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 need to consider a planned strategy for collecting their social security benefits. Strategies have been designed to assist them in maximizing social security payouts.
New Social Security rules were signed into law on November 2, 2015 which changed the right to file a restricted application for those born on or after January 2, 1954.
If you were born on or before January 1, 1954, are currently married, or are divorced and eligible for a benefit on an ex-spouses's record, once you reach full retirement age (assuming you have NOT yet claimed your benefits) you can use a restricted application to claim a spousal benefit, while letting your own benefit continue to grow.
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.