Parsing Social Security rules for spouses

Recently, I participated in a three-hour All Star Tax training video sponsored by Edward Jones to bring accountants, tax attorneys and enrolled agents up to speed on Social Security rules and claiming strategies. I have been flooded with questions ever since, and I have detected a common misperception about claiming options for married couples. As my regular readers know, I call 66 the “magic age” for claiming Social Security benefits. There are several advantages of waiting until the full retirement age to claim benefits: • A worker is entitled to full retirement benefits. • The earnings cap disappears at full retirement age, so one can continue to work while receiving Social Security with no reduction in benefits. • And by waiting until full retirement age, married couples, as well as divorced spouses in some cases, can exercise some creative claiming strategies to maximize lifetime benefits. The two primary claiming strategies are file and suspend and filing a restricted claim for spousal benefits only. Several professionals who viewed the training video asked if it is possible for both spouses to file and suspend their benefits or for both spouses to file a restricted claim for spousal benefits only. It is a logical question, but the short answer is no. Let me explain why.

File and suspend

When individuals file and suspend, it means that they tell Social Security that they want to file for benefits so that they trigger benefits for their spouse or dependent minor children and immediately suspend their own benefits so that they are worth more when collected. For every year that individuals delay collecting retirement benefits beyond full retirement age, they earn delayed retirement credits worth 8% per year up to 70. So by waiting until 70 to collect, the retirement benefit would be worth 132% of the full retirement age benefit. (Actually, it would be even larger, as intervening cost-of-living adjustments would be applied). File-and-suspend makes sense for traditional couples in which one spouse is the primary earner and the other has little or no work history. In that case, the husband could file and suspend to trigger benefits for his wife while his own retirement benefit continued to accrue delayed retirement credits. The other strategy, in which one spouse files a restricted claim for spousal benefits, works best for dual-earner couples. Once one spouse files for retirement benefits, the other spouse, upon reaching full retirement age, can file a restricted claim for spousal benefits only. That allows the second spouse to collect half of the first spouse's full retirement age benefit while allowing his or her own retirement benefit to accrue delayed-retirement credits.

Can both spouses file?

So can both spouses file and suspend, or file a restricted claim for spousal benefits? No. In order for someone to file a restricted claim for spousal benefits only, the other spouse must claim benefits. Otherwise, there are no spousal benefits available to claim. Similarly, it would make no sense for both spouses to file and suspend, which Social Security wouldn't allow, anyway. It essentially would mean that both spouses would file for a retirement benefit, but by each suspending their benefit, neither would collect anything. However, there is a combination strategy that can help married couples in which both spouses have substantial earnings history to maximize their Social Security benefits. This generally works best when the lower-earning spouse's benefit is worth more than half the higher-earning spouse's benefit. In other words, a wife's own retirement benefit is worth more than she could collect as a spouse. Assuming that both spouses are at least 66, one can file and suspend to trigger spousal benefits for the other, and the second spouse can file a restricted claim for spousal benefits only. So Spouse A would get nothing for four years and Spouse B would get half of Spouse's A's benefit. At 70, they would both switch to their own maximum benefit. It works like this. Say both spouses are entitled to Social Security benefits worth $2,000 per month at their full retirement age of 66. The husband files and suspends to trigger spousal benefits for the wife. She then files a restricted claim for spousal benefits only. For the next four years, the husband collects no Social Security benefits, and the wife collects $1,000 per month, half her husband's full retirement age benefits. At 70, they each switch to their own retirement benefits, which, thanks to four years' worth of de-layed retirement credits, are now worth $2,640 per month. That is 132% of their full retirement age benefits. Together, this retired couple would collect more than $63,000 per year in Social Security benefits, creating a larger base for future annual cost-of-living adjustments. That is real money.