Social Security: Expert Breaks Down ‘Widow’s Scam’ and 3 Other Mistakes That Can Cost Thousands

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There are a lot of moving parts to Social Security retirement benefits, and unless you take the time to research how they are determined and how to maximize your monthly payment, you could end up making mistakes that cost a lot of money. Factors to keep an eye on include how much you contributed to the system while working, when you claim benefits, your marital status and how much outside income you earn after filing for Social Security.

As CBS News recently reported, Social Security is an “incredibly complex system” with an operations manual that is 20,000 pages long. Within those pages you’ll find roughly 2,700 rules that can “easily trip up claimants and cost them tens of thousands of dollars in lost benefits.”

This tangled web of rules is addressed in a new book, “Social Security Horror Stories,” co-authored by Boston University economist Laurence Kotlikoff and personal finance writer Terry Savage.

As previously reported by GOBankingRates, Kotlikoff made headlines earlier this year for his role in a study showing that waiting until you are 70 years old to claim Social Security could boost your finances by more than $182,000 — which means that not waiting could cost you more than $182,000.

In a recent conversation with CBS MoneyWatch, Kotlikoff underscored the importance of familiarizing yourself with Social Security’s various rules before filing for benefits.

“We probably have about 20% of retirees who are totally dependent on Social Security for their only source of income,” he noted. “This is a big deal. You have to take this seriously, and you have to do your homework.”

Are You Retirement Ready?

Here are four Social Security filing mistakes cited by Kotlikoff that could cost you thousands of dollars.

Falling Prey to the ‘Widow’s Scam’

This is not really a “scam” in the sense that you’re being purposely bilked out of your money. It’s more a mistake that is often made because the rules are so fuzzy.

As CBS News reported, one of the 12 types of Social Security benefits is the survivors benefit paid to widows, widowers and dependents of eligible workers. Widows and widowers can file for Social Security based on their spouse’s earnings and claim as early as age 60 rather than wait until age 62, which is normally the earliest age you can file.

The mistake people make is filing for survivor’s benefits and their own retirement benefits at the same time — even though the Social Security Administration will only pay one benefit, whichever is higher. If the survivor’s benefit is higher and you claim both at the same time, you could lose out on thousands of dollars of benefits by claiming too early.

“You go into Social Security and you say, ‘Hey, I want my 76% higher check for the next possibly 30 years,'” Kotlikoff said. “And they say, ‘No, look at our records here. You filed for both benefits, you checked off the box.'”

Not Waiting To Claim

Although you can claim retirement benefits as early as age 62, you’re almost always better off waiting at least until full retirement age (FRA) and ideally until age 70, after which there is no financial benefit to waiting. Your payment goes up for each year you hold off filing. After you reach full retirement age (either 66 or 67), your benefit rises by 8% annually for each year you wait to file.

Are You Retirement Ready?

Misunderstanding the Earnings Test

The “earnings test” refers to thresholds on outside income earned after you claim Social Security, and the rules surrounding it often cause beneficiaries to make costly mistakes.

The Social Security Administration considers you “retired” when you start receiving retirement benefits. If you are younger than full retirement age and earn more than the SSA’s yearly earnings limit, your benefits might be reduced.

The SSA counts your earnings only up to the month before you reach your FRA — not your earnings for the entire year. For 2023, the limit for recipients not reaching FRA is $21,240. Up to that amount, no benefits are withheld. The threshold will rise to $22,320 in 2024. The year you reach FRA, $1 in benefits is deducted for every $3 you earn above a different limit. In 2023, this limit is $56,520. In 2024, it will rise to $59,520.

The mistake, Kotlikoff said, involves the “adjustment of reduction factor,” or ARF, which restores those lost benefits once the claimant reaches full retirement age. 

“Know that it’s a good thing to lose money to the earnings test because for every dollar you lose to the earnings test, you get about about roughly $1.20 back in benefits,” Kotlikoff said. “But people aren’t being told that, so they mistakenly think that going back to work just makes no sense because all they’re doing is working for the government.”

Not Keeping an Eye on Overpayments

The SSA has taken considerable heat for issuing tens of billions in overpayments to Social Security beneficiaries and then sending letters demanding that the money be paid back — even if it wasn’t the recipient’s fault. This issue impacts about 1 million Social Security recipients a year.

Are You Retirement Ready?

To soften the blow from having to repay what could total thousands of dollars in overpayments, Kotlikoff advises Social Security recipients to keep careful records of their interactions with the SSA and any information they send in. Your best move is to create a my Social Security account to track your expected benefits.

“If you start seeing that you’re getting overpaid, you should set that money aside because they’re going to come back for it at some point,” Kotlikoff said.

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