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How to Avoid Social Security Traps

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Social security is arguably the most robust pension program ever created. Not only does it provide guaranteed lifetime retirement benefits which are enhanced by cost of living (COLA) adjustments but it also provides benefits for spouses, divorced spouses, widows/widowers, children, children in care and disabled workers. On the other hand, the complexity of the program rivals that of the tax code. Social security is governed by over 2,700 rules which are written in a cryptic style that most CPA’s and attorneys would struggle to decipher.

This complexity can often times work against you when you have a dispute over benefits with social security.

If you go into a social security office to file for a benefit you believe you are eligible for, but are told that you are not, what recourse do you have? Well, you can file to have your request reviewed by a supervisor and they will eventually get back to you with a decision.

It is always helpful, however, to be able to reference the social security “rule book” which is called the POMS (Program Operations Manual System).  Unfortunately, trying to identify the applicable code sections and then deciphering and interpreting those code sections is indeed challenging. Working with a social security advisor (someone certified in social security planning) may be well worth it as he/she can arm you with the applicable POMS section(s) to take with you to the social security office to support your claim.

I had a client who’s wife had filed for her benefits prior to full retirement age (FRA). He had decided to defer his own benefits to age 70. I told him that, since he was now age 66 (his FRA), he was also eligible to collect spousal benefits while deferring his own benefits to age 70. When he went to social security to file for spousal benefits he was told he was not eligible to do so because his own benefit was more than half of his wife’s benefit. I told him that the social security agent was incorrect. She was applying the “deemed filing rule” to his request but, since he had now reached FRA, the deemed filing rule no longer applied.

I printed out the applicable section from POMS and told him to go back to social security with this information and file for spousal benefits again. Although he had to involve a social security supervisor he was able to receive his $1,000 per month spousal benefit (worth over $50,000 from age 66-70!) that he was originally told he was not eligible for.

In another instance, a client told me that she had gone into social security approximately 3 months prior to turning age 70 in order to ready her paperwork so that she could commence receiving her maximum eligible benefits when she turned age 70. The social security agent instead insisted that she take retroactive benefits (6 months of back payments, lump-sum) and that she would start her benefit amount based on a start date as if she had filed 6 months earlier.

The problem with doing that is she would also be permanently reducing her lifetime monthly benefits going forward by approximately 6% per year. This is because she would forfeit the option to increase her benefit amount by an 8% annualized delayed retirement credit (DRC) to age 70. By starting her benefits 9 months prior to age 70 she would be forgoing a 6% permanent increase in her benefits (i.e. 9 months worth of DRC’s to her age 70).

The issue here is that POMS assumes someone filing for benefits after FRA intends to file for any eligible retroactive benefits unless that applicant specifically declines retroactive benefits in order to preserve their DRC’s. Unfortunately, applicant’s are not typically told what their options are and these default provisions may often lock them into permanently lower lifetime benefits.

Therefore, in addition to being an enormously complex system, it is important to know that the default provisions built into the social security may not always align with your personal goals and objectives.  Knowing what your options are and working with a social security specialist who can arm you with specific POMS references may be the best way to ensure that your options are clear to you and you can confidently go to social security to file for all the benefits you are entitled to.

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