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Social Security is underpaying widows and widowers – sometimes by large amounts.
In cases where widows are eligible to claim their own retirement benefits or those of a deceased spouse, the agency often fails to inform of options that would increase their payments. That is the troubling finding of a report issued last month – on Valentine’s Day, no less – by Social Security’s Office of the Inspector General (OIG).
The OIG reviewed cases of so-called dual eligible beneficiaries, and found that in 82 percent of cases, Social Security had failed to follow its own procedures for laying out options for maximizing benefits. That is bad enough – but even worse, this failure disproportionately impacts women, who tend to outlive men and face greater challenges meeting their financial needs in retirement.
Dual-eligible widows have some claiming choices that are not available via the Social Security spousal benefit. They are entitled to receive their own benefit or that of a deceased spouse, whichever is higher. But they also can make a strategic choice to take the lower amount first, and wait to switch to the higher amount later. That approach helps the higher benefit grow even more as it accrues credits for delayed filing, generally 8 percent per year, plus cost-of-living adjustments during the delay and all the ensuing years.
“You can really increase your lifetime payout by timing how you file the two claims for the two different payments,” said Andy Landis, a former Social Security Administration employee and author of “Social Security: The Inside Story,” one of the best guides to the program’s benefits. The book, recently updated with a new edition, contains a chapter on the ins and outs of survivor benefits.
The most unique feature of the widow’s benefit is that she (or he) can receive 71.5 percent of a deceased spouse’s benefit starting at age 60. If she is caring for any of their children under age 16, that amount rises to 75 percent. If she is filing at her own full retirement age, she can receive 100 percent of her spouse’s benefit. The benefit is computed using the deceased worker’s Primary Insurance Amount (PIA), which is the amount a beneficiary would receive if she files at her full retirement age for widow’s benefits (around 66). In many situations, these rules also apply to divorced surviving spouses.
An SSA representative said the agency is looking in to the problem of underpaying widows and developing a plan of action.
TWO SWITCHING STRATEGIES
Big dollars can be at stake here.
I asked Social Security Solutions, which advises individuals and financial planners on how to optimize benefits, to run a couple of scenarios illustrating how much money might be left on the table. (In both cases, no cost-of-living adjustments have been applied – they illustrate “today’s dollars” scenarios)
In the first example, Barbara is a 60-year-old widow with a $1,600 PIA. Her husband Ron passed away at 63 before claiming his benefits; his PIA is $2,000. She can claim her own reduced retirement benefit of about $1,200 at 62 and switch to the widow’s benefit of $2,000 at her full retirement age for widows.
Or, at 60, Barbara can claim a reduced widow’s benefit of $1,430 (71.5 percent of Ron’s PIA). She then waits for her own benefit to grow through delayed claiming; at 70 she claims her own benefit, which has now grown to $2,112. If she lives to age 89, Barbara will have collected $45,000 more in benefits lifetime.
In the second example, Joan is a 60-year-old widow with a PIA of $1,100. Her husband Jim died at age 63 before claiming, and his PIA is $2,000. She can claim the reduced widow’s benefit of $1,430 at age 60, but she would receive that amount for the remainder of her life since her own benefit is too small to exceed the widow’s benefit by delaying her own claim.
Instead, she claims her own benefit early at age 62, collecting $825 per month. At 66, she claims the widow’s benefit of $2,000. That yields a lifetime gain of $101,000, assuming she lives to age 89.
“All widows or widowers need to assess two possible switching strategies to determine which is better for their situation,” said Bill Meyer, CEO of Social Security Solutions. “In some cases, it will make sense to take the survivor benefit right away at age 60, and switch to your own benefits at 70. But in other cases, it makes more sense to take your own benefit at 62 and switch to a survivor benefit at your full retirement age.”
The OIG studied a random sample of 13,564 widows and widowers who are currently receiving survivor benefits and who were dually eligible; it found that 11,123 would have been eligible to receive a higher benefit had they delayed their retirement application until age 70.5.
The report calls on the SSA to take action to correct benefit underpayments for the people it has already underpaid, and that it “remind employees” of the need to discuss delaying strategies. The OIG’s report said in an appendix that the SSA agreed with the recommendations.
Action cannot come soon enough. Widows have it hard enough without being short-changed by Social Security.