In our last article, we tried to simplify a complicated subject: Social Security (SS) spousal benefits. Most people need and want help coordinating these benefits. We used some case studies to give a more detailed analysis of the two most significant enhancements: “file and suspend” and “spousal only.” Today we will take a detailed look at something nearly as important: SS survivor benefits.
We often spend a considerable amount of time with our clients explaining how SS spousal benefits work. But in many cases, survivor benefits can have just as much of an impact as spousal benefits.
Survivor benefits are calculated in two phases: The first phase focuses on the age of the deceased spouse and the second takes into account the age of the surviving spouse. You need to understand both to truly understand survivor benefits.
It helps to keep in mind the basic concept. For a surviving spouse’s benefit, the age of the surviving spouse used to determine if benefits are paid early or at full retirement age (FRA). If the benefit is paid early, say age 62, there will be an actuarial reduction. But prior to any actuarial reduction, the amount of the benefit applicable to or being paid to the deceased spouse is used to determine the amount paid.
Effect of Deceased Spouse’s Age
Let’s take a look at the most common (and simplest) scenario: What happens if death occurs after both spouses have reached FRA? In this case, the survivor benefit is fairly straightforward. It’s simply the higher of the two benefits. If one spouse is collecting $2,500 and the other is collecting $1,500, the surviving spouse’s benefit would $2,500. It actually doesn’t matter which spouse dies, the survivor benefit is still $2,500.
Let’s note an important difference between survivor benefits and spousal benefits. Spousal retirement benefits provide a maximum 50 percent of the other spouse’s primary insurance amount (PIA), while a surviving spouse’s benefit provide a maximum benefit of 100 percent of the deceased worker’s retirement benefit.
Note the difference between the PIA and retirement benefit. This is critical when considering deferred retirement credits (DRCs). DRCs offer a benefit increase of 8 percent per year when the worker elects to start collecting after FRA, up to a maximum age of 70. They don’t increase the PIA so they aren’t applicable to spousal benefits, but they’re applicable to survivor benefits. So if one spouse has the higher personal benefit and waits until age 70 to begin collecting, the full benefit with DRCs would be payable to the surviving spouse.
Example: Assume Mr. K. has a personal benefit of $2,000. This is the amount he would get at age 66. But let’s say he elects to defer until age 70. He would then get a 32 percent increase in his personal benefit to $2,640.
Now let’s say Mrs. K. never worked outside the home. When Mr. K. is age 66, the spousal benefit would be 50 percent, or $1,000. But what would it be when he’s age 70? It would still be $1,000 (not $1,320), because the 32 percent increase doesn’t apply to spousal benefits. But DRCs do apply to survivor benefits. So if Mr. K. died, Mrs. K. would get the full $2,640 as a survivor benefit.
Now let’s examine some trickier situations. What happens if the first spouse dies prior to age 62? The benefit will be the deceased worker’s recalculated PIA, which is based on a different set of assumptions. It uses the worker’s earnings for a “substitute year” and a different set of required SS credits for the applicable age. This special PIA calculation can only help; it can’t hurt. It’s only applicable if it provides a higher PIA then the regular PIA calculation.
What happens if death occurs after age 62 but prior to FRA after taking early retirement benefits? The benefit will be the deceased worker’s reduced retirement benefit. This is one good reason not to retire early. Note that there’s a minimum benefit of 82.5 percent of the deceased worker’s PIA, not including any actuarial reduction in benefits.
Effect of Surviving Spouse’s Age
What if the surviving spouse decides to collect before her own FRA? As with other SS retirement benefits, there’s an actuarial reduction if you start early. For a personal, spousal or divorced spouse’s benefit, you can start as early as age 62. But a surviving spouse can start collecting as early as age 60. If the survivor benefit is at FRA or later, there’s no actuarial reduction. See “Actuarial Reduction,” below.
The FRA is calculated differently as well. For a surviving spouse, the calculation can actually be a bit more generous. For a regular retirement or spousal benefit, FRA is 66 for anyone born before 1955. It increases two months every year until it reaches 67 in 1960. For a survivor benefit, FRA is 66 for anyone born before 1957. It increases two months every year until it reaches 67 in 1962.
It’s important to realize that the surviving spouse has additional options. Let’s say the surviving spouse is age 62 and not collecting any benefits. When the other spouse dies, she has the option of receiving her actuarially reduced personal benefit, then later switching to a full unreduced survivor benefit at FRA. This could limit the downside of collecting early.
Let’s say the surviving spouse is already collecting a reduced personal benefit because she started at 62. Her spouse dies when she’s 64. At that point, she has the option of continuing to collect her personal benefit for two more years, then switching to a full, unreduced survivor benefit at age 66.
The deemed filing rule isn’t applicable because one of the benefits is a personal benefit and the other is a survivor benefit. If the circumstances were right, she could also do the opposite: start with the survivor benefit, then switch to a personal if that were greater. This would probably occur at age 70.
Of course, you can’t collect both at the same time; you have to choose one or the other. And only one switch is allowed. If she’s already collecting a personal benefit, she couldn’t go from a personal benefit to a survivor benefit and then back to the personal benefit.
Another quick example of how survivor benefits work: Let’s say the surviving spouse is currently receiving her personal benefit. But it was permanently reduced because she began early. Her early retirement benefit at age 62 was a reduced personal benefit of $700 and a reduced spousal benefit of $200, for a total of $900. If she’s 64 when her husband dies, she has the option to take a reduced surviving spouse’s benefit or continue the $900 combined benefit. If she continues with the current arrangement, her personal/spousal benefit can subsequently be converted to the higher surviving spouse’s benefit at her FRA.
One place where understanding survivor benefits can be especially important is when there’s a significant age difference between the two spouses. Let’s say one spouse is 10 years older than the other. Some of the claiming strategies we’ve talked about before, such as “file and suspend” or “spousal only” wouldn’t be available with that big of an age difference. But when one spouse may outlive the other by a considerable margin, survivor benefits are a much bigger issue. In that situation, it’s often a good idea to make sure that if possible, the spouse with the higher personal benefit defers until age 70.
Life insurance can also play an important role. Consider what happens when a married spouse dies. Let’s say your client collects $2,500 per month in SS, and his wife collects $1,800. So the combined SS income is $4,300 per month. When one of them dies, the survivor would get $2,500. That’s more than a 40 percent reduction in household income. But many household expenses, such as the mortgage, maintenance and real estate taxes, will be the same. How do they replace that income? Used creatively, life insurance can help solve this problem.
We’re just scratching the surface when it comes to survivor benefits. Here’s another issue: what happens when a surviving spouse remarries? If someone remarries before she reaches age 60, she can’t receive benefits as a surviving spouse. If someone remarries after age 60, she’ll continue to qualify for benefits based on the deceased spouse's SS record, but may switch if she chooses.
In our next column, we’ll give detailed coverage to an often overlooked area: retirement benefits available to a divorced spouse.