I recently did a column on Social Security and I received some comments and questions, so back by popular demand, is a similar discussion on the same topic, with a little more information.
Many married couples approaching Social Security’s full retirement age (currently age 66 for individuals born between 1943 and 1954) are being barraged by advertisements about spousal options available. They are told they may be eligible for “free spousal benefits,” or that they should file a “restricted application,” or perhaps that one of them should “file and suspend.” What do these mysterious terms really mean?
There are at least three types of retirement income from Social Security; the worker benefit, the spousal benefit, and the survivor benefit.
For the purposes of this column, I will focus on the worker benefit and the spousal benefit.
The Social Security retirement benefit of a married individual is generally thought of as being the greater of what the individual earned on his own account or one-half of the spouse’s benefit, if larger. In some cases, it’s a great deal more complicated than that. A retiree at full retirement age (FRA) having access to both a worker benefit and spousal benefit is not limited to the choice of the greater of the two. The FRA retiree may choose to file a “restricted application” and make a choice to take one or the other benefit only while deferring the other.
So, why would a retiree choose to defer a benefit? In the case of the worker’s benefit, deferring the benefit past normal retirement age means the benefit grows at a rate of 8 percent per year up to age 70, plus cost-of-living adjustments. Therefore, if a retiree chooses to defer the worker’s benefit to age 70, then the benefit at age 70 will be substantially larger.
Added to the increase in the worker’s benefit is the feature that the retiree may collect, during the years of 66 to 70, the spouse’s benefit equal to one-half of the other spouse’s benefit. This is what is sometimes referred to as the “free spousal benefit.”
Before 2000, if a worker delayed collection of Social Security benefits, the spouse would neither be able to collect spousal benefits nor receive delayed retirement credits (DRCs) on the spousal benefit.
Fortunately, changes made in 2000, now allow a worker to “file and suspend” benefits once full retirement age has been reached. This allows the spouse to begin receiving spousal benefits based on the worker’s account, while the worker continues to earn DRCs. Thus, under current Social Security rules, once a retiree has reached full retirement age (say, age 66, for example), he may file for benefits and immediately suspend those benefits to some later date, say age 70, for example. By doing this, his spouse may apply for spousal benefits, and the working spouse who continues to work will see his own worker account grow (up to age 70) at 8 percent per year plus cost-of-living adjustments.
A retiree must have reached full retirement age in order to elect to take the spousal benefit while choosing to defer the worker benefit. Under some circumstances, the “file and suspend” strategy may also help a lower-earning spouse wishing to take early retirement.
Now, if you haven’t fallen asleep yet, let me remind you that these are very important decisions. You really do need to seek out the advice of a qualified Social Security advisor. If you have any questions, please don’t hesitate to call our office.