There are a many different benefits offered by the Social Security Administration, and knowing your options and requirements is essential. Don’t expect the Social Security Administration to know who you married, who you divorced, whether your spouse or ex-spouse died, whether or not you are caring for a young or disabled child, or if you are taking care of dependent parents. You need to equip yourself with some knowledge of the benefit provisions, ask if you don’t know, and/or find a well-informed advisor. Decisions made regarding claiming Social Security are critically important. This is the third piece of a series of articles with the objective of assisting you in making better decisions regarding claiming Social Security. The first two articles discussed the eligibility rules, earnings penalty, delayed retirement credits, benefits formula, and the first two steps in the process: obtaining an estimate of benefits and appreciating the significance of full retirement age (links to those articles are below). Understanding benefit options is the third step of effective Social Security decision-making. This article will discuss the key types of SS benefits that you should understand as well as some of the marriage/divorce rubrics.
WORKER, SPOUSAL, AND SURVIVOR BENEFITS
The most conventional SS benefit is worker benefits. As noted in previous articles, you must accumulate at least 40 quarters/credits to be eligible. Credits are a function of dollars earned and not calendar quarters worked. Worker benefits are averaged over your 35 highest-earning years. For 2018, the maximum monthly worker benefit at full retirement age is $2,788, and the average monthly benefit was $1,404. After you qualify for worker benefits, your current spouse, ex-spouse, children, and disabled children may qualify for auxiliary benefits. Also, upon your death, your record may provide survivor benefits to your dependents, including your parents. Single and divorced-too-soon individuals without children are generally eligible for only worker benefits based upon their own earnings records and possibly one auxiliary benefit, parents’ benefits. (The length of marriage requirement is discussed below.)
Married and qualified divorced individuals are eligible for benefits based upon their own records as well as spousal and survivor benefits, but not both at the same time. If claimed at full retirement age, spousal benefits are equal to 50% of the Primary Insurance Amount (PIA) of the worker and survivor benefits can be equal to whatever the worker was collecting at the time of death. The PIA is basically the worker’s Full Retirement Age (FRA) benefit amount. A current spouse needs to be married for at least one year to qualify for spousal benefits, and the worker needs to have filed for benefits. In order for an ex-spouse to qualify for spousal benefits: s/he must be presently unmarried, the worker needs to be eligible for retirement benefits or disability benefits, the marriage needs to have lasted for at least 10 consecutive years, and they must have been divorced for a least two or more years or the ex must have filed for retirement or disability benefits. Survivor and ex-spouse survivor benefits can start at age 60 or at age 50 if disabled. A current spouse needs to be married for at least 9 months to qualify for survivor benefits. For survivor benefits, the ex-spouse needs to be unmarried unless the remarriage was after age 60. Social Security has created a strong motivation to stay married for the required ten years.
Just like worker benefits are penalized if collected before full retirement age, so are spousal and survivor benefits reduced if collected before the recipient attains FRA. FRA for spousal benefits is the same as that for worker benefits: age 66 for anyone born 1943 – 1954, it is increased by two month for every year from 1955 to 1959, and FRA is age 67 for anyone born 1960+. The graph below illustrates spousal benefits as a percentage of worker benefits for those with FRAs of 66 and 67. The percentages adjust for those in transition from 66 to 67.
FRA for survivor benefits is: age 66 for anyone born 1945 – 1956, it is increased by two month for every year from 1957 to 1961, and FRA is age 67 for anyone born 1962+. The graph below illustrates survivor benefits as a percentage of worker benefits for those with FRAs of 66 and 67. The percentages adjust for those in transition for 66 to 67.
MARRIAGE AND DIVORCE COMMENTS
Here are some noteworthy observations: marriages that end in divorce on average terminate in eight years, women more than men collect spousal benefits, and more divorces are initiated by women. A current spouse needs to wait until the worker has filed for benefits. Ex-spouses do not need to wait until the ex has filed for benefits. Only one member of a currently married couple can collect spousal benefits. However, post-divorce both members can collect spousal benefits. There is an irrational aspect of the rules that provides an incentive to get divorced at age 64 so that both ex-spouses can collect spousal benefits and let their own worker benefits increase to their maximum at age 70. The Bipartisan Budget Act of 2015 eliminated the divorce incentive for those born after January 1, 1954. Before acting on such a divorce strategy, consider the implications for income, estate, and inheritance taxes. Also, the divorce could be considered a sham and the divorce disregarded by the Social Security Administration.
OTHER AUXILIARY BENEFITS
Children can collect up to 50% of the retired worker’s or disability benefits. If the parent is deceased, up to 75% of the parent’s basic SS benefit can be collected. The child must be unmarried and under 18, or no older than 19 and a full-time elementary or secondary student.
Two other auxiliary benefits for spouses and ex-spouses are “child-in-care” spousal benefits and mother/father survivor benefits. There is no 10-year marriage requirement for either of these benefits. These benefits are paid to spouses and ex-spouses who care for children of a retired worker who are under age 16 or disabled before age 22. For the “child-in-care” benefit the worker needs to be collecting benefits or grandfathered for “file and suspend” (filed before April 30, 2016). Current spouses can be of any age and ex-spouses need to be over age 62 to be eligible for child-in-care benefits. Child-in-care benefits do not trigger “deeming” (discussed in the previous article) but are subject to the maximum family benefit provisions (discussed later in this article). The child-in-care benefit is 50% of the worker’s PIA and mother/father benefits are 75% of the worker’s PIA. There is no reduction for taking either child-in-care or mother/father benefits early. Divorced spouses can collect mother/father benefits before age 62 if their ex-spouses dies.
A worker’s parents, if age 62 or older and the dependents of a worker for at least 50% of their support can collect parent’s benefits. One surviving parent collects up to 82.5% of the PIA. If both parents are alive, each would receive 75% of the PIA. These benefits are subject the maximum family benefit provisions (discussed latter in this article).
Social Security benefits are available for people who were working but became unable to work due to a medical condition that will last for at least one year or result in death. The SSA employs a very strict definition of disability and benefits are not paid for partial and short-term situations. There is also a recent work test to show that you worked within a certain time before becoming disabled. If disabled before age 24, 1.5 years of work is required during a 3 year period ending with the quarter that the disability occurred. If disabled between ages 24 and 31, work required during half the time for the period beginning with the quarter after turning 21 and ending with the quarter that the disability began. If disabled at age 31 or older, work for 5-out of 10-year period ending with the quarter that the disability started. Family members of disabled workers can collect benefits. Benefits are payable to spouses aged 62 or older, spouses of any age caring the worker’s child who is younger than age 18 (or younger than 19 if still in high school), or an unmarried child age 18 or older if he or she has a disability that started before age 22.
FAMILY MAXIMUM BENEFIT
There is a Family Maximum Benefit (FMB) that applies to the total that the worker, spouse, children, and parents receive on a single worker’s record. The FMB ranges from 150% to 188% of the worker’s PIA. The percentage of the worker’s PIA varies based upon the worker’s earnings, when benefits commence, and the type of benefits involved. The maximum includes the worker’s own full retirement benefit, which leaves 50% to 88% to be split between spouses and children. Fortunately, the benefits paid to ex-spouses are not included in the MFB. When the worker dies, any benefits received by a spouse and qualifying children should increase. This is because the worker’s benefits are no longer included in the FMB calculation.
Understanding your Social Security benefit options is a prerequisite to maximizing the value from this resource. For example, a 61.5 year-old worker reviews his/her statement issued by the SSA to see that the monthly benefits will be: $1,200 at age 62, $1,600 at FRA, and $2,112 at age 70. All benefits are in today’s dollars. The potential recipient plans to stop work at age 62, is healthy with a normal life expectancy, and would like at least $1,000 to $1,200 per month to supplement retirement cash flow. The worker is single and many years ago he/she was married for 10.5 year. The ex-spouse who was older passed away a few years ago. Unless the worker asks, the SSA would not indicate that he/she is eligible for survivor benefits of $1,150 starting at age 62. In this situation, the better choice would be to collect survivor benefits first and switch to worker benefits at age 70. Remember survivor benefits are not subject to deeming and the recipient is free to choose the lower benefit amount while letting his/her own worker benefits grow. Excluding the value of cost-of-living adjustments, the individual would forfeit $50 per month for 8 years to collect $912 ($2,112-$1,200) more per month from age 70 until death. The simple breakeven point is less than 5.3 years [($50 x 12 x 8) / $912]. If COLAs were considered, the breakeven would be shorter. If you haven’t taken your retirement benefits when your spouse or ex dies, you can benefit by taking one early and let the other grow. Generally, it is better to take the smaller of the two benefits (worker or survivor) first. Being aware of your options, asking the right questions, and patience are often rewarded when making decisions regarding collecting Social Security.