On Retirement

Mary Beth Franklin: Social Security math quiz

Spousal benefit calculations are more complicated than you think.

Sep 10, 2012 @ 1:07 pm

By Mary Beth Franklin

My mailbag continues to fill up with questions about Social Security claiming strategies. I have to admit that no matter how much I think I know about this subject, I always learn something new thanks to your detailed questions. So, please, keep them coming.

There seems to be a lot of interest in how spousal benefits are calculated. This is a great opportunity to lift the curtain on the formula that the Social Security Administration uses to arrive at a benefit amount.

When a worker files for retirement benefits, the worker's spouse may be eligible for benefits based on the worker's earnings. The spousal benefit can be as much as half of the worker's primary insurance amount, but it's not always a simple matter of dividing by two. It also depends on what age the spouse files for her benefits.

First, let me clarify a key definition. The primary insurance amount, or PIA, is the benefit amount a worker would receive if he or she elects to begin receiving retirement benefits at normal retirement age. It does not include the additional 8%-per-year delayed retirement credit the worker earns by postponing claiming retirement benefits until age 70.

If a spouse is eligible for a retirement benefit based on her own earnings—and if that benefit is higher than the spousal benefit—Social Security pays her the retirement benefit. Otherwise, it pays the spousal benefit.

Here's an example of how SSA calculates the benefit for a woman who collects retirement benefits early at age 62 on her own earning records and then qualifies for spousal benefits at a later age once her husband files for his benefit.

Let's say the wife's primary insurance amount or PIA is $1,000 per month. She files for her own benefit at 62 and receives a reduced retirement benefit of $750—a 25% reduction because she claimed four years before her normal retirement age.

And, let's also assume her husband has a PIA of $2,500 per month at his normal retirement age of 66. Once he files for benefits, she is eligible to receive one-half of his PIA at her full retirement age, which would be $1,250. This is the full spousal rate.

But because she claimed her own retirement benefit early, it will also affect how much she receives as a spouse.

First, Social Security subtracts the wife's PIA of $1,000 per month from the full spousal rate of $1,250. The resulting $250 differential is then added to her reduced retirement benefit amount of $750 to arrive at $1,000. That's the new monthly amount she will receive in combined retirement and spousal benefits once her husband files for his retirement benefits. It is a combination of her reduced retirement benefit because she collected early and the differential between her full retirement benefit and full spousal benefit at normal retirement age.

Even if he delayed collecting his retirement benefits until age 70, which would boost his benefit to $3,300 per month, it would not increase her spousal benefit. Remember, her spousal benefit is based on his PIA at full retirement age, not including any delayed retirement credits.

However, if he dies first, she will receive a survivor benefit worth 100% of what he received during his life—including the delayed retirement credits. And as long as she is at least normal retirement age at the time, her survivor benefit will not be reduced even though she collected her own retirement benefit early. Think of retirement benefits and survivor benefits as two separate pots of money.

And therein lies the secret of Social Security claiming strategies for married couples: The primary goal should be for the main breadwinner to secure the largest retirement benefit possible because it translates into the maximum benefit for a surviving spouse. If really doesn't matter if the lower-earning spouse collects reduced benefits early because she is still likely to step up to larger survivor benefits.

This is just one of the issues we'll be discussing in our third and final webinar on Women and Investing scheduled for October 30. Don't miss it.

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