation. I’m pretty comfortable reading legalese and figuring out what it means and that’s basically what social security research is. That’s how I got into Social Security. The first place was writing that book. At the requests of readers about a year ago I started working on this calculator and it’s been released and available for six or seven months and how I got into that was completely accidentally. My wife recently changed careers she became a software developer and I just was interested in having a better understanding of what she does so I learned a little bit about programming, about writing code, and seemed like a natural way to put that to use given my social security background.

Rick Ferri: Well I personally have used the calculator and it works great. And I appreciate you doing that work and we’ll get to some of the aspects of that calculator a little bit later on, but I just want to reiterate one thing that you said. You don’t take any clients, that I can’t call you up and pay you to help me. Is that true?

Mike Piper: That’s correct. Right I’m happy to answer questions but no, I do not do any client work at all.

Rick Ferri:Let’s go ahead then and start our discussion about Social Security.  But before we get into the nitty-gritty of it. I was reading a lot about how we actually got a Social Security program to begin with and it goes way back to civil war days and even prior to that. Can you give us a little history of what Social Security was supposed to be for and what it has become over the last say, well it’s only been around since 1935, so that would give us about eighty-five years.

Mike Piper:  Exactly, the Social Security Act was originally passed in 1935 and of all the different types of benefits that we have now, the only major one that was available then was just plain old retirement benefits, there were no spousal benefits, no survivor benefits, no child benefits, no disability benefits. None of those things. The spousal benefits for wives and survivor benefits for widows as well child benefits came two years later in 1939 and then they extended those same benefits so spousal benefits for husbands and widower benefits came in 1950, so a little bit more than ten years later. Disability benefits in 1956, so the program expanded pretty dramatically in the first twenty years adding on all these different types of benefits. 

And then as far as major changes since then, there’s been several. The automatic inflation adjustments that began in 1972; the increase for full retirement age happened in 1983. It’s a program that’s really evolved over time and continues to evolve. Just a few years ago we had another change in terms of restricted applications and voluntary suspension rules.It’s changed over time and it will certainly continue to change in the future.

Rick Ferri: I was reading that the very first person to receive Social Security benefit was a Cleveland motorman by the name of Ernest Ackerman who had put one nickel out of his penny into Social Security system and received a payment back when he retired of 17 cents. So exactly, yeah we’ve come a long way in the last 85 years. Mike let’s talk about your book Social Security Made Simple. You wrote this book to explain Social Security in 100 pages or less. Is that possible to do?

Mike Piper:  Not every single possible rule with all the exceptions for the rules but most of the information that most people need to know, I think is explained and hopefully explained clearly in that book. 

Rick Ferri: Let’s go through some of them. Let’s say the top ten things people need to know about Social Security, and this would be people who are just starting work, people who are, have been in the workforce for a while. People like me who are in their early 60s, who are looking at gee, when should I take Social Security. Step by step, go through some of the major portions of your book and talk about some of these topics.

Mike Piper: First thing to know is that the amount that you get as a retirement benefit is based on two things. Number one is your earnings history, so how many years of earnings you have and how much you earn per year, and number two is how old you are when you begin taking your benefit. 

So as far as the earnings that they look at, the way the calculation works is they look at all of your years of earning and they adjust years prior to age 60. They adjust them upward for essentially wage inflation. Essentially that’s the growth in the national average wage that  they’re, they’re using to adjust upward, and then out of all of those years they pick the 35 highest, and from there they calculate something called your average indexed monthly earnings which is just the average monthly amount out of those 35 wage inflation adjusted years and from there they calculate something called your primary insurance amount and this is, of all the social security jargon, this is the one term that you really need to know what it means. Again it’s the primary insurance amount and it is the amount of your monthly retirement benefit if you file for your benefit exactly at your full retirement age. It’s a function of your earnings history: the higher your earnings, the higher your primary insurance amount.

Rick Ferri: You mentioned full retirement age. How is that calculated? 

Mike Piper:  For anybody born 1943 to 1954, it was a full retirement age of 66, and then for people between born between 1955 and 1959 it’s basically between 66 and 67, and then for anybody born in 1960 or later you have a full retirement age of 67.

Rick Ferri: You said that they take the average of the highest 35 years. What if you don’t have 35 years. What if you have 20 years or 10 years or just five years.

Mike Piper: Sure, good question. So if you only have five years you’re not actually going to qualify for a retirement benefit in the first place because you need at least 10 years. If you have, let’s say 20 years, then they fill in zeros to get you up to 35 so they’ll look at your 20 years of earnings and then they’ll be using 15  years of zeros. So definitely having 35 years of earnings will certainly help you to qualify for a larger benefit.

Rick Ferri: What if you only have a say 8 years. You don’t qualify. What happens to all the money you put in. 

Mike Piper: Well then, you don’t get anything. 

Rick Ferri: [Laughing] Well then, you’ve donated to the cause!

Mike Piper: Yeah in cases where you only have 8 years of earnings, potentially it’s because the most common situation is that likely either a) you became disabled in which case you can qualify for benefits with less than ten years of earnings, or maybe you spent a lot of years out of the workforce taking care of children, so it’s likely that you’re married or were married, so you may qualify for special benefits or survivor benefits on your spouse’s work record.

Rick Ferri: I’ve always had a question of where does that money come from if I worked and my wife didn’t work. So I put in for me but I never put into anything extra for her. When she starts getting paid half of my Social Security at some point, where does that money come from? I didn’t  put it in.

Mike Piper: Yeah the system is not designed to be a retirement account. Essentially it’s not designed to have what you would call, or many people would call “fair” outcomes based on, you know,  this person put in X dollars and this other person put in Y dollars. Something about they’re going to get out is based on exactly what they put in. That’s not how it works. You have two people who have exactly identical earnings history. One of them never got married and the other was married, and so one of them is going to have a spouse collecting benefits on their work record. Well, the two people put in the same amount but one of those families is going to be getting more out. And the same could be said just based on let’s say, you pay in for your entire career and then you had a heart attack and died at age 60. Well you didn’t get anything out then either.

So it’s really not designed even with the intention of working like a retirement account where the amount you put in is the amount you eventually get out. Or, I suppose it’s supposed to be proportional. It’s more about taking care of people when they’re most in need is roughly what Social Security is designed to do.

Rick Ferri: So really it is an insurance program rather than a retirement program.

Mike Piper: Yes, absolutely it’s a social insurance program. That’s precisely what it is.

Rick Ferri: I think that that’s really important for all of us who are paying in or taking out to understand. That we often talk about Social Security retirement pay, or the money we’re going to get in social security in retirement, but it’s really not a retirement pay and the reason why all these quirky rules and regulations exist, and as you said, you know it may seem unequal that why would my wife who doesn’t have ten years of work because she stayed  home with the kids, why did she get paid? Why should I get one and a half times my Social Security benefit when I never put the money in. It’s just because that’s what the insurance program says and therefore that’s why that’s what happens and there’s no equality to it as you said, which is interesting. I think it’s an aspect of Social Security that a lot of people don’t really understand.

Mike Piper: Yeah. I think a related point, a lot of people look at the money they’re putting in, they compare it to the money that they ultimately get out, what would they miss is that a big chunk of what you’re paying is not just going to retirement benefits you’re also essentially getting a life insurance policy and a disability insurance policy while you’re working. A lot of people don’t recognize that part of the taxes that they’re paying goes towards that as well. 

Rick Ferri: On the disability side, you said you don’t need ten years to collect a disability Social Security benefit. How many years do you need?

Mike Piper: It depends on how old you are when you become disabled. Basically there’s a  calculation. I don’t remember honestly off the top of my head.

Rick Ferri: So we’ve talked about how your benefit is calculated at your full retirement age. But if you don’t take your benefit at full retirement age, if you take it before or after, that also affects your benefit.

 Mike Piper: Exactly. If you file for your retirement benefit before full  retirement age you get less than your primary insurance amount and if you file after your full retirement age you get more than your primary insurance amount. And the math works based on months, so every month that you wait you get a little bit more than if you had filed the month before. If you want to look at it from a year’s perspective for somebody who files four years before their full retirement age, for instance, they would get 75% of their primary  insurance amount. Somebody who filed two years before their full retirement age would get a little under 87% of their primary insurance amount. Somebody two years after full retirement age gets 116%, some of the four years after their full retirement age gets 132%. The longer you wait the more you get, and roughly speaking to be waiting all the way until age 70 to file will get about 75% more than somebody who files as early as they can.

Rick Ferri: that all sounds great except there’s a couple of issues with that and you just recently wrote an article about this in your Oblivious Investor blog, great blog by the way, you do a great job with that and that is that, this extra money that you’re getting…there’s a couple of things that are happening. Number one you’re getting a year older, so you are getting one year closer to death right. So you’re not going to collect it as long even though you’re collecting more. And the other aspect of it is, if you collect it early you could take the money and you could invest it and you could make money on the money. Let’s say you just make a four percent return…I mean what’s the break-even point? How does it all mesh out? 

Mike Piper: Well it depends on if you’re married or not. Because if you are married we have to be thinking about survivor benefits rather than just retirement benefits. But in the simplest situation, so somebody who isn’t married and we’re only looking at one person’s retirement benefit and one person’s life expectancy. If you compare filing at 62 versus filing at 70, if the  person lives to age 80, then those two filing choices are basically the same. If they earned a return that exactly matches inflation. It’s actually 80 and a half, eighty and six months. And the higher the return you get are the further the break-even age is pushed out into the future. 

I think though one mistake that a lot of people make, is that the rate of return that they’re assuming or that they’re using for this analysis is too high, because generally speaking when we’re talking about delaying Social Security, so spending down the portfolio to delay Social Security, we’re not talking about spending down your portfolio overall. We’re talking about specifically spending down your bond portfolio, essentially exchanging bond holdings or fixed income holding for more Social Security. And that’s what has in most cases a very advantageous outcome, not every case but in a majority of cases.

Rick Ferri: So let me understand this correctly. You’re really now looking at Social Security as a bond holding in your portfolio, or at least has similar characteristics. So if you’re not going to take Social Security early, if you’re going to delay, then on your portfolio side your stock and bond, your investment portfolio, you would be taking your money out of the bond side and spending that because the Social Security portion which is like a bond,  although it’s not exactly a bond, will be increasing in value. Is that what I understand you saying? 

Mike Piper: What I’m saying here is that when you’re delaying Social Security, or even more broadly, when you’re  annuitizing, you really want to do it by using your fixed income holdings to buy that annuity, or in this case that’s “buy” more Social Security. Essentially because that’s what we’re looking at doing. That’s the analysis that we’re making here, is “should I spend down my bonds to get more Social Security”? The rate of return you want to use in your analysis is the rate of return that you would expect from your bond holdings. The rate of return that I usually use is 20-year TIPS because that’s the thing that’s most compatible to Social Security, and it’s inflation-adjusted, backed by the federal government and it has a duration in the rough ballpark of what a social security annuity would have, and that’s the discount rate that’s used by default. When you load the calculator you can adjust the discount rate if you want to and a lot of people make this mistake of using,they say “oh well I can take money and invest it and get a 4% return so I’m going to take the money and invest it”.

Well okay fine. But again you have the option. You don’t have to be spending down your stock holdings to delay Social Security. You could be spending down your bonds and in most cases that’s what makes sense to do, so that’s the analysis that we’re usually looking at. 

Rick Ferri: Now that’s interesting. it’s a really great way of looking at it. I hadn’t really thought about it that way but it makes complete sense to do it.

Let me throw one more zinger in there, that how does your health work into all of this? In other words, my parents are still alive and my father is 90 and my mother is in her late 80s.They’re not going anywhere. They’re basically unfortunately bound to, you know, a small apartment where they’re living in. My father, there’s not going anywhere, so even though they might be making more money because my father delayed taking Social Security until he was 70 years old, the fact is he can’t spend it now. So doesn’t a quality of life also come into this equation?

Mike Piper: Sure. So there’s a lot going on with that question. Number one, his life expectancy, again we’re still just talking about the simplest case here. An unmarried person because we haven’t talked about how survivor benefits work yet. So for an unmarried person the longer their life expectancy the more advantageous it is to delay and the shorter their life expectancy the more advantageous to file early. For a married couple it’s different because we have to look at joint life expectancies.This is a bit of a simplification, but roughly speaking, the way survivor benefits work is that after one spouse dies the spouse who’s still alive, the amount that they get from that point forward is roughly (in most cases) the amount…whichever person had the higher benefit at that point. Again, that’s a bit of a simplification, but that’s roughly how it works.

With regards to the “when to file” decision for a married couple…for the higher earning spouse,  when they delay taking benefits it increases the amount that the couple gets as long as either person is still alive. So we need to look at, there is a joint life expectancy, and specifically it’s the couple’s joint second to die life expectancy. And conversely for the lower earning spouse, when they delay claiming benefits it only increases the amount that the couple is going to receive as long as both people are still alive. So now we need to look at is joint life expectancy that’s  actually a couple joints first to die life expectancy, which is shorter. So the way that works out in terms of optimal filing strategies is that it’s usually advantageous for the higher earning spouse to wait until 70 and it’s often, but not always, advantageous for the lower earning spouse to file early.

Rick Ferri: Mike, all this sounds great but I’m not going to remember any of, well maybe 10% of it. So I just want to find out from you, if I used your Open Social Security calculator online and I put all my data in, this is what it does for me correct, it helps me figure this out?

Mike Piper: Yeah that’s that’s what it’s doing. By default, it uses the Social Security Administration’s life expectancy mortality tables, but you can select different mortality tables if you’re in better than average or worse than average health and it essentially looks at all of the different possible claiming ages for you, and if you’re married, it looks at all the combinations of claiming ages for you and your spouse. And it determines which one is expected to provide the highest total level of spending over your retirement, and then after that you can say, okay, so the calculator suggested filing, let’s say at age 70 for me and at age 63 and seven months for my spouse. What if instead I filed at 67 and my spouse filed at 65? How does that work out? It tells me the total amount of spending that Social Security would be expected to fund over your lifetimes, with that set of filing ages should see how different it is, but in some cases what you’ll find is that there are an assortment of combinations that work out fairly similarly. They’re about as good as each other. And then there are claiming ages that are quite a bit worse. And so Social Security planning is not necessarily about picking the very best one, because the very best form and the next best one are usually about the same as each other but not that different. It’s about avoiding the really bad decisions. 

Rick Ferri: John Bogle always said you go to get the big things right. Don’t make big mistakes. So your calculator will help avoid big mistakes and even if you’re not absolutely perfect you’re generally getting it right and so you’ve done well.

Mike Piper: Yeah. 

Rick Ferri: Let me ask a question about inflation. Social Security is adjusted for inflation every year unless there’s deflation which is the lowering of prices, and then Social Security is not adjusted down. So can I talk about inflation and Social Security payments.

Mike Piper:  Every year beginning at age 62, your primary insurance amount is adjusted upward based on the position, and because your monthly benefit amount is a percentage of your primary insurance amount what that means is that your monthly benefit amount is going upward based on inflation every year. And that’s true  regardless of when you do or don’t file. So something a lot of people ask is if I don’t file until 70 or if I wait until 68 do I miss out on with inflation adjustments? No you don’t miss out on them at all.The inflation investment started at age 62 regardless of the age at which you file.

Rick Ferri: A lot of people also say there’s also inflation in Part B of my Medicare and so forth. It seems, one Boglehead wrote in, who said it seems as though whatever extra I get in Social Security just turns over, I just turned it over to Medicare because I have to pay higher premiums there. I know this isn’t a discussion about Medicare, but is it comparable. I mean is that about what happens?

Mike Piper: Well it’s going to vary depending on the size of the person’s retirement benefit right because the larger their retirement benefit is, the larger the dollar amount of inflation adjustment that they’ll get. Every year the amount of your Medicare premium varies based on their income levels so it’s going to vary from one person to another. But it is true, of course, that healthcare costs tend to rise at a rate that’s quite a bit faster than prices in general, so faster than the overall raise in inflation. So, yes, it’s often true that the increase in Medicare premiums you’re going to see is kind of taking a big chunk out of Social Security inflation.

Rick Ferri:  I went back earlier this year and I looked at how the government uses inflation and various things to determine levels, for example how much of your earnings, the dollar amount of your earnings do you have to pay, where you have to pay into Social Security. I don’t know what the level is right now but maybe you do. Is what is the dollar amount? In other words I make $120,000 a year. How much of that do I have to pay into Social Security?

Mike Piper: Oh the maximum tax earning? For 2019,  $139,900 is the maximum amount of your earnings that would be taxable under Social Security tax. But this figure is one that is adjusted, not based on price inflation, but based on essentially wage inflation. So increases in the national average wage.

Rick Ferri: I find it funny that that goes up it seems faster than the benefit goes up. So the government uses great numbers. I’m a military retiree and they used yet a different number for determining my increase in my military pension. So you’ve got this maximum amount that’s taxed for Social Security, which goes up seems to be like six percent a year and then you’ve got Social Security which goes up by something else and then you’ve got my military vintage pension which goes up by something else. Just interesting that the government uses all these different numbers for inflation.

Mike Piper: Yes it is true that generally over an extended period of time average wages will grow by a faster rate than prices. So yes, the rate at which the maximum tax of earnings grows will usually outpace the rate at which it grows.

Rick Ferri: And I suppose that this is a way of keeping the system solvent, which by the way I do have a question and let’s get to that right now. A lot of people on the Bogleheads forum, when I announced that I was going to be talking with you and interviewing you, and asked the Bogleheads to submit their questions, there were a few people who submitted a question asking about the solvency of the whole Social Security program. Could you address your thoughts  on the solvency of Social Security, say over the next 50 years?

Mike Piper: The fundamental source to look at here is the trustees report. So Social Security trustees put out an annual report that speaks, and a fair bit of that, to this issue, and with regard to what they call the Old-Age and Survivors Insurance Trust Fund, which is the trust fund that pays for retirement benefits and widow and widower benefits, it has a projected depletion date of 2034. 

Then after that what a lot of people think, I see this all the time, especially among younger people, they think that Social Security is going away. And it’s not going to go away because when that trust fund is depleted, taxes are still expected to be able to cover about 77% of promised benefits. So even if no legislation was passed at all to improve the funding status of the program, we end up seeing a drop in benefits of about 23% in 2034.

Of course, that’s not exactly the most likely scenario. More likely we’ll see some sort of changes before then, which are probably going to be a combination of tax increases and benefit cuts rather than not happening at all, and then all of the sudden, on one day we see a big cut in benefits. It’s much more likely I would assume that we see a combined sort of solution here.

Rick Ferri: It’s all math though. I was listening to Alan Greenspan speak at a conference and he was saying that the Social Security system could be solved in 15 minutes because it’s just all math. He said Medicare is a much more difficult problem that we have in this country.

Mike Piper: Absolutely, healthcare prices, there’s a lot going into that in terms of unknowns and it’s much harder to control, whereas Social Security, not only is it just math, it’s math where we know the numbers. I mean we know about how long people live, on average, and we know exactly how many people there are who are currently age 60, and we know how many people there are who are currently age 59. So we can figure out really precisely how much the trust fund will have to pay out every year. It’s more of an estimate how much we’ll be taking in every year, of course, because we don’t know exactly what earnings are going to look like, that depends on how well the economy does, but  yeah we have a very, very good estimate here, the projections.

So like I said they put out this trustees report every year and it doesn’t change that much from one year to the next because the projection is basically bearing out according to plan. I think they’re basically, you know, their projection is proving to be true so far. So they don’t need to adjust it very much one year to the next.

Rick Ferri: I’d like to circle back to the quality of life question and I talked about my parents who are in the, you know, basically unable to travel and unable to do very much right now because my father is in his in his 90s and really immobile. How do you look at quality of life issues as far as the decision as to when to take Social Security, whether to delay or not delay?

Mike Piper: Yeah, this is something that comes up a lot. A lot of people say that they want to spend more in early retirement rather than late retirement because they’ll be able to enjoy it more in the early years because they can travel and so on. And that makes a lot of sense for many people. Of course, what a lot of people don’t understand though, is that in many cases, and this is not every case, but in many cases the plan that allows you to spend the most in early retirement, it’s still delaying Social Security because this delaying Social Security allows you to spend more over the course of your whole lifetime. You can choose when you do that spending, right, you can spend more earlier because you can spend more overall. Essentially what you’re doing is just spending down your portfolio at a faster rate, and that’s okay because, I’m sorry, you’re spending down your portfolio at a faster rate in early retirement and that’s okay because then once Social Security does kick in at this later age and a higher amount, the rate at which you’re spending from your portfolio will decline. So even in many cases where the person wants to spend more early in retirement, delaying Social Security is still the best option, especially, in particular, for the higher earner in a married couple or for an unmarried person.

Rick Ferri: Yeah, now wait a minute wait a minute, you just threw a whole monkey wrench into this thing called a four percent rule which basically says you’ve got to save X amount of dollars where you can draw four percent off of that indefinitely for the rest of your life. What you’re talking about your strategy, where you’re incorporating Social Security into this just threw a whole big monkey wrench into that. 

Mike Piper: Yeah it does. It definitely, definitely does. Vernon, Joe Tomlinson and Wade Pfau released a piece of research, I guess maybe the beginning of 2018 and maybe the end of 2017, that talked about the strategy that I think makes quite a bit more sense. And it’s basically if you are planning to delay Social Security then figure out the amount of Social Security that you’re giving up in the meantime basically.  And carve out a piece of your portfolio that’s equal to that chunk of money and basically keep it in something very safe and you’re going to be spending that down to delay social security and again that’s what we talked about. You’re basically spending down your bonds while you delay Social Security and then from the rest of the portfolio, so the rest of the portfolio is where you’re going to be spending a roughly equal amount through the course of your retirement. That’s where the four percent or three point whatever percent spending rules can be applied, and that’s where you’re going to use a more typical balanced stock bond allocation.

Rick Ferri: That makes too much sense, Mike.  Great,great, great concepts and give me the name of that paper again.

Mike Piper: So the name of the paper is, Optimizing Retirement Income by Integrating Retirement Plans, IRAs and Home Equity, and the authors are Wade Pfau, Joe Tomlinson and Steve Vernon.

Rick Ferri:  And where would we able to find that paper?

Mike Piper: So the site where I see it is stanford.edu stamp. Here if you just, yeah google the name of the paper and the authors that had come up. [http://longevity.stanford.edu/wp-content/uploads/2017/11/Optimizing-Retirement-Income-Solutions-November-2017-SCL-Version.pdf] 

Rick Ferri: Great let’s switch topics here and talk about application strategies and a lot of people thought that changes a couple of years ago took out a few of these strategies, like “file and suspend”, and they’re no longer valid. Can you talk about what that was and what  happened to it and what people might be able to do as an alternative.

Mike Piper: The file and suspend strategy was kind of weird that it became the famous one because it wasn’t actually that useful for very many people. The one that was useful to a lot more people was a restricted application strategy and hardly anybody has heard of a restricted application unless you’ve done quite a lot of reading about Social Security. And what a restricted application is; that’s where at your full retirement age you file for spousal benefits, but only spousal benefits, and you let your own retirement benefit continue growing until age 70.

Rick Ferri: Okay let me stop you for a second there, I just want to make sure I understand that: is it at my full retirement age or is it at my wife’s full retirement age one, when would I file this restricted application? 

Mike Piper: There’s the requirement that you have to have reached a full retirement age and your spouse has to have started on their retirement benefit and then you can file an application for just spousal benefits. Now the Bipartisan Budget Act is what they called it, and that was 2015 but that eliminated the ability to use this strategy for anybody born after January 2nd 1954.

So basically for people who are reaching their full retirement age roughly now it’s still available, but for younger people it’s been eliminated. But if you’re somebody who is eligible for that strategy it is extremely beneficial because you’re just collecting the spousal benefit with no downside whatsoever; you get four years of spousal benefit while letting your own retirement benefit continue growing. 

Rick Ferri: But if my spouse is younger than me it would be at a reduced amount correct.

Mike Piper: No if your spouse’s…so okay, a spousal benefit is half of the other person’s primary insurance amount and that’s true regardless of when the other person files for retirement benefits, so let’s say when you reach your full retirement age, so you’re if, let’s assume you have a full retirement age of 66 and let’s assume your spouse is three year younger. So if your spouse starts her retirement benefit at age 63 she’ll be getting a reduced retirement benefit and which is to say, she’ll be getting less than her primary insurance amount and then when you, in this scenario, if you file a restricted application for spousal benefits at that same time because you reached your full retirement age, you’ll be getting half of her primary insurance amount. So half of what she would have gotten if she’d waited until full retirement age. They’re getting more than half of what she’s actually receiving. Your spousal benefit is not reduced as the result of her having filed early.

Rick Ferri: That’s interesting. Yeah I don’t think a lot of people know that.

Mike Piper: No, people get confused by that all the time.

Rick Ferri: So that goes away though for anybody who was born after 1954 that goes away so it’s only available for people who right now are reaching full retirement age.

Mike Piper: Yeah roughly it’s January 2nd 1954 is the cutoff.

Rick Ferri: What happens if the primary worker in the family passes and the widow is not yet full retirement age, or the worker who put into the Social Security system wasn’t at full retirement age, I mean, what are the benefits for widowers and children of people who have died who have paid into Social Security?

Mike Piper: There’s three different types of benefits here. Basically that we’re going to be talking about the first one is the regular widow or widower benefit and eligibility for that begins at age 60. 

Rick Ferri: Okay. Is it age 60 for the widower or age 60 for the person who was paying in.

Mike Piper:  It’s age 60 for the widow survivor. They have to be age 60. There’s no requirement for how old the deceased spouse passed to have been. And the amount that they get this is one of the more complicated Social Security calculations. So this is a simplification, but if the surviving spouse waits until their full retirement age to file for survivor benefits they’ll get the total benefit that they would get, is essentially whatever the deceased spouse had been receiving or if they hadn’t yet filed, if the deceased spouse died after their full retirement age then the surviving spouse would get whatever the deceased spouse would have received if they had filed on their date of death.

If the deceased spouse died before the full retirement age and had not yet filed, then the spouse gets the deceased person’s primary insurance amount, so what they would have gotten if they had lived to their full retirement age and filed.  Now again, just like any other benefit, Survivor benefits are reduced for early filing so if the widow or widower files for their lower benefit before their full retirement age they get less than the full amount.

Now a super important thing to know for any widows or widowers is that the restricted application strategy that we talked about for spousal benefits, it also applies for widow and  widower benefits and it was not changed by the Bipartisan Budget Act so it’s still available to you regardless of what year you were born and you don’t have to wait until your full retirement age.

So a strategy that frequently makes sense for a surviving spouse is to either file for survivor benefits as early as they can at age 60 while they let their own retirement benefit grow until age 70, or do the opposite so file for their own retirement benefit as early as possible so at age 62 and let their survivor benefit growing until it maxes out at full retirement age. So those strategies are for anybody who loses their spouse before this point, either of those two strategies is almost always the best solution. It’s almost always the case that they should file for one benefit, the smaller benefit specifically, and let the larger benefit continue growing until it maxes out.

Rick Ferri: I’m going to ask a little bit of an esoteric question on this. So a lot of people still are not under the Social Security system meaning they might work for a city or they might work for the railroad or there are some groups out there, there’s some professions out there, where they don’t pay into Social Security, they pay into something  else but it’s not Social Security. So if I am a spouse and I work for the railroad, so I’m not paying into Social Security, but my spouse is paying into Social Security and my spouse passes away, I’m going to be getting a railroad pension will I still get half of my spouse’s Social Security or survivor benefit from my spouse?

Mike Piper: Railroads specifically have their own rules, and probably more applicable to more people is the government pension.

Rick Ferri: Okay let’s use government pension then.

Mike Piper: So if we assume then that you worked for let’s say the state of Illinois and you were paying into their retirement system but you weren’t paying Social Security and your spouse was paying into Social Security, and then she dies. Then you’re going to be affected by something called the government pension offset, which means that the amount that you can receive either as a spouse or a surviving spouse is going to be reduced by two thirds of your monthly government pension amount. That one does apply to a whole lot of people.

Rick Ferri: it does apply to a lot of people. Well so Mike we’ve talked about widowers and our survivors and let’s talk about two children now.  What benefits two children get and for how long do they get them?

Mike Piper: if you, when you file for retirement benefits, if you have a minor child so somebody who in this case either under 18 or in some cases a full-time student up to 19 or you have an adult disabled child, when you start taking your retirement benefits they can get benefits on your work record, and that benefit, that child’s benefit is half of your primary insurance amount.

If or when you die, if you have minor children or adult disabled children, they can get a child  benefit that is 75 percent of your primary insurance amount.  In either case, you need to be aware of something called family maximum rule which basically is a maximum based on your primary insurance amount and the percentage varies, but it could put a limit on the amount that your children and/or surviving spouse could receive as a part of their child benefits and widow benefits. 

Rick Ferri: I got a lot of questions on the Bogleheads forum about Social Security as it relates to working for another country, or working in another country, US citizen paying into another country’s Social Security type system and how do you get credit for that here in the US. Could you talk about this because it came up a lot. In fact, three different people asked this particular question?

Mike Piper: The topic that you want to look up is called a totalization agreement. These are agreements that the US has with other countries to basically lay out the rules for how a person will be treated under each country’s Social Security system when they’ve paid into both those systems basically. And the tricky thing here is that we have separate agreements with each country so the rules and the specifics are going to vary from one to another somewhat. And they have to because of course each country has their own system with its own rules so the specifics of the agreements after Barry (1983).

So the tricky thing here is that you’re not really going to find anybody who’s an in-depth expert on any one particular country. For example, I mean I write about Social Security all the time, I get tons of emails every week and I get maybe two or three people asking about totalization agreements per year. And of course, you know this year they might be asking about Germany and the UK, and next year they’re asking about Canada and Japan. So if I’m only getting one question about Canada every three or four years I’m never going to become an expert on it, and the same goes for anybody. That’s even for me dealing with Social Security all the time. I don’t get asked about any one country’s agreement very often.

I guess the takeaway here is that it’s going to be super important for anyone in the situation to do their own research, to actually read the terms of the agreement in question. But as a general rule the way they work is they say that if you don’t have enough years of earnings under one country or the other country’s system to qualify for benefits the agreement will basically let you count earnings from the other country to qualify for benefits. But they don’t actually then end up calculating the amount of benefit for which you qualify, right.

So roughly speaking, it’s going to vary from one country to another, but in the US, again, you need ten years of earnings. So let’s say you only paid into US Social Security for eight years but you paid into Germany, for instance, if you put into their system for several years you can qualify for US Social Security under the totalization agreement. They’ll allow you to count those here that you’re paying into another system.

One thing that people have to be aware of here is that in some cases you might also be affected by the Windfall Elimination Provision, which is the rule that basically reduces your primary insurance amount, so it reduces your retirement benefit and the benefit of anybody, anybody else claiming benefits on your work records, on anybody getting spousal benefits. So the windfall elimination provision can in some cases apply.

Rick Ferri: One of the readers of the Bogleheads forum just was curious, based on everything you know about Social Security, at what age are you planning on taking Social Security and what is your rationale for when you are going to take it? And by the way before we get to that, you’re in your early 30s correct? 

Mike Piper: 34, so mid early 30s.

Rick Ferri: Okay, so would you like to answer that question?

Mike Piper: Sure. And again my name [Oblivious Investor] plays a huge role here because the, the true answer to that question is I have no idea because I don’t know what the system is going to look like when I’m 62. It’s almost certain that there’s going to be significant changes between now and then. My honest opinion for somebody in their thirties is that there’s no need to spend a lot of time thinking about when you’re going to be filing for Social Security because the rules are going to change. 

Now if I were let’s say in my 50s or 60s, you know coming up on the age in question, then I would almost certainly be waiting til 70, would be my plan, and that’s because I’m married and so far my earnings record is higher than the earnings record of my spouse. That could certainly change, and if that did change, if she ended up being the one with higher earnings records, and I would encourage her to wait until 70. The strategy that I would be following is the same rough strategy, and I think it makes sense to most married couples, which is higher earner waits until 70, lower earner files somewhat before that, and it depends on their life expectancies, so if either person is in particularly poor health, the lower earners should file pretty early. If they’re, if they’re both in very good health the lower earners should wait, but not necessarily wait all the way until 70.

Rick Ferri: Oh Mike thanks. We could go on for probably a week talking about all the different scenarios that could take place, but I want to thank you for being our guest on Bogleheads on Investing. We wish you a lot of luck with all of your book sales. Again, Mike’s website is Oblivious Investor.com. Please go there, check it out, and check out his Open Social Security Calculator, and Mike, what’s the website for the open social security calculator?

Mike Piper: It’s OpenSocialSecurity.com.

Rick Ferri: Great.  I’ve used it. It worked well for me. I know what I’m supposed to do now. Mike thanks for being our guest.

Mike Piper:  Thank you.

Rick Ferri:  This concludes the seventh episode of Bogleheads on Investing. I’m your host Rick Ferri. Join us each month to hear a new special guest. In the meantime visit Bogleheads.org and the Bogleheads wiki. Participate in the forum and help others find the forum. Thanks for listening.

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