by Daniel G. Mazzola, CPA, CFA
Social Security has been described as the one product all Americans buy yet none understand. Though flippant, this characterization sadly rings true. In 2012 the Social Security Administration paid benefits to over 56.3 million Americans, the overwhelming majority of whom had no idea how eligibility is determined, the manner in which payouts are calculated, or the extent to which family members may collect on the earnings record of the primary breadwinner.
Many of those eligible for social security are not aware of an interesting feature called the spousal benefit. Spousal benefits allow one spouse to collect a retirement benefit based on the working record of the other spouse, regardless of his or her own earnings history.
As an example, we will use a married couple (Mr. and Mrs. Smith) with the husband employed while the wife stays at home to maintain the household. Social Security regulations allow Mrs. Smith at full retirement age (currently 66 for those born in 1943 through1954) to receive a spousal benefit of 50% of Mr. Smith's payout, even though she has no record of employment outside the home. Had Mrs. Smith worked during her lifetime to earn enough credits for social security coverage, she would then be entitled to the greater of the spousal benefit (50% of Mr. Smith's) or one derived from her own record.
According to the Bureau of Labor Statistics, in 2012 both spouses were employed in 47.4% of American "married couple" families; this rate increases to 59.0% for "married couple with children" units.
With reductions in benefits for filing before full retirement age and delayed credits (until age 70) for applying afterward, married couples can select from a wide variety of collection options.
Strategies have been designed to assist them in maximizing social security payouts. One of these strategies is termed "file and suspend." Let us return to Mr. and Mrs. Smith. Under "file and suspend," Mr. Smith applies for his benefit (permitting Mrs. Smith to collect her spousal benefit) and then immediately postpones his payout until needed. The advantage to him in suspending collection is that he receives a delayed credit of 8% a year while he waits. An 8% guaranteed return is nothing to dismiss in the current climate of low interest rates.
This delaying tactic is doubly rewarding in that it locks in a higher survivor benefit for Mrs. Smith if she outlives Mr. Smith.
Another strategy to be employed when both spouses have similar earnings records yet one wants to delay collecting is to file a "restricted" application. We will use the Smiths again with an adjustment. Mrs. Smith has worked enough to have earned her own benefit. She wants to collect, while Mr. Smith does not. Mrs. Smith will file for and claim her own benefit. By filing for a "restricted" benefit, Mr. Smith can collect his spousal while again postponing his own and receiving a delayed credit of 8% a year.
Key points to consider with these approaches is that the party who "files and suspends" or applies as "restricted" must have reached full retirement age, and that a husband and wife cannot collect a spousal benefit on each other -- a married couple is limited to one spousal benefit only.
Spousal benefits add another layer of complexity to an already challenging question: "When should someone take their social security benefits?'
There is, obviously, no one-size-fits-all answer. The many nuances of the program, combined with an individual's lifestyle, health status, and financial resources should all be considered before reaching such an important decision. Yet while perplexing, social security is too important a topic not to educate oneself and become cognizant of the varied features and options.
As Americans, we pay for social security retirement benefits in the form of payroll taxes remitted through a lifetime of working. It would be imprudent not to take full advantage of all it has to offer.