Maximizing Your Social Security Benefits - Part 2
With Tom Clark
On this episode of the Plan for 100 Podcast, Tom Clark, a nationally recognized Social Security expert, talks about the future of Social Security, common mistakes to avoid and how retirees can maximize their benefits.
Voice Over: [00:00:07] Thanks to medical advances and healthier choices, Americans are living longer, more active lives well into their 80s, 90s and beyond. Welcome to "Plan for 100," a new podcast from AIG. This podcast series is devoted to educating and empowering Americans to prepare for longer lives and retirements that could last four decades or more. Our podcast aims to help you "plan for 100," no matter what age you are today.
Mike Treske: [00:00:37] Hello and welcome to the AIG podcast, Plan for 100. I'm your host, Mike Treske, executive vice president and chief distribution officer for AIG annuities and mutual funds. It is my pleasure to be joined today by Tom Clark. Tom is a nationally recognized Social Security expert and worked for the Social Security Administration for 33 years. During that time, he gave more than 6,000 presentations on Social Security. Tom has appeared on more than 200 TV shows about this topic, and written columns for numerous publications. He also helped us at AIG, creating one of our most popular programs ever, "Social Security Savvy," and a benefits calculator that matches that program. Tom, welcome.
Tom Clark: [00:01:23] Thanks, glad to be back.
Mike Treske: [00:01:24] So I know there's a lot of moving parts, and there are some more complex things that enter into Social Security. I wonder if you could tell us a little bit about the Windfall Elimination Provision and the government pension offset law.
Tom Clark: [00:01:38] OK, and to make it clear right from the start so we don't confuse anybody, these only apply to people who receive a pension based on work that was not covered by Social Security. If you've always paid into Social Security, if you get a pension, that won't affect your Social Security at all. This is only pensions based on work where a person did not pay into Social Security. And there's two laws that can affect the benefits, one called the Windfall Elimination Provision. That addresses how receiving that kind of pension, a pension based on work not covered by Social Security, can affect the person's Social Security benefits on their own work, if they've got their 40 credits. The other law the government pension offset, addresses how that kind of pension can affect any Social Security spousal benefits they receive. Just talking about the Windfall Elimination provision first, if somebody has their 40 Social Security credits, but also receives a pension based on work not covered by Social Security, they may have their benefits computed definitely and probably will. The exceptions I'll talk about in a minute, but they probably will. And the reason they compute their benefits differently is because they're receiving a pension based on work not covered by Social Security, goes back to the [brave] (unintelligible) way they computed benefits ever since Social Security started. While it's true the more you make and the more you earn under Social Security, the higher your check is. That is true. This is social insurance. So, the low-income worker gets a better deal in the computation than somebody who made more money. So, the lower income worker's check is not as big as somebody who made more money, but they get a higher percentage of their earnings replaced with Social Security. Somebody who works outside of Social Security for most of their life, they look like a low-income worker to Social Security because Social Security just looks at those Social Security-covered earnings in the computation of that benefit amount. And those earnings over a lifetime for most of those people were so much lower than genuine low-income workers have, those people got a bigger advantage before the windfall law was passed than real low-income workers got. They got such an advantage that before the windfall provision was passed, I saw a lot of people in that situation that got back every dime they paid in Social Security taxes in their whole lifetime. They got it all back in their first five checks. Where somebody paid in Social Security their whole working lifetime, it takes them about five years drawing their checks to get back all their taxes. So what the windfall law does is, it takes away that advantage low income workers have from people who are not really low income workers. It's a very fair law. They still actually get their money back faster when they're affected by windfall than somebody paid in a whole lifetime. But with a windfall they don't get all the money back in the first five checks any longer. Now somebody who has 30 years of full-time work under Social Security, they don't look like a low-income worker. And that windfall won't apply to them if they have between 21 and 30 years of work under Social Security, of a certain amount of full-time work would meet that, then they're affected less by the windfall as they get closer to 30, the credit phases out. But if somebody does have their 40 social credits, and also received a pension based on work not covered by Social Security, they will receive their own Social Security and they will receive a fair amount based what they paid in. And you know, that's a very quick overview, because it's very complex, of course. Now the other law, called government pension offset, that applies to benefits on their spouse's record, and once again, the purpose of this law is to treat people who don't pay into Social Security equally with those who do. Because people who pay into Social Security on all their jobs, they have an offset, their own Social Security offsets what they can draw on their spouse's record. If they're due, entitled to more, based on their own work than they can receive on a spouse's record, that's what they get, is at their own higher benefit, they can't receive anything on the spouse's record. When somebody gets a pension based on work not covered by Social Security, that pension replaces two things. Part of that pension replaces Social Security. The other part replaces a private pension. Those pensions replace both. That's why they're all much bigger than people get who pay into Social Security. Matter of fact, not many people have pensions any longer, but of those that do, the ones that are based on work outside of Social Security are generally more than twice as big as the pensions where people do pay the Social Security. They're supposed to be bigger because once again they're replacing Social Security plus a private company's pension, and that's why they're bigger. So, it's part of those pensions based on work not covered by Social Security, replace Social Security, then part of them offset what they can draw on their spouse's record, just like somebody that's on Social Security does. The government pension offset just gives the people who don't pay the Social Security, gives them the same offset people have who do pay the Social Security. And once again, that's kind of a quick overview of a law, of a complex law, but that's why the pension offset is in there, to give them the same offset people have that paid into Social Security. Because before these laws were passed, people who didn't pay into Social Security most of our life got a better deal out of Social Security than people who did. And these laws were passed just so we would be treated equally.
Mike Treske: [00:06:20] So to help simplify the understanding and maybe recognize benefits and things of that nature, I want again to thank you for helping us create our "Social Security Savvy" program at AIG and the related benefits calculator. So, why is it important for people to use a tool like that to calibrate their benefits, and, as a rule of thumb, how many years before retirement should people really start to be thinking about this?
Tom Clark: [00:06:47] I really think they should probably start looking about 10 years before, because using a calculator like this, kind of helps them decide when to retire. You know, I think a lot of planners kind of hope that when you use a calculator like this that somebody decides, I might need to work a little longer, when they realize how long they actually may live, and how much money they may need. Maybe they're thinking they should work longer than retire when they first planned, and it's so important to know how much you were going to have. You know, if you're going to carry a little bit of debt into retirement, are you have enough income to service that debt? Things like that. Is your house paid for or not? Do you need what your house is paid for before you retire? This calculator and the "Savvy" program can help somebody kind of make those decisions. And AIG's calculator, I'm very proud of it. As you said, I helped develop it. I'm very proud of it, because it does a couple of things that most don't. And then maybe no other calculator out there does. One is, AIG's calculator will actually compute what I just talked about, those complex laws, the windfall benefit provision and government pension offset for people that are outside of Social Security. It actually will help them compute that and see what the effect of the actual effect in dollar amounts it is on their, on their Social Security. And that's very important. And I don't know of another one that does that. Also, widows and widowers have some options that do not apply if somebody's spouse is living. If your spouse is living, almost always you have to take your own Social Security first. And that offsets what you can draw on your spouse's record, but a widow or a widower can take whatever benefit they want whenever they choose. For example, let's say that their own is higher than the widow's benefits. They could take the widow's benefits when they retired or at full retirement age, once you're at least 60, and draw that lower benefit, don't touch their own yet, let it keep growing,in that case, it'll grow to like age 70 when it comes to late retirement, because they can draw the widow's early and let theirs keep growing to 70 and switch over to their own maximized benefit at that point. Or if the widows were higher. Say the widow's were higher and they retired at 62, they could take their own lower benefit at 62 and they let the widows keep growing. Switch over to that maximized check for retirement age. So, it's very helpful to have a benefit calculator that will actually show them all their options, if they took the lower benefit first. How much more they get on the higher benefit by waiting and taking it later, and then based on how long are they going to live, how much more money they would receive if they did that. And once again, I don't know of any other calculator that does that. That's very helpful for widows and widowers.
Mike Treske: [00:09:34] Tom, again on behalf of all of us at AIG, thank you for sharing your knowledge. We hope you'll come back.
Tom Clark: [00:09:40] Yeah, thanks. Thanks for having me back. Be glad to come back anytime.
Voice Over: [00:09:43] Thank you for joining us for AIG's "Plan for 100" podcast. For more information, please visit our website, planfor100.com.