Figuring out Social Security spousal benefit requires some ciphering

Most financial advisers grasp the basic concepts of Social Security claiming strategies: Claim early and collect a smaller benefit over a longer period of time or hold out for a bigger benefit at full retirement age or later, which for married couples can also translate into a higher survivor benefit. But the math can get complicated when calculating how much as spouse will receive.

In response to my recent column on the interplay between Social Security spousal and survivor benefits, Kevin, a CPA in Eugene, Ore., posed an excellent question.

Kevin asked about the impact of a lower-earning spouse taking her own reduced retirement benefit early at age 62 and then stepping up to a higher spousal benefit once her higher-earning husband claims his benefit.

He used the hypothetical example of a wife with a Primary Insurance Amount (PIA) of $1,000 per month on her own earnings record at her full retirement age of 66 and a husband with a much larger PIA of $2,400 per month at his full retirement age of 66.

Let’s assume both spouses are the same age and that the wife decides to claim her retirement benefit as early as possible at age 62. Let’s also assume the husband waits until 66 to claim his benefit. The wife’s retirement benefit is reduced by 25% to $750 per month because she will receive benefits for an additional 48 months.

What happens when the husband later claims his benefit at his full retirement age, Kevin asked? Will the wife’s benefit increase?

Yes, she will step up to a higher monthly amount, but it won’t be as large as if she had waited until 66 to claim benefits.

The math works like this: The husband’s PIA is $2,400 and the wife’s is $1,000. Half of the husband’s benefit is $1,200 per month, which would have been her spousal benefit had she waited until her full retirement age to claim it. The difference between her spousal benefit of $1,200 per month and her own full retirement benefit of $1,000 is $200.

Because she claimed benefits early at age 62, her own retirement benefit was reduced to $750. Once her husband claims his full benefit at 66, the Social Security Administration (SSA) will recalculate her benefit to add the spousal differential of $200 to her reduced retirement benefit of $750 for a new total monthly benefit of $950 per month.

The math is a bit different if she was entitled to both her own benefit and a spousal benefit when she first filed for benefits, known as being “dually entitled”. (That assumes her husband has already claimed his benefit or has filed and suspended his benefit in order to trigger his wife’s spousal benefit).

“Because she is taking both benefits at age 62, they will both be reduced by the number of months before she reaches full retirement age,” said Kia Green Anderson, a spokesperson at SSA.

Using the above example, if the wife claimed benefits at 62, her $1,000 retirement benefit would be reduced by 25% to $750 per month. The $200 excess between her spousal rate ($1,200) and her retirement benefit ($1,000) would be reduced by 48 months to $140.

The two reduced amounts are added together to calculate the monthly benefit of $890 ($750 + $140).

The wife’s combo retirement/spousal benefit will be permanently reduced for the rest of her life. But if her husband dies first, and she is at least normal retirement age at the time, her survivor benefit will not be reduced. A survivor benefit is equal to 100% of what her husband received—or was entitled to receive—at the time of his death. At that point, her own retirement benefit would disappear.