A number of rules that govern Social Security retirement benefits appear insignificant at first glance but turn out to be incredibly important for those trying to maximize their income in retirement. The so-called "deemed filing" rule is one of these.
This rule mandates that a person claiming retirement benefits before reaching his or her full retirement age is deemed to have filed for all of the benefits that they potentially qualify for.
Deemed filing and spousal benefits
This often comes up in the context of spousal benefits. Let's say, for instance, that you're entitled to both spousal benefits and benefits based on your own work history. If you apply for one or the other prior to full retirement, it is presumed that you have applied for both. The Social Security Administration should then, at least in theory, approve you for the one that yields the largest monthly check.
Why does this matter? By assuming that you applied for all of the benefits you were entitled to at the time (that is, both spousal and primary retirement benefits), it follows that you can't come back later and apply for the other type of benefit, even if it subsequently yields larger monthly payments.
Jim Blankenship, author of the blog Getting Your Financial Ducks In A Row, offers the following example of how this works:
Steve and his wife Edie are ages 66 and 61, respectively. The plan is for Steve to file for his Social Security benefit now (at his full retirement age), and for Edie to file for her own benefit when she reaches age 62. Then Edie will wait until she reaches her full retirement age of 66 to file for the spousal benefit based on Steve's record, which will increase her benefit by $500 at that time.
Oops! Deemed filing will apply to Edie when she files for her own benefit at age 62, which will eliminate her chance to wait until filing for the spousal benefit. This will effectively reduce her total monthly benefit from the expected $875 per month down to $725. It may not seem like a lot, but $1,500 per year is still significant, and it could be considerably more depending upon the circumstances.
When the deemed filing rule no longer applies
It's important to recognize that the deemed filing rule only governs instances in which someone applies for benefits prior to reaching full retirement. If you wait until passing this threshold -- which, at present, is 66 years of age -- then you are no longer precluded from later substituting in benefits that derive from a different source.
So let's assume again that you're entitled to both spousal and primary retirement benefits. If you apply for the former at age 66 -- that is, after reaching full retirement -- then the benefits stemming from your own work history will be allowed to accumulate delayed-retirement credits, which will increase them by 8% a year until your 70th birthday. That could add up to as much as 32% in total.
It isn't hard to see, in other words, how your primary benefits could end up being considerably larger than your spousal share. And because you're not constrained by the deemed filing rule, you are free to later substitute them in place of your now-lesser spousal benefits.
Thus your full retirement age takes on added significance when it comes to spousal benefits. Not only does it factor into the size of your spousal share, but it also serves as a threshold prior to which the deemed filing rule prohibits you from later substituting in larger benefits that derive from your own work history.