Readers of my InvestmentNews
blogs and
columns come up with the best questions! They make me rethink how I can present information about the often-complicated Social Security claiming rules in a clearer fashion.
Sarah, a financial adviser in Los Angeles, is one of them. Sarah asked whether a person who claimed reduced Social Security spousal benefits early at age 62 can do anything to restore a higher benefit? Specifically, could she suspend her spousal benefits at full retirement age and wait until age 70 to claim a higher benefit?
The answer is no. I'll explain why after reviewing some basic rules.
If you collect Social Security benefits early then change your mind, you have two options.
Within the first 12 months of claiming, you can withdraw your application for Social Security benefits, repay any benefits you have received (including any other benefits collected on your earnings record, such as spousal or dependent child benefits) and restart your benefits at a higher amount at a later date.
Once the 12-month window has expired, you have another option, but you must wait until your full retirement age to exercise it. When you reach age 66, you can voluntarily suspend your benefits, but not repay them. The suspended benefits will accrue delayed retirement credits worth 8% per year up to age 70.
For example, if you collect retirement benefits as soon as possible at age 62, you would receive a benefit worth 75% of the amount you could have collected if you had waited until your full retirement age of 66 to file an initial claim. If you later regret your early claiming decision, you could suspend benefits at 66, resulting in a 32% increase in benefits when you resume collecting them at age 70 (4 years x 8% = 32%).
At that point, the enhanced retirement benefits would be worth 99% of what they would have been if you collected them initially at age 66 (75% x 1.32% = 99%).
But delayed retirement credits apply only to worker's retirement benefits, not spousal benefits. That means the maximum spousal benefit is paid at full retirement age. It is based on half of the worker's primary insurance amount if collected at 66; less if collected earlier.
So if a worker is entitled to a $2,000 per month retirement benefit at age 66, his wife is entitled to a spousal benefit of $1,000 per month if she collects it at her full retirement age of 66. But if she collects her spousal benefit at age 62, as Sarah's client did, the spousal benefit would be reduced by 30% to $700 per month. (It gets a bit more complicated if Sarah's client is entitled to both a retirement benefit on her own record and a spousal benefit. She would be paid her retirement benefit first, and then an additional amount to bring her up to the level of her spousal benefit if that were higher).
Although Sarah's client could voluntarily suspend her benefits once she reached full retirement age, it wouldn't make sense because spousal benefits do not earn delayed retirement credits.
“So she's stuck with the lower amount unless her husband dies and she can claim a potentially higher survivor benefit then?” Sarah replied after I answered her question. (Remember, a survivor benefit is worth 100% of what the worker received or was entitled to receive at the time of his death — including any delayed retirement credits--whereas a spousal benefit is worth up to 50% of the worker's benefit and does not include delayed retirement credits).
“Don't think of it as being stuck with a lower benefit,” I responded. “She is lucky the Social Security system allows her to collect benefits as a spouse considering she doesn't have enough work credits to qualify for benefits on her own.”
In most cases, the most important decision a married couple can make regarding their Social Security benefits is for the higher-earning spouse to delay claiming benefits until full retirement age or later as a way of maximizing retirement income during their joint lifetimes as well as securing the largest possible survivor benefit.
But many times, it does make sense for the lower-earning spouse—or a spouse with insufficient earnings record to collect benefits on her own — to claim Social Security retirement or spousal benefits early as a way of generating some retirement income now and more later. And even though her retirement benefits will be permanently reduced, they will not affect her survivor benefits as long as she is at least full retirement age when she collects them.
