Social Security Benefits: What Married Couples Approaching Retirement Need to Know
Social Security benefits represent a valuable source of guaranteed income individuals can count as part of a retirement strategy. For married couples, a critical part of any Social Security claiming strategy is integrating Social Security benefits to take best advantage of the rules surrounding the claiming of benefits.
SOCIAL SECURITY BENEFITS AVAILABLE TO MARRIED COUPLES
Members of a married couple are each entitled to Social Security benefits based upon their own work records (a “worker benefit”). This benefit, at Full Retirement Age,1 is known as the Primary Insurance Amount (PIA). The earliest an individual can file for a worker benefit is age 62, but actuarial reductions apply if it is taken prior to Full Retirement Age. If the benefit is taken after Full Retirement Age, Delayed Retirement Credits2 apply.
The lower-earning spouse may also be entitled to Social Security benefits based upon the other spouse’s work record (a “spousal benefit”). The spousal benefit is calculated as the greater of the individual’s own worker benefit at Full Retirement Age, or one-half of the spouse’s worker benefit at Full Retirement Age. To see how the numbers work, let’s assume that Ken is eligible for a worker benefit of $2,000 per month at his Full Retirement Age of 66 (his PIA). Ken’s wife Mary is eligible for her own worker benefit of $600 per month at her Full Retirement Age of 66 (her PIA). One-half of Ken’s PIA ($1,000) minus Mary’s PIA ($600) leaves Mary eligible for an additional $400 in the form of a spousal benefit. If Ken and Mary filed at age 66, Ken would receive $2,000 and Mary would receive $1,000. Mary’s $1,000 might be thought of as a spousal benefit, but it really is made up of two parts, her own worker benefit ($600) and her spousal benefit ($400).
There are a few important things for Ken and Mary to keep in mind. First, Ken must have filed for his worker benefit for Mary to become “entitled” to a spousal benefit. Second, both the worker benefit and a spousal benefit are subject to actuarial reductions if taken earlier than age 66. Third, Mary cannot file for only one type of benefit—if she files for a worker benefit or a spousal benefit, she is deemed to be filing for both.3
An individual is also entitled to Social Security benefits based on the work record of a spouse who is deceased (a “survivor benefit”). For survivor benefits, the individual can “step into” the benefit amount that a deceased spouse was receiving if it is higher than the individual’s own Social Security benefit amount at the time the spouse passes away.
SOCIAL SECURITY CLAIMING STRATEGIES FOR MARRIED COUPLES
Delay the Higher Earner’s Benefit
Many retirees focus only on the initial Social Security benefit amount and not the “second stage” benefit calculation, the survivor benefit. When this second stage calculation is taken into account, married couples may find that, if retirement income is needed, it’s beneficial for the spouse who is eligible for the lower Social Security payments to start collecting his/her own worker benefit early—while delaying the other spouse’s benefits.
Then, at the death of the primary breadwinner, the lower-benefit spouse will “step up” to a much higher benefit. In essence, when the primary worker delays benefits, at the death of the first spouse, the smaller benefit drops off and the larger benefit continues. When considering whether to delay Social Security, not only should the worker’s expected longevity be considered, but, perhaps more importantly, the spouse’s as well.
Delay Both Spouses’ Benefits
If both spouses expect to live long retirements, or merely wish to protect their income in the event that they do, they may both consider delaying their benefits. The latest age one can delay benefits and receive Delayed Retirement Credits is age 70. Further, a strategy whereby both spouses delay Social Security claiming to age 70 may prove more tax efficient than starting benefits earlier.
Delay the Higher Earner’s Benefit Until the Spouse’s Benefit Is Maximized
Since a spousal benefit does not grow larger with Delayed Retirement Credits after Full Retirement Age, a married couple may wish to start the higher earner’s benefit when the spouse reaches Full Retirement Age, as this triggers the ability of the spouse to claim a spousal benefit.
Using another example couple, let’s assume that Joe is three years older than Sue. Joe has earned a worker benefit, while Sue has no benefit based on her own work record and will rely on a spousal benefit based on Joe’s work record. Let’s further assume that Joe’s PIA is $2,000 at age 66. Since Sue’s benefit is based on Joe’s work record, her maximum benefit amount (excluding COLAs) is $1,000. This is the amount Sue is eligible for at her Full Retirement Age of 66. If she waits past age 66 to claim her benefit, it does not grow larger with a Delayed Retirement Credit. In addition, she cannot claim this spousal benefit until Joe files for his benefits. Since Sue’s $1,000 benefit does not increase past her Full Retirement Age, Joe could file for benefits at age 69, when Sue is age 66. Joe’s worker benefit would be $2,480 per month since he has earned Delayed Retirement Credits of 8% per year for three years by waiting until age 69 to start his benefits. Sue’s spousal benefit, which she can file for since Joe has filed for his worker benefit, would be $1,000 per month.
Hypothetical Benefit Amount
Before, At or After Sue’s Full Retirement Age (66)
File a Restricted Application
Under the Bipartisan Budget Act of 2015, which restricted the use of Social Security claiming techniques, this strategy is only available to individuals who were born prior to January 2, 1954 and are, therefore, deemed to have turned age 62 in 2015, or earlier. This strategy permits an individual who has reached Full Retirement Age and whose spouse has filed for worker benefits to file for ONLY a spousal benefit, while letting the benefit based on his/her own work record grow until age 70 by earning Delayed Retirement Credits. This process is referred to as filing a restricted application for a spousal benefit. Interestingly, the spousal benefit is not reduced by the individual’s own worker benefit, but rather is based on half of the spouse’s Full Retirement Age benefit (his/her PIA).
Mary would switch from the spousal benefit to her worker benefit at age 70. As a result, she would have used the spousal benefit to bridge to a higher worker benefit, which she will receive until either she or Ken dies. Should Ken die first, she would step up his current benefit ($2,000 plus accumulated COLAs). Although the Bipartisan Budget Act of 2015 limited this strategy to those born prior to January 2, 1954, the other spouse can be born after this date, but he/she must have filed for his/her worker benefits for this strategy to work.
Social Security provides valuable guaranteed income to married couples. A well thought-out approach to claiming these benefits can be the cornerstone of a retirement income strategy.
THE EARNINGS TEST
Any individual who starts either a worker benefit, spousal benefit, or survivor benefit prior to his or her Full Retirement Age (age 66 for those born prior to 1955) will be subject to the Earnings Test. In every year leading up to the year Full Retirement Age is reached, $1 in benefits will be withheld for every $2 earned above the limit for that year ($15,720 in 2016). During the year Full Retirement Age is reached, benefits will be reduced $1 for every $3 earned above a higher limit ($41,880 in 2016), until the month Full Retirement Age is reached. At that point, the Earnings Test no longer applies.
For an individual who is receiving a spousal benefit, the earnings test applies in two ways. First, the individual’s own earnings will reduce his/her spousal benefit if his/her income is earned over the limit. Second, the spouse’s earnings (on which the spousal benefit is based) may also reduce the spousal benefit if the spouse’s income is over the threshold. The reduction is applied proportionately to the worker benefit and the spousal benefit.
For example, assume Walter, age 64, is receiving a $20,000 annual worker benefit and Paula, also age 64, is receiving a $10,000 annual spousal benefit. Further, assume Walter earns $21,720 in 2016. Since his earnings are $6,000 over the $15,720 limit, the benefits associated with his work record will be reduced by $3,000. However, since there is more than one beneficiary being paid based on Walter’s account, the $3,000 reduction is applied proportionately. Since Walter’s $20,000 worker benefit is twice as high as Paula’s $10,000 spousal benefit, Walter’s benefit will be reduced by $2,000 while Paula’s benefit will be reduced by $1,000.
IF YOU ARE MARRIED – KEY POINTS TO REMEMBER
- To receive a spousal benefit based on a spouse’s work record, the spouse must have filed for benefits.
- Individuals born on or after January 2, 1954, are deemed to be filing for all available benefits, and cannot choose to file for only one type of benefit (e.g., worker benefit).
- An individual can only file a restricted application for spousal benefits if he/she was born before January 2, 1954, has reached Full Retirement Age, and has a spouse who has filed for his/her own worker benefits.
- If an individual starts taking worker benefits earlier than Full Retirement Age, they don’t increase later in the form of a spousal benefit. A spousal benefit may become available later, but the total benefit will always be lower, since at least a portion started early.
- No matter which spouse dies first, the smaller benefit is eliminated and the larger benefit continues.
- To receive spousal benefits, an individual must have been married for at least one continuous year, and be currently married to the worker when the application is filed.
1 Full Retirement Age is the age at which an individual first becomes entitled to unreduced benefits.
2 Delayed Retirement Credits apply after the Full Retirement Age and increase worker benefits by 8% per year.
3 See “File a Restricted Application” above for an exception to this rule.
This material should be regarded as education information on Social Security and is not intended to provide specific advice. Since individual circumstances may vary, you should consult your own legal and tax advisors if you have questions on the tax treatment described. Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice.