Social Security Spousal Benefits: Real World Examples of How the System Works

Wednesday, September 24, 2014

Joe Alfonso, GoLocalPDX Contributor

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In a previous article, we looked at the general rules governing Social Security spousal benefits. As with all things related to Social Security, it is important to see how the rules apply to your own situation in order to truly understand how the system works.

The following are some examples that should help clarify some of the finer points regarding this key benefit.

In my article, I mentioned that the key factor determining the size of the spousal benefit is when you claim it. Waiting until full retirement age (FRA) entitles you to a full spousal benefit valued at 50% of your spouse’s FRA benefit, known as the primary insurance amount (PIA); filing before FRA subjects it to a reduction. The application of these rules is complicated and depends on whether or not you as claimant are eligible for your own retirement benefit and the size of that benefit relative to your spouse’s.

Note that all examples assume an FRA of 66 and that the claimant’s spouse has already filed for a retirement benefit. Married individuals can only claim a spousal benefit if their spouse has already filed for a retirement benefit. Different rules apply to divorced spouses.

Example 1: You Are Not Eligible for a Retirement Benefit

If you do not qualify for your own Social Security retirement benefit and file for a spousal benefit before FRA you will receive a reduced spousal benefit and this reduction will be permanent:

Joan is 62 and is not eligible her own benefit. Jim is 66 and just started collecting a retirement benefit. His PIA is $2,000. Joan files for a spousal benefit at age 62.

If Joan had waited until her FRA she would have received a full spousal benefit of $1,000 (50% of Jim’s PIA of $2,000). In this case, she filed for an early benefit at age 62. She will therefore receive a $700 benefit ($1,000 x 70%) reflecting a 30% reduction for early claiming.

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Example 2: You Qualify for a Retirement Benefit That is Less Than Half Your Spouse’s

Joan is 62 and her PIA is $70. Jim is 66 and his PIA is $2,000. Joan files for a spousal benefit.

In this case, Joan worked and qualified for her own retirement benefit. Rather than take her own lower benefit, however, she elected to file early for the higher spousal benefit. Joan’s PIA is less than half of Jim’s.

Under the Social Security rules, Joan’s options are severely limited in this case, as follows:

Social Security will first pay Joan her own retirement benefit, reduced by 25% for early taking. This benefit will equal $525 ($700 x 75%)

Social Security will then pay Joan a spousal benefit based on the difference between her and Jim’s PIAs. This benefit will in turn be reduced by 30% for early taking and will total $210:

$1,000 (50% of Jim’s PIA) - $700 (Joan’s PIA) = $300 x 70% (reduction for early taking) = $210

Joan’s total benefit will be a combination of the reduced retirement and spousal benefits and will total $735 ($525 + $210= $735)

You can see that Joan’s total reduced benefit of $735 is less than the full spousal benefit of $1,000 she would have received if she had waited until FRA.

Example 3: You Qualify for a Retirement Benefit That is Greater Than Half Your Spouse’s

Joan is 62 and her PIA is $1,100. Jim is 66 and his PIA is $2,000. Joan files for a spousal benefit.

In this case, Joan’s PIA is greater than 50% 0f Jim’s. As a result, Joan will only receive a reduced retirement benefit and will never be paid the “spousal adder” in Example 2.

1. Joan’s PIA will be reduced by 25% for early taking to $825 ($1,100 x 70%)

2. Because Joan’s PIA is greater than half of Jim’s ($1,100 vs. $1,000), Joan will not be allowed a spousal benefit, even a reduced one.

Examples 2 and 3 reflect the fact that applying for benefits before FRA limits claiming options. In the case of spousal benefits for claimants who also qualify for a retirement benefit, filing before FRA prevents them from filing a “restricted application” limited to the spousal benefit in order to delay their retirement benefit.

This claiming option is only available at FRA and allows a claimant to grow their retirement benefit by 8%/year by delaying until age 70. Note that spousal benefits do not grow after FRA and there is therefore no benefit to delaying them.

Example 4: You Apply for a Spousal Benefit at FRA

Joan is 66 and her PIA is $1,100. Jim is 70 and his PIA is $2,000. Joan files a restricted application for a spousal benefit and delays her own retirement benefit to age 70.

In this case, because Joan is at FRA, she can limit her claim to a spousal benefit while delaying her own retirement benefit. She will therefore receive a full spousal benefit of $1,000 (50% of Jim’s PIA of $2,000). Four years later, at age 70, her own benefit will have grown by 32% to $1,453 ($1,100 x 1.32), excluding cost of living adjustments. Joan will then switch to her maximized retirement benefit and continue to collect it for the rest of her life. She will switch to Jim’s higher benefit as a survivor if he predeceases her.

The devil is clearly in the details when trying to understand how the Social Security rules apply to you. Consider working with an advisor with Social Security expertise to help you understand and compare your own claiming options. Making the correct claiming decision is critical and can result in tens of thousands of dollars in additional lifetime income for you to enjoy in retirement.

Joe Alfonso, CFP®, ChFC, EA regularly writes on financial topics and is an expert on Social Security planning. He is founder of the Fee-Only financial planning firm Aegis Financial Advisory (http://www.aegisadvisory.com) in Lake Oswego, Ore., and is the principal advisor for the firm. Joe is a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, admitted to practice before the IRS to represent taxpayers at all administrative levels for audits, collections, and appeals. He is a member of The National Association of Personal Financial Advisors (NAPFA).