Social Security benefits are the major source of income for most people over age 65, according to the Social Security Administration. That means living standards in later life can depend heavily on how well retired workers and spouses understand the program.
Unfortunately, misunderstandings are all too common. A recent survey from Nationwide Retirement Institute found that 44% of adults were unaware that, upon the death of a spouse, the surviving spouse would inherit the bigger Social Security benefit.
Read on to learn the difference between retirement benefits and survivors benefits.
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Understanding Social Security retirement benefits
Social Security old-age and survivor benefits is a broad term that includes two subcategories: retired-worker benefits, and benefits for spouses and other family members. They share certain things in common. For instance, eligibility begins at age 62 in both cases. But there are important differences married couples should understand.
Here is a brief overview of how Social Security benefits generally are determined:
- Retired-worker benefits depend on lifetime income and claiming age. A formula is applied to the inflation-adjusted income from the 35 highest-paid years of work to calculate the primary insurance amount (PIA), the benefit a worker would receive if claiming Social Security at full retirement age (FRA). Workers who claim before FRA receive less than 100% of their PIA, and workers that claim after FRA receive more than 100% of their PIA. Delayed retirement credits stop accruing at age 70, so it never makes sense to claim later.
- Benefits for spouses allow spouses to claim Social Security on the work record of a partner, provided that partner has already claimed Social Security. Spousal benefits refer to what a spouse is entitled to receive while the partner is still living, and they depend on the partner's lifetime income and the spouse's claiming age. Specifically, the spousal benefit will equal 50% of the retired partner's PIA if the spouse claims Social Security at FRA. Spouses who claim before FRA receive less than 50% of their retired partner's PIA. However, spouses cannot earn delayed retirement credits, so there is no advantage to claiming after FRA.
In situations where both spouses work -- meaning both spouses are eligible for retired-worker benefits on their own record and spousal benefits on their partner's record -- each spouse will automatically be awarded the higher benefit when applying for Social Security.
The upshot is that married couples generally receive two revenue streams from Social Security. In some cases, that means two retired-worker benefits. In other cases, it means one retired-worker benefit and one spousal benefit. Regardless, when one spouse dies, one of those revenue streams disappears. But the surviving spouse can generally then receive the higher of the two payouts as the survivors benefit.
Understanding Social Security survivors benefits
When a married person dies while receiving Social Security retirement benefits, the surviving spouse is eligible for survivors benefits if he or she satisfies certain conditions. The most common qualifications are as follows:
- The surviving spouse must be at least 60 years old (or 50 years old with a disability).
- The surviving spouse must not remarry before age 60 (or age 50 with a disability).
The Social Security Administration must be notified when a beneficiary dies. In most cases, the funeral home will handle the reporting, but the surviving spouse can also report the event by contacting the local Social Security office. Once that's done, the surviving spouse can begin receiving a survivors benefit in place of his or her current benefit.
Specifically, spouses who receive benefits as a spouse will automatically have their payout switched to the survivors benefit because it will always be larger. Alternatively, spouses who receive benefits as a retired worker can apply for survivors benefits if the new payout would be larger than their current payout.
The survivors benefit will equal 100% of the deceased partner's Social Security benefit if the surviving spouse has reached FRA. But the survivors benefit will be reduced by a predetermined percentage if the surviving spouse has not reached FRA. The precise reduction depends on how many months early survivors benefits start. The largest reduction is 28.5%.
Strategies to consider when claiming Social Security benefits
Married couples should carefully consider when they start Social Security. One person's claiming age could have a substantial impact on the other person's survivors benefit. For instance, if the spouse with the higher income also has a shorter life expectancy, that person should consider delaying Social Security until age 70. Doing so would maximize the person's retired-worker benefit in the present, and it would maximize the spouse's survivors benefit in the future.
Alternatively, widows and widowers should carefully consider which type of Social Security they claim first. For instance, a 62-year-old widow eligible for survivors benefits and retired-worker benefits may find it advantageous to start with survivors benefits. That strategy would allow their retired-worker benefit to earn delayed retirement credits, meaning it would increase by two-thirds of 1% per month, or 8% per year, until they reach age 70. At that point, they could switch from survivors benefits to retired-worker benefits if the latter payout was larger.
Ultimately, determining the right age to claim Social Security is a complicated decision best made with help from a financial advisor. If that's not a viable option, married couples and widows and widowers should at least consult a Social Security strategy calculator like Open Social Security. In either case, it's important to understand retirement benefits and survivors benefits.
