Volume 5 Issue 5
Understanding Social Security Survivor Benefits
An earlier issue of The ElderCounselor addressed social security benefits generally and when to apply. In this issue we’ll address the critical yet often-misunderstood topic of Social Security survivor benefits. This e-newsletter is based in part upon an article by Frank Rainaldi and William Rainaldi, first published in Trusts & Estates magazine and available on WealthManagement.com.
Simply stated, survivors benefits are determined by looking first at the age of the deceased spouse, and then at the age of the surviving spouse. In other words, we look at the amount of the benefit available to or being paid to the deceased spouse. Then, we use the age of the surviving spouse to determine if benefits are paid early or at FRA; if the surviving spouse’s benefits are paid before 65, we must apply an actuarial reduction to the deceased spouse’s benefits.
It’s important to note a key difference between survivor benefits and spousal benefits. Spousal retirement benefits provide a maximum 50% of the other spouse’s primary insurance amount (PIA). Alternatively, survivors’ benefits are a maximum 100% of the deceased spouse’s retirement benefit.
Also note the difference between the PIA and retirement benefit, which is critical when considering deferred retirement credits (DRCs). DRCs can increase benefits by 8% per year when the worker elects to start collecting after FRA, up to a maximum increase of 32% for deferral to age 70. Note, however, that DRCs apply only for survivor benefits; DRCs don’t increase the PIA and thus they are not applicable to spousal benefits. Therefore, if one spouse has the higher personal benefit and waits until age 70 to begin collecting, the full benefit with DRCs would be payable to the surviving spouse.
The Most common Scenario – Both Spouses Reach FRA
For example, assume Mr. A has a personal benefit of $2,000, the amount he would receive at age 66. If he elects to defer until age 69 he would get a 24% increase in his personal benefit to $2,480.
Now let’s say Mrs. A. never worked outside the home. When Mr. A. is age 66, the spousal benefit would be 50 percent, or $1,000. Note, however, that the spousal benefit would still be $1,000 (not $1,240) when he’s age 70 because the 24% increase doesn’t apply to spousal benefits. But DRCs do apply to survivor benefits. So when Mr. A. dies, Mrs. A. would get the full $2,480 as a survivor benefit.
What if the first spouse dies prior to age 62? The benefit will be the deceased worker’s recalculated PIA, which is based on a different set of assumptions. It uses the worker’s earnings for a “substitute year” and a different set of required Social Security credits for the applicable age. This special PIA calculation can only help; it can’t hurt. It only applies if it provides a higher PIA then the regular PIA calculation.
What if death occurs after age 62 but prior to FRA after taking early retirement benefits? The benefit will be the deceased worker’s reduced retirement benefit. This is one good reason not to retire early. Note that there’s a minimum benefit of 82.5% of the deceased worker’s PIA, not including any actuarial reduction in benefits.
Surviving Spouse Collects Early
It’s important to note that the surviving spouse has additional options. Suppose the surviving spouse is age 60 and not collecting any benefits. When the other spouse dies, she has the option of receiving her actuarially reduced personal benefit, then later switching to a full unreduced survivor benefit at FRA. This could limit the downside of collecting early.
To determine the monthly reduction amount, simply take 28.5% divided by the number of months between age 60 and the survivor FRA determined above. The “Widow Limit” caps the survivor’s benefit at the larger of the benefit the deceased would have received if he or she were still alive, or 82.5% of the deceased PIA. This Widow Limit only comes into play if the deceased claimed benefits prior to his or her FRA. The following, from SocialSecurityTiming.com, graphically explains these options.
Of course, the survivor cannot collect both benefits at the same time; the survivor must choose one or the other. And only one switch is allowed. If the surviving spouse is already collecting a personal benefit, she couldn’t go from a personal benefit to a survivor benefit and then back to the personal benefit.
Understanding survivor benefits is especially important when there is a significant age difference between the two spouses. When one spouse may outlive the other by a considerable margin, survivor benefits are a much more important than “file and suspend” or “spousal only.” In that case, it’s often a good idea to make sure that the spouse with the higher personal benefit defer until age 70, if possible.
Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692