Financial advisers often ask me how to maximize Social Security benefits based on the ages and relative retirement benefits of each spouse in a dual-income couple, which is a typical client profile today. But for much of Social Security's 84-year history, one-breadwinner families with a stay-at-home spouse were the norm and the program's benefit structure still favors this Ozzie-and-Harriet style family.
Two-income households often pay more in Social Security taxes than a one-income household with the same level of income but reap smaller benefits per dollar of taxes paid. That's because the federal government only collects Social Security taxes on an individual's income up to a certain threshold ($132,900 in 2019).
If a one-income household earned $200,000 this year, its Social Security tax bill would be $8,240 ($132,900 x 6.2% payroll tax rate for employees.) If a two-income household earned the same $200,000 split evenly between the two spouses, all of their earnings would be subject to the Social Security tax for a total of $12,400 ($100,000 x 6.2% x 2).
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An individual must work at least 10 years to earn the minimum of 40 credits — four credits per calendar year — needed to be eligible to receive Social Security retirement benefits. But the amount the worker receives is based on the highest 35 years of indexed earnings and the age when benefits are claimed. Each zero year in the 35-year calculation reduces future benefits.
If someone is entitled to two benefits — as a worker and as the spouse of a worker who is eligible for Social Security benefits — they would receive the higher of the two benefit amounts.
In many cases, a spouse with a small Social Security benefit of her own will qualify for larger spousal benefit on her husband's earnings record — the same benefit she would receive if she had never worked outside the home.
One adviser from Illinois was astonished by this fact. "So even if one spouse has no Social Security benefit of her own, together they would get 150% of the worker's monthly benefit for life?" he asked.
Yes, that's correct.
The adviser asked how the rule would apply to his clients where the husband's full retirement age benefit is $2,600 per month and the wife's is $400 per month.
I responded that if the wife claimed benefits when she turns 66 next year, she would receive her full $400 per month in Social Security benefits, even if her husband decided to delay claiming his own benefits up to age 70.
Once the husband claimed his Social Security benefit, the wife would step up to the larger spousal amount of $1,300 — half of his full retirement age benefit amount, not half of his age 70 amount.
If the husband claimed his benefit at age 70, it would be worth about $3,432 — 32% more than his full retirement age amount. For every year a worker postpones claiming Social Security beyond full retirement age, benefits increase by 8% per year up to age 70.
If the husband dies first, the wife's survivor benefit would be worth 100% of what her husband was collecting at time of death, including any delayed retirement credits. At that point, her smaller benefit would disappear.
Another adviser from North Carolina was disappointed to learn that a wife's spousal benefit can't be triggered until her husband claims his Social Security retirement (or disability) benefits.
The adviser asked for help crafting a Social Security claiming strategy for a couple in which the husband, 66, is a high earner and the sole breadwinner of the family. The wife, 64, is a homemaker with no Social Security benefit of her own.
The adviser suggested that the husband wait until at least age 68 to collect a bigger retirement benefit and lock in a potentially larger survivor benefit for his wife. But the wife wants to collect Social Security now.
"When I model my recommendation, I see that his amount goes up nicely by waiting until age 68, but her spousal benefit today would be zero," the adviser wrote. "Does he need to be collecting for her to get her spousal benefit?"
Yes, he does. In the past, it would have been possible for the husband to file for his Social Security benefits at his full retirement age, thus triggering a spousal benefit for his wife, and then immediately suspend his own benefit so it would continue to grow by 8% per year up until age 70. But Congress eliminated the so-called "file-and-suspend" claiming strategy in April 2016, so this option is no longer available.
The husband must actually claim his Social Security benefit before his wife can collect a spousal benefit on his record. On the plus side, earnings restrictions disappear at full retirement age, so he could claim Social Security at 66 and his benefits would not be reduced even if he continues to work.