What could possibly be more boring than another article about Social Security? It’s in the news all the time anyway, and it might not even be around in another 20 years (or so the talking heads on television admonish). So what could anyone possibly need to know about Social Security at this point? Unfortunately, these thoughts may well sum up most people’s attitude towards Social Security these days. While it’s not unusual for the public at large to ignore issues that affect their future, choosing instead to focus on the present, it would benefit everyone to spare a modicum of attention to something that may affect them, their parents and other relatives, and also their clients. Rather than seeking to maximize their return on an investment they have been compelled by the government to make, most
Americans wait to even consider the idea until they have to use it. This article seeks to spur individuals to learn more about their investment, to take charge of their future, and to begin considering the best use of this program, before they need its benefits.
The vast majority of the information here was obtained during conversations and meetings with doctors, CPAs, CFPs, and even an individual who used to work for the Social Security Administration (SSA).1 The information contained in this article is not simple to find, and it is doubtful that any SSA representative will volunteer it unless specifically asked. Although one can find the substantive body of law governing Social Security in literally hundreds of places,2 the government does not typically go out of its way to help an individual take the maximum amount of money out of the government’s own coffers. The sad state of facts is that many in the SSA would prefer that people just not know this information. With Social Security approaching a crisis point,3 the last thing the government wants is to run out of money even earlier.4 Attorneys working in practice areas such as family law, estate planning and elder law need to know this information. Many are approaching retirement age themselves, or have a relative approaching retirement age, and this information will be important for them as well. When dealing with a “retirement” program like Social Security, it is best to begin at the beginning. There are many websites and quick charts out there to give you an indication of what you will receive.5 But how are these benefits calculated?
To calculate benefits, the SSA starts with Covered Earnings. Think of these as lifetime earnings for this purpose. Then the SSA indexes those earnings to calculate one’s AIME, or Average Indexed Monthly Earnings. They use that to create one’s PIA, or Primary Insurance Amount. After adding in COLA, or Cost Of Living Adjustment (from age 62 on) they apply either an actuarial reduction or a delayed credit based on an individual’s history, and we arrive at a benefit amount. Here is an example of an actuarial reduction, for individuals born between 1943 and 1954:
Age Benefit Spousal Benefit
66 100% 50%
65 93.3% 45.8%
64 86.7% 41.7%
These percentages are percentages of one’s PIA (Primary Insurance Amount). If someone waits until they are age 66 to take Social Security, they get 100% of their benefit. The actuarial reduction comes in if they take Social Security before age 66. If they take it prior to age 66, they get a diminishing amount of their benefit. Their spouse would also get a diminishing amount of their spousal benefit if they took their benefit prior to age 66. This is the actuarial reduction in action.
The delayed credit works in the opposite fashion. If one waits past the time when they are first eligible to take Social Security (age 66 currently, for someone born between 1943 and 1954), their monthly benefit goes up via the application of this delayed credit. Here is an example for the same group of people born in between 1943 and 1954:
Age Your Benefit
Two things immediately come into focus. First, people can greatly increase their benefit amounts by waiting to take Social Security until a few years after they are eligible. Second, Spousal Benefits do not earn delayed credits. It does not matter how long one waits to collect Social Security, the spousal benefit will never reach higher than 50% of the PIA percentage. One could wait until the age of 70 and collect 132% of the Primary Insurance Amount percentage, but their spouse would still only get half of 100% (assuming they take the spousal share). However, survivor benefits do include the effect of delayed credits earned by a deceased spouse.
Unfortunately, Social Security Service representatives often suggest that people take their own Social Security benefits, even if their deceased spouse earned delayed credits that make their surviving spouse benefit worth more per month.
Survivor Benefits. There are many quirks relative to survivor benefits.6 Here are some of the main ones:
• The Surviving Spouse must have been married for nine months (or less if the spouse’s death was due to an accident).
• If the Surviving Spouse is entitled to survivor’s benefits from two or more previous marriages, the Surviving Spouse can choose the highest of the benefits.
• The Surviving Spouse may marry after age 60 and not lose any benefits.
• If the spouse’s death occurs after the full retirement age (FRA) of 66, then the survivor benefit amount is the same as the deceased’s benefit, including delayed credits earned by the deceased spouse. However, if the Surviving Spouse applies for the survivor benefit before Surviving Spouse has attained full retirement age (FRA), then an actuarial reduction is applied to the benefit.
This Surviving Spouse area of Social Security thus produces several strategies for maximizing the length and/
• Keep track of divorced spouses, because filing for survivor benefits is a “use it or lose it” provision in the law.
• If the survivor’s benefit at 70 will be higher than an individual’s own benefit at age 70, they might think about filing early for their own benefit and then switching to the survivor benefit immediately when they hit FRA. There is no actuarial reduction for doing this, unlike a simple spousal benefit.
• If the survivor’s benefit at 70 is lower than an individual’s own benefit at 70, they might think about filing early for the survivor benefit, and then waiting until they hit age 70. They will get some extra years of benefit, and earn some delayed credits.
Divorced Spouse Benefits. Divorcees have their own particular regime of qualifications and rules for obtaining their benefits.7 In order to apply for Divorced Spousal Benefits, one must have been married for ten years or more, and one must not be currently married. One quirk of the Divorced Spouse Benefit is that the former spouse does not have to have applied for their own benefit in order for the Divorced Spouse to apply for theirs. The former spouse simply has to be 62 or older and the parties need to have been divorced for more than two years (assuming the former spouse has not applied for his or her benefits yet). Remember, though, if the former spouse dies, the Divorced Spouse is then entitled to Survivor Benefits, and should use the analysis in that category to determine their best benefit scenario.
Another quirk of the Divorced Spouse Benefit is that, if the Divorced Spouse files for this benefit before attaining Full Retirement Age (FRA), they do not have a choice between receiving benefits based on their own earnings or their former spouse’s earnings. If the Divorced Spouse applies before attaining FRA, they will automatically get the higher of the two (assuming the former spouse is at least 62). Conversely, if the Divorced Spouse files after attaining FRA, they are allowed to choose between the two benefit levels.
The Divorced Spouse area of Social Security thus produces several strategies8 for maximizing the length and/or the amount of benefits: Avoid filing before attaining Full Retirement Age, unless an individual (or their ex) has a low life expectancy; File for benefits at one’s FRA, but only file for Divorced Spouse benefits. Then file for one’s own benefits at age 70, having gained the benefit of earning the maximum delayed credit, while still receiving benefits through one’s divorced spouse for the past four years.
But what happens if an individual’s ex is the high wage-earner but is not yet 62? What will happen when they do turn 62? Simply put, one’s benefits as a Divorced Spouse will be prorated. Bear this in mind, as sometimes one’s own benefit at age 66 would have been more than one’s Divorced Spouse benefit at age 62. See the Strategy section above for an example of how to avoid this predicament.
Spousal Benefits. There are also some simple rules and strategies9 to keep in mind at the beginning of planning one’s Spousal benefit strategy:
• One spouse cannot receive Spousal Benefits until the other spouse has applied for their own benefits.
• Both spouses may not receive spousal benefits on each other (double-dipping).
• Just like a Divorced Spouse benefit, if one files for Spousal Benefits before one attains Full Retirement Age (FRA), then one does not have a choice of their own or their spouse’s benefit levels, they will automatically get the higher of the two.
• Also just like a Divorced Spouse benefit, if one files for Spousal Benefits after one attains Full Retirement Age (FRA), they can choose between their own or their spouse’s benefit level.
Another critically important tip is that, after one attains FRA, one may “File and Suspend” their benefits, which allows their spouse to receive spousal benefits while they earn delayed credits.
File and Suspend. “File and Suspend” is a strategy whereby one spouse (ideally the lower wage-earner) collects spousal benefits while the other spouse (ideally the higher wage-earner) earns delayed credits. This is how it works: The high wage-earner files for Social Security once FRA is attained (66), but then files to suspend the payments. Remember, once a spouse has filed, then the other spouse is allowed to file for spousal benefits. So now the lower wage-earning spouse files for spousal benefits.
And it doesn’t matter if the lower wage-earning spouse has hit FRA or not, as even if they have not, they get the higher of the two benefit levels. So the couple waits four years, the high wage-earner eventually earning enough delayed credit to receive 132% of their PIA, while the lower wage-earner has banked the spousal support payments based on the high wage-earner’s higher benefit level. The high wage-earner then starts to collect 132% of their PIA at age 70, while the spouse also continues to receive the spousal benefit (which is 50% of the high wage-earner’s 100% PIA level). Once the low wage-earner hits FRA, they can then see if they will receive more money by keeping the spousal benefit, or by filing for their own benefit at that time. This is the way to maximize your Social Security benefit as a married couple.
Claim Now, Claim Later. Another strategy that can be utilized is called the “Claim Now, Claim Later” strategy. Its purpose is to help the high wage-earner accumulate delayed credit, while at the same time collecting spousal benefits. Perhaps the lower wage-earner’s benefits are really low, or perhaps the disparity between the two benefit levels is huge. This strategy will allow the couple to maximize their benefits. However, this is a ‘use it or lose it’ strategy. If it is not timed correctly, this strategy loses its advantage. Here’s how it works: The lower wage-earner applies for their benefits, it doesn’t matter when. The higher wage-earner then applies only for the Spousal Benefit upon attaining FRA (66). The higher wage-earner then banks four years of Spousal Benefits (which are based on their higher benefit level) until they hit age 70, at which point they begin collecting 132% of their PIA. This enables the couple to earn a higher benefit level, for a few more years, then they would have achieved if the low wage-earner had waited until they hit FRA, or if the high wage-earner had taken Social Security prior to attaining FRA.
Conclusion. The issues in Social Security can get complicated, the choices can be important, and it’s not usually a good idea to just rely on a government representative to explain what choices there are and then make recommendations. The rules change all the time and articles on the subject (including this one) can get dated fairly quickly. For lawyers, then, it is increasingly important to learn about the pitfalls in Social Security and get a working handle on how to handle these cases.
With the “baby boomer” generation starting to retire, it doesn’t matter in what area of practice an attorney is working. What is a certainty is that everyone has friends, relatives, clients and acquaintances who will all be dealing with these issues sooner or later.
1 42 U.S.C., Ch. 7 (August 14, 1935).
Joseph F. Emmerth is a partner at the Law Firm of Sullivan, Taylor & Gumina, P.C., which limits their practice exclusively to family law in Cook, DuPage, Will, Kane, Kendall & DeKalb Counties. He is a long time member of the DCBA Editorial Board and past Chairman of the DCBA Membership Committee.