How to Use Social Security Spousal Benefits

Couples could gain billions in annual payments by making better use of program’s spousal benefit rules.

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Each year, married couples are leaving billions of dollars on the table that they could be claiming from Social Security. The foregone money can be found in Social Security's spousal benefit rules, which are not widely understood or followed by many beneficiaries.

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The missed opportunity and strategies for exploiting it were laid out in a 2009 study by the Center for Retirement Research at Boston College. "Strange But True: Claim Social Security Now, Claim More Later" described how spouses could increase their benefits by using Social Security's spousal benefit provision. A spokeswoman from the center says the points in the study are still valid today. But the process is complicated. Here goes:

Married individuals are allowed to begin claiming Social Security retired worker benefits as early as age 62. If they delay receiving benefits, the amount they get will rise by about 8 percent a year, every year, topping out at age 70 (this is in addition to annual cost-of-living increases in benefits). Before then, people reach what Social Security calls the "full retirement age," (FRA) which is 66 for most folks. When you reach FRA, any outside earnings you have do not reduce your Social Security benefits. Prior to reaching FRA, such earnings can take a big bite out of your benefits. (Here's more background on the FRA and outside earnings.)

[See Begin Social Security Benefits for the Right Reasons.]

With lifespans increasing, delaying Social Security is widely advised as a good way to boost lifetime income in those later years. The key, of course, is being able to afford to defer the benefits. The research from the Center for Retirement Research offers married couples a way to get benefits earlier from Social Security and still qualify for the higher payouts that are triggered at later benefit claiming ages.

Instead of claiming benefits based on their own earnings, a married individual can claim half of their spouses' benefit; the maximum payment would be half of what's called the spouse's primary insurance amount (PIA), which is the benefit when they reach their full retirement age. If done at the right ages, the person receiving the spousal benefit can still be entitled to their full benefit at a later date. And claiming the spousal benefit does not reduce any benefit being claimed by the other spouse.

Both spouses have to be at least 62 to use this approach and one of the spouses has to have begun receiving primary retirement benefits for the other spouse to begin filing for spousal benefits. (The person claiming the spousal benefit needs to wait until their FRA to claim that benefit or the strategy won't work, the Center for Retirement Research says. That's because of an assumption that Social Security makes for benefit filings made prior to a person's FRA. The assumption involves what's known as a "deemed filing" or "deeming."

[See How to Tune Up Your Retirement Plan.]

The CRR researchers said they initially expected what they call their "claim now, claim more later" strategy to be used by wives, who are typically three years younger than their husbands and generally have a history of lower earnings. Instead of both husband and wife waiting to claim benefits until age 70, the wife would begin claiming a spousal benefit as soon as her husband made his claim, which would make her 67 in this example (because he is waiting to claim until age 70). Under this approach, the wife could collect half of her husband's PIA and still continue working if she chooses. At age 70, she can then stop receiving spousal benefits and begin claiming her own maximum worker benefit based on her earnings record. As the CRR notes, the strategy produces the most dollars for higher-earning couples where the husband and wife have similar earnings histories.

So far so good, but the researchers found that a superior strategy would reverse the claiming process so that husbands would be the ones claiming spousal benefits. That's because women live longer than men and tend to earn less during their careers. So, the optimum Social Security strategy for couples is for the wife to begin taking benefits as soon as she can, and continue claiming her own benefit until her husband dies, at which time she is entitled to his benefit as a widow. Based on life expectancies, the wife would claim her benefit at age 62, and her husband would claim a spousal benefit based on his wife's earnings once he reaches his FRA (66 is the age used in the CRR example). At age 70 (or earlier, depending on financial circumstances) he could claim his own worker retirement benefit and stop the spousal benefit. This assumes the husband is the higher earner. If the wife has made more money, the husband would begin claiming payments at age 62 and the wife would claim spousal benefits when she reached her FRA.

The 2009 Center study estimated that nearly $10 billion in spousal benefits was not being claimed each year. A Social Security spokeswoman said the agency has not recently done any research on spousal claiming trends or total available benefits that aren't being claimed.

Twitter: @PhilMoeller