I was skimming one of the interminable posts over at Michael Kitces’s Nerd’s Eye View blog by Jeff Levine and was struck by his description of a very strange feature of the Social Security spousal benefit calculation. To spare you from trudging through the post, there are three curious features of Social Security benefits to consider:
- A worker’s old age benefit is reduced if claimed before the worker’s full retirement age (67 for people born after 1960) and increased if claimed after the worker’s full retirement age, until age 70 when the benefit is no longer augmented (although it’s still subject to inflation-based cost-of-living adjustments).
- A worker’s spouse’s spousal benefit (50% of the worker’s primary insurance amount) is reduced if claimed before the spouse’s full retirement age, but not increased if delayed past the spouse’s full retirement age (there’s one added nuance I’ll return to later).
- A worker’s spouse cannot claim their spousal benefit until the worker claims their old age benefit.
This creates a few interesting situations to consider.
Differentials in earnings and age
I find it useful to illustrate scenarios using extreme examples, so let’s take a look at two such extremes.
Consider a 62-year-old worker with a 67-year-old spouse, and assume the worker has earned consistently more during their lifetime than their spouse. By filing for their old age benefit at age 62, the worker sees a permanent 30% reduction in their old age benefit (“36 months times 5/9 of 1 percent plus 24 months times 5/12 of 1 percent“). However, since their spouse has already reached the spouse’s full retirement age, their spousal benefit will be a full 50% of the worker’s primary insurance amount — unreduced by the worker’s early old age benefit claim. Thus, the total household benefit will be 120% of the worker’s primary insurance amount. By the the worker turns 67, the household will have received 6 times their primary insurance amount.
After that, the household will continue to receive 20% lower benefits than if the worker had waited to claim their old age benefit (and the spouse their spousal benefit) at 67: instead of receiving 150% of the worker’s primary insurance amount, the household will continue to receive just 120% of it. 20 years later (when the worker is 87 and the spouse 92) the lower lifetime benefit will finally offset the early windfall and the couple will have permanently lower income each additional year they both live (depending on the rate of return they received on their earlier cash flow).
Now consider a more complicated question: if a worker has a younger spouse, when, if ever, should they delay filing for their old age benefit after their spouse has turned 67? After their spouse reaches age 67 the spousal benefit will no longer increase, but the worker’s old age benefit continues to rise by 8% of their primary insurance amount per year (until age 70).
Take a couple with the same birthday one year apart, with the higher-earning spouse also the older of the two:
- If the worker files at age 67, the household will receive a benefit of 145.84% of the worker’s primary insurance amount (100% in old age benefits, plus a spousal benefit reduced by filing 12 months early);
- At age 68, the household will receive a benefit of 158% of the worker’s primary insurance amount (108% in old age benefits and 50% in spousal benefits);
- At age 69, the household will receive a benefit of 166% of the worker’s primary insurance amount;
- At age 70, the household will receive a benefit of 174% of the worker’s primary insurance amount.
This calculation gives a mechanical breakeven point of 15.5 years: if both spouses survive until the worker is 85.5, the higher benefits after age 70 offset and then overwhelm the 3 years of foregone spousal benefits. Larger age differences give different breakeven points: a 5 year age difference (i.e. the spouse claiming benefits at age 62 versus age 65) gives a breakeven period of 12 years (the proof of this is left as an exercise for the reader). This is logical, since for spouses below the full retirement age, delaying the worker’s retirement increases both the worker’s old age benefit and the spousal benefit, meaning fewer years are required after delayed filing to make up for the earlier, foregone payments.
Two corner cases
So far I’ve been talking about situations where both the higher-earning worker and spouse are eligible to file for benefits at all. But there are two unique cases to consider: a spouse too young to collect spousal benefits, and a household with a minor or disabled child.
In the case of a spouse below the age of 62, the worker’s old age benefit filing decision should be made without regard for the spousal benefit, which typically means delaying filing as long as possible until age 70 (unless you have other pressing financial needs or known health issues that make it unlikely you’ll benefit from delaying old age benefits). That’s simply because the spouse isn’t eligible for a spousal benefit, so nothing the worker does can increase or reduce it. The spousal benefit claiming decision should be made on its own.
The second situation to be aware of is when a spouse is caring for a minor or disabled child. Regardless of the spouse’s age, they’re entitled to the full, unreduced spousal benefit. That means a worker filing for old age benefits at age 62 (accepting a 30% reduction in benefits) can entitle their spouse of any age to a full 50% of their primary insurance amount as long as they’re caring for a minor or disabled child. Additionally, the minor children of retirees are entitled to their own benefits (subject to certain household maxima that are a topic for their own post). High-earners who have children late in life thus have considerable incentive to claim their old age benefits at or before full retirement age, to increase the number of years their spouses and children are entitled to the full spousal and child-in-care benefits.
I actually have personal experience with this aspect of the program, since I was born late in my father’s life and received several years of dependent child benefits while I was in high school. I can’t say that they did me much good, but it’s something for older parents of young children to be aware of when making an old age benefit filing decision.