On Retirement

Social Security closes claiming loophole for people with disabilities

Rule clarification eliminates option to collect auxiliary benefits

Apr 14, 2015 @ 11:37 am

By Mary Beth Franklin

If you see something, say something. We have all grown accustomed to that public safety announcement in airports, train stations and subways warning us to speak up if something seems amiss in our post-9/11 society.

I want to thank Boston University economics professor Laurence Kotlikoff for being the first to sound the alarm about a minor change in the Social Security Program Operations Manual System (POMS) late last year that resulted in a big change in the rights of people who receive Social Security disability benefits.

First, let me give you a little background. Social Security disability benefits automatically convert to retirement benefits at full retirement age, although the monthly amount remains the same.

Until late last year, it appeared that disability beneficiaries could request to withdraw their benefits to prevent the automatic conversion to retirement benefits. That withdrawal would allow them to collect spousal or survivor benefits — known as “auxiliary benefits” — between ages 66 and 70 while their own retirement benefits earn delayed retirement credits worth 8% per year.

Using an example from Mr. Kotlikoff, assume Sally is a disabled widow just reaching her full retirement age of 66. She has a widow's benefit of $15,000 per year and a full retirement benefit of $15,000 per year. Under what Mr. Kotlikoff calls “a reasonable reading of the original POMS provision,” Sally could withdraw the conversion of her disability benefit to retirement benefits. That would allow her to collect her full widow's benefit from ages 66 to 70. Then she could switch to her higher retirement benefit now worth $19,800 — 32% more thanks to four years of delayed retirement credits.

But a clarification of the agency's rules last December seems to have wiped out that option.

Under the revised version, a withdrawal request to prevent an automatic conversion to retirement benefits will now be treated as a request to withdraw all benefits — including disability benefits. That would require individuals to repay all of the disability benefits they have received to date — an expensive and unattractive option.

“Social Security made it essentially impossible for recipients of disability benefits to collect the same full auxiliary benefits that the rest of us can collect between full retirement age and 70, allowing our own retirement benefits to grow,” Mr. Kotlikoff, co-author of “Get What's Yours — the Secrets of Maximizing Your Social Security Benefits” wrote in his regular PBS News Hour column in January. He called it an outrage and suggested that Social Security bureaucrats overstepped their authority.

The Social Security Administration insists that the rewrite of POMS regulation was not a change but merely a clarification of existing policy. “We received questions on that section and clarified the existing instructions to make it less confusing and more comprehensible,” Social Security spokeswoman Dorothy Clark told me via email.

I chuckled at the reference to “less confusing and more comprehensible.” If you have ever read any of the more than 2,700 regulations in the POMS, those are not the two descriptors that readily come to mind.

I polled some other Social Security experts for their opinions on the change. None were as incensed as Mr. Kotlikoff. But most, like Robin Brewton of Social Security Analyzer, a company that provides software and education to help financial advisers optimize claiming strategies for their clients, agreed that “the new wording eliminates the ability for the withdrawal of a retirement benefit after converting from a disability benefit.”

David Cechanowicz, director of education for Social Security Timing, another company that provides Social Security software and training for financial advisers, pointed out that “while the information published in the POMS is not law, it will probably take a court case to clarify whether or not the SSA's interpretation is correct.”

The bigger question is, what other changes might the Social Security Administration effect by rewriting its rulebook? Back in 2010, SSA made another administrative change that immediately reduced the time period for the do-over strategy by requiring beneficiaries to withdraw an application within 12 months of first claiming retirement benefits. Prior to 2010, there was no time limit.

Last year, President Obama's budget included an ominous proposal to eliminate “aggressive claiming strategies which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” At the time, I noted that the file-and-suspend strategy was a byproduct of the Senior Citizens' Freedom to Work Act of 2000. Congress created it, and it would take an act of Congress to eliminate it.

Lawmakers will have to tackle Social Security reform some time before the retirement and survivor trust fund runs dry in 2033. Discussions could begin as early as next year when the disability trust fund is exhausted. In the meantime, stay tuned.

(Questions about Social Security? Find the answers in my ebook.)

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