Social Security Q&A: I'm Confused About the Spousal Benefit. What Do I Need to Watch Out For?

Commentary by Laurence Kotlikoff

Source: Forbes

Social Security may be your largest or one of your largest assets. How you manage it, by deciding which benefits to collect and when, can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.

I’ve been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR’s website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company’s site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.

Today’s question is about spousal benefits and how they affect, and are affected by, retirement benefits. For those who claim before their full retirement age, it also shows how the deeming provision might constrain your options.

Sander J. Smiles — Skokie, Ill.: Can you explain spousal benefits? I understand my wife can take her spousal benefits when she is 62 even though I continue working. Is that right?

Larry Kotlikoff: Yes, but she can’t take her spousal benefit unless you file for your retirement benefit. If you are at or are over full retirement age, you can file for your retirement benefit and then immediately suspend its collection and then wait until, say, 70 to collect a higher benefit.

Assume you either file and collect or file and suspend, your wife will have to file for both her retirement benefit and her spousal benefit if she files for either one early. This is due to Social Security’s deeming provisions. Having your wife take benefits early will mean permanently lower benefits.

Also, her own retirement benefit may wipe out her spousal benefit. Having filed (or having been forced to file) for her retirement benefit, your wife’s spousal benefit will be calculated as an excess spousal benefit equal to half of your full retirement benefit minus all of her full retirement benefit.

This could well be negative, in which case her excess spousal benefit will be set to zero. If she were to wait until full retirement age, she could file just for her full spousal benefit, which would be calculated as simply half of your full retirement benefit. Under this strategy, she’d wait until, say, 70 to collect her own retirement benefit, when it would be as large as possible.