In our last article, “Early, Full or Delayed Social Security Benefits," we compared retirement at ages 62, 66 and 70. Today, we look at six major Social Security benefit enhancements available to workers when they reach full retirement age (FRA; assume age 66). We covered the first three in the last article. They are: 1) the full unreduced retirement benefit is available at FRA, 2) the earnings test no longer applies, and 3) 8 percent deferred retirement credits (DRCs) become available if the worker elects to delay benefits until age 70. All three of these are available to any worker who qualifies for Social Security retirement benefits. We’ll now cover enhancements four, five, and six. Four and five are only applicable to a married or qualifying divorced worker. Enhancement #4 is referred to as the "File and Suspend" option. Enhancement #5 is the so-called "Spousal Only" option, also known as "Restricted Application."
Spousal Benefits Very Complex
For many workers, spousal benefits are the most complex and least understood part of Social Security. Most people need and want help with the coordination of spousal benefits. We’ll try to make it as simple as possible, but almost all workers will need professional help through the maze of spousal options. We’ll use a case study format featuring Mr. and Mrs. K to explain the two enhancements involving spousal retirement benefits.
Before we cover the two special enhancements applicable to spousal benefits, let’s review a list of key factors.
First, even if your client’s spouse never worked, she would be entitled to a spousal benefit equal to 50 percent of your benefit at FRA. But for that spouse to begin collecting, your client would have to either begin collecting himself or have filed to collect. This is an important distinction we’ll cover later. And understand that only one spousal benefit can be paid at a time; two spouses can’t collect spousal benefits at the same time.
Also, DRC’s do not apply to spousal retirement benefits. In other words, assume your client’s benefit at age 66 is $2,000 per month, but your client decides to wait until age 70. At age 70 your client’s personal benefit would now increase by 32 percent to $2,640. But the spousal benefit would still be $1,000 per month, not $1,320.
Let’s say your client’s spouse has a benefit of her own equal to $1,200 per month. What would her spousal benefit be then? Because her personal benefit is already more than 50 percent, if she collects before FRA it would be $0. And under normal circumstances, it would be $0 after FRA as well, but there are two critical exceptions below that can change that. These are Enhancements #4 and #5, and they’re what make spousal benefits so challenging.
Enhancement #4: File and Suspend
As mentioned, for a spouse to receive spousal benefits, the other spouse must be receiving or have filed to receive personal retirement benefits. The primary reason for “File and Suspend” is to make the other spouse eligible to receive spousal benefits without affecting your client’s personal benefits.
When Mr. K reaches FRA, he has a right to file for unreduced personal retirement benefits, but he doesn’t have to actually take them. Essentially, he files the paperwork for his benefit, then says, “Never mind.” By doing this, he’s deemed to be receiving benefits for spousal benefit purposes, even though he isn’t actually collecting them. This makes the spouse potentially eligible for her spousal benefit.
Example: Let’s assume Mr. and Mrs. K have both reached FRA (age 66) without taking any retirement benefits. Mr. K has a primary insurance amount (PIA) of $2,000 and Mrs. K has a minimal PIA. In this situation, the spouse with the higher PIA (Mr. K) will file and then suspend his benefits. (See “Enhancement # 4” below).
Enhancement #5: Spousal Only
Like Enhancement #4, Enhancement #5 is only applicable once the married worker reaches FRA; not before. It allows the worker to choose which benefits he starts collecting and which benefits he delays collecting.
Example: Assume Mr. K has reached his FRA with a $2,000 PIA. In this case, Mrs. K has a $1,200 PIA. Enhancement # 5 provides that if the spouse reaches FRA without having taken any benefits, he may file to have the spousal benefit based solely on the other spouse’s record. This is referred to as the “Spousal Only” benefit. Under this arrangement, Mrs. K’s $1,200 PIA isn’t considered in determining the spousal benefit. Essentially, Mrs. K is saying: “Don’t count my personal benefit toward the spousal benefit.” Because Mrs. K has reached her FRA, the spousal benefit will be $1,000 (50 percent of Mr. K’s $2,000 PIA).
Because Mr. K has already filed (or filed and suspended) his benefits, Mrs. K will now be eligible for her spousal benefit. Because she has already reached her FRA, she’ll choose “Spousal Only” benefit (see “Enhancement # 5,” below).
Not Counting Personal Benefit Toward the Spousal Benefit
So long as Mrs. K has reached her FRA without taking early retirement benefits, she has the right to file for the Spousal Only benefit option. By filing for the Spousal Only benefit she’s saying: " I want to restrict my benefit application so that it will be based solely on my spouse's (Mr. K's) record.”
Another important advantage in this arrangement is that it allows Mrs. K to collect a spousal benefit for four years while still allowing her to take advantage of DRCs. Starting at age 70, the increased benefit if $1,584 will be payable for life, plus cost of living (COLA) benefits.
Let's continue the above example by going out four years when Mrs. K will be age 70. At that time, she’ll terminate her $1,000 Spousal Only benefit and file for her enhanced personal benefit of $1,584 per month ($1,200 PIA + 32 percent).
Note that in situations in which Mr. K is the older and/or higher paid spouse, people tend to overlook the Spousal Only benefit option. This is because it’s assumed that the spousal benefit will be paid to the lower paid spouse. But in some cases, the spouse receiving the Spousal Only benefit is actually the higher paid spouse.
Enhancement 6: Retroactive Benefits
Not many people realize that when the file and suspend option (Enhancement # 4) is selected at FRA, it also gives the worker the right to retroactively receive benefits back to the date of the filing (FRA).
Example: Let’s say that Mr. K is single. Assume he decides to wait until age 70, but files and suspends at age 66 anyway. But he becomes terminally ill at age 69. There’s no longer any sense in waiting until age 70 because he may not live much beyond that. In that situation, he has the option to collect his $2,000 monthly benefit all the way back to age 66, so long as he had implemented the File and Suspend option. He would then receive a $72,000 as a lump sum payment (36 months). (See “Retroactive and Future Payments,” below.) In subsequent months, he’ll continue to receive the $2,000 benefit (plus COLAs).
This will work in the right circumstances, but there are two potential disadvantages. First, a “miracle cure” to Mr. K’s ailment would have one downside: he would no longer be able to collect the age 70 enhanced benefit of $2,640. Second, we assume Mr. K is single. The decision is far more complicated when you factor in potential survivor benefits. In many cases the $2,000 benefit will continue for Mr. K’s lifetime then become the surviving spouse’s benefit. So it may not make sense when the surviving spouse has the potential to live considerably longer.
In our next two articles, we’ll take a much more detailed look at how spousal benefits work, and what the best options may be for spouses of different ages and different benefit amounts.