Spousal Benefits: Unequal

Social Security spousal benefits shortchange some couples. Here’s what to know.

Among facts about these benefits:

·         For you to file for spousal benefits, your spouse must file for benefits first. The first filing spouse does not have to begin receiving money at once: He or she can postpone that after filing, allowing you to take spousal benefits.

·         If you begin receiving spousal benefits prior to your full retirement age (FRA), which is 66 if you were born in 1954 or before and increasing to 67 if you were born in 1960 or later, you must also receive your own retirement benefit at the same time due to a regulation termed deemed filing. Both benefits, retirement and spousal, are then reduced.

·         If you begin taking spousal benefits at FRA or later, deemed filing doesn’t apply and you need not receive retirement benefits at the same time.

A flaw in the process makes spousal benefits unequal, as the following two couples exemplify.

First couple: Jane worked her entire life and earned a Social Security benefit of $2,600 per month when she retires. Her husband Sam was a struggling artist his whole life as well as a stay-at-home dad to their three kids when the kids were young. As a result, Sam never generated enough income on his own to receive the 40 quarter credits (the amount of earnings needed for a calendar quarter of coverage) necessary for a Social Security benefit of his own.

Second couple: Sid and Nancy both worked and accumulated earnings in the Social Security system over their lifetimes. Sid earned more, generating a monthly Social Security retirement benefit of $2,600.

Nancy operated a home-based business part-time while their kids were young and worked outside the home for several years after the children finished high school. Thus Nancy’s monthly retirement benefit reaches $1,000.

The result: Both couples, if they file at FRA, qualify for the same benefit amounts. (For the sake of my illustration and simplicity, let’s say all four individuals reach FRA at the same time.)

Jane files for her retirement benefit of $2,600. Sam, without an earnings record, can now file for a spousal benefit of $1,300; Jane and Sam receive a total of $3,900 per month.

Sid also files for his retirement benefit of $2,600. Nancy then files for her retirement benefit of $1,000 and, since she’s eligible to file for the spousal benefit, she also receives that payment, offset to $300. That brings her total benefit to $1,300 and together Sid and Nancy also get $3,900 per month.

Note that Nancy receives nothing extra from Social Security for her earnings record.

One possible difference: Nancy decides to file a restricted application for spousal benefits only, which results in the same $1,300 monthly benefit. Later, when Nancy turns 70, she files for her own benefit, which increases 32% due to her earning delayed retirement credits awarded for putting off filing for benefits past an FRA.

This brings her total benefit to $1,320 per month. For her work record, Nancy increases her overall benefit by $240 per year. Doesn’t seem fair, does it?

Don’t get me wrong: A stay-at-home parent shouldn’t be penalized and receive nothing for time spent in that critical occupation. Nor do I think spouses with low or no income should suffer. Yet Social Security must offer some additional benefit for the lower-earning spouse who generates a benefit on his or her own record.

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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

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