Mary Beth Franklin: Social Security benefits include past inflation adjustments

I recently received a great question about Social Security benefits that I had never before encountered. Carl Holubowich, a financial adviser in Washington, D.C., said that he has a female client who recently reached her full retirement age of 66 and wanted to file a restricted claim for spousal benefits only to allow her own retirement benefit to continue to grow. So far, so good. Here's the twist: Her husband is significantly older — 82. He started collecting his reduced Social Security benefits 20 years ago at age 62. The question: Would she receive half of his current benefit, which is about $1,500 per month, or might her spousal share be based on a higher amount since she is eligible for half of his primary insurance amount at his full retirement age, not half of the reduced benefit that he started collecting early at 62? I knew the answer was half of his full retirement age benefit. Based on his birth year of 1931, his full retirement age would be 65. But my question was whether her spousal benefit would be based on half of his primary insurance amount 20 years ago, which was about $1,000 per month, or whether that amount would be adjusted to take into account the intervening cost-of-living adjustments, which would make a huge difference. So I asked the folks at the Social Security Administration headquarters in Baltimore. The SSA press office is staffed by professionals who seem to know the answer to every question I ask, no matter how obscure. They didn't disappoint me this time, either. It turns out that the spousal benefit would include intervening COLAs. I'm not sure what the exact amount would be, but it would be based on a higher amount than her husband is currently receiving. Annual cost-of-living adjustments have averaged about 2.5% per year since 1993, including a whopping 5.8% increase in 2009, followed by two years of no increase. At that rate, an inflation-adjusted benefit would double in about 28 years. So by filing a restricted claim for spousal benefits at 66, the wife will receive a monthly amount worth half of her husband's benefit at his full retirement age, adjusted for 20 years' worth of inflation. At 70, she can switch to her own retirement benefit, which will have been accruing delayed retirement credits worth 8% per year since her full retirement age of 66. When she switches to her own retirement benefit at 70, it will be worth 132% of her full-retirement-age benefit, serving as a larger base for future cost-of-living adjustments.