MAKING SENSE -- April 8, 2013 at 11:48 AM ET
What's the Maximum a Couple Can Collect Monthly from Social Security?
Larry Kotlikoff's Social Security original 34 "secrets", his additional secrets, his Social Security "mistakes" and his Social Security gotchas have prompted so many of you to write in that we now feature "Ask Larry" every Monday.
We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff's state-of-the-art retirement software is available, for free, in its "basic" version. His considerable and often very useful output is available on his website.
Sal Neri -- Nesconset, N.Y.: Is there a maximum amount a husband and wife can collect monthly from Social Security?
Larry Kotlikoff: There is a maximum family benefit payable on any worker's earnings record. Here's a reprise of how I've explained the rather weird and arguably unfair formula for calculating the the family benefit maximum (FBM).
Your own full retirement benefit, called your your primary insurance amount (PIA), is what you can begin to take when you reach the age of full retirement -- 66 years old these days, but rising to 67 for those born in 1960 or later.
The problem is, if your PIA is very low, your total family benefit maximum will be only 150 percent higher. With a somewhat larger PIA, however, the maximum rises to 187 percent of your PIA. It then ebbs, ending up at 175 percent of your PIA. So 175 percent is the family maximum for those with the highest full benefits for themselves, a considerably higher multiple of PIA than for workers with the lowest personal benefits.
These family benefits -- spousal benefits, survivor, mother/father, and children benefits -- are called auxiliary benefits. The total family maximum is the wage earner's personal maximum plus the maximum of auxiliary benefits for family members. What makes the system both arbitrary and regressive is that the maximum auxiliary benefits are just 50 percent of a very low-income worker's full or "primary" retirement benefit (PIA), 87 percent of the moderate income worker's PIA, and 75 percent of the high earner's PIA.
A second kink in the rules and regulations: the most the family, including the worker, can receive also depends on when the worker takes retirement benefits.
Say you're a low-income worker and you take your benefits as early as possible, at 62, because you need the money in order to live. Your retirement benefit will then be reduced permanently to 75 percent of what you would get at your full retirement age. So the maximum you and your family can receive is 75 percent of your PIA (your reduced retirement benefit) plus 50 percent of your PIA in auxiliary benefits. In this case, your family maximum is only 125 percent -- 75 percent plus 50 percent -- of your full retirement benefit.
Contrast this to a moderate earner who waits until full retirement age. They would have a family benefit maximum equal to 187 percent of her full retirement amount. Now look at what happens if this worker can afford to wait until 70 to collect her retirement benefit. In this case her own retirement benefit is 1.32 times her PIA thanks to the "delayed retirement credit" and the maximum auxiliary benefits are 87 percent of her PIA. (The delayed retirement credit compensates workers who wait to collect Social Security with higher benefits once they start collecting.)
Hence, the largest amount the moderate earner family, including the earner herself, can receive is 219 percent of what she would receive at normal retirement age.
Donald Patterson -- Plainfield, Ill.: I will be 62 in April. My wife will be 63 in July. Except for a few years when I was unemployed, I always earned more than the maximum income taxed by Social Security. My wife was primarily a stay-at-home mother and never earned enough credits to qualify for her own retirement benefit. I am currently retired and living off my IRA and 401k balances. I plan on delaying my Social Security benefit until I turn 70 so as to maximize our benefits later in life. My question has to do with when my wife should begin her spousal benefit. Does she have to wait until I turn 66 to collect a spousal benefit? Should she wait until she turns 70 or until I turn 70 (when she will be nearly 71)? Neither of us has any medical condition that should result in a shorter than average life expectancy.
Larry Kotlikoff: Here are two options to consider:
A. When you reach full retirement age, you file for your retirement benefit, but suspend its collection until age 70. This will enable your wife to start collecting a full spousal benefit equal to half of your full retirement benefit.
B. You apply for a reduced retirement benefit when your wife reaches age 66. When you reach 66 (your full retirement age), you suspend your retirement benefit and start collecting it again at 70. This will give you reduced benefits for one year (reduced by 8.33 percent relative to your full retirement benefit) but means that your benefits when you start them up again at age 70 will also be permanently reduced by 8.33 percent compared with what you'd get after age 70 under option A.
I suspect option A is better, given the fact that your survivor benefit will be permanently reduced by 8.33 percent as well.
Rodney Jackson -- Catonsville, Md.: My wife died last year and did not have much of a work history. Is there a minimum for survivor benefits?
Larry Kotlikoff: Yes, the minimum is zero if she didn't have any work history. But chances are she had some kind of work history and that it's not zero. You need to check with Social Security or run a software program to determine the size of the survivor benefit for which you are eligible. When you should take it, as opposed to taking your own retirement benefit, depends on both of your earnings histories -- earnings on which you pay Social Security taxes.
Most likely, from what you say, it will be best for you to start a survivor benefit early, maybe as early as 60, and then start your own retirement benefit at 70.
Laura S. Buice -- Williston, N.D.: My husband and I are both retired. He will turn 62 in July and I will in October. He was a Department of Energy federal employee, so no Social Security, but he does have a little from some other jobs. I worked as a teacher for 30 years so I have Social Security from those years. Is there any special advice for someone like my husband, who was a government worker except for a few years of his career?
Larry Kotlikoff: The Windfall Elimination Provision (WEP) will not apply if your husband was a federal worker first hired by the government after Dec. 31, 1983. In that case, he would have 30 or more years of substantial earnings under Social Security. Even if the WEP does apply, however, your husband may still get a significant benefit. He may also be able to get spousal benefits on your earnings record. You need to run the numbers through a software program or consult a financial advisor to see what he'll actually be able to collect. As is often the case when it comes to Social Security, the answer is in the details.
Steve -- Fruitport, Mich.: I am 60 and want to retire at 62 and receive early Social Security. My wife is 50. I have two boys who just turned age 11 and 13. When I retire, can my wife and I collect a SS benefit for my wife and two boys and might that compensate for retiring early as compared to retiring at 67 and receiving my full SS benefit?
Larry Kotlikoff: Your wife can, indeed, receive a mother's benefit (while your children are under age 16) and your children can receive child benefits, provided that 1) they are unmarried, 2) they are younger than 18, or 3) they are 18-19, but also full-time students still in high school, or are 18 or older and disabled (but the disability must have started prior to age 22).
Whether your strategy beats other strategies requires calculating all your benefits under all different collection options.
Deborah -- New York: Having recently discovered your column, I saw references to people qualifying for spousal benefits after divorce. A dear relation was married and divorced several times. Would she get benefits from only one of her exes, and which one?
Larry Kotlikoff: If she was married for more than 10 years before divorcing, say, Moe, Larry (no relation) or Curly, she can receive the highest spousal/survivor benefit available from the three men's earnings record, but not from more than one ex's earning record at a time.
BUT -- and this is the fun stuff -- your dear relation can flip from the benefit of one ex to that of another whenever it's going to generate the highest benefit for her. Suppose, for example, that ex-spouse Moe earned 10 percent more than ex- spouse Larry and that she never married Curly at all. Further suppose that your relation reaches her full retirement age without filing for her own retirement benefit.
She can then take a full spousal benefit based on Moe's earnings record (assuming Moe has either filed for a retirement benefit or they have been divorced for more than two years). The benefit will equal half of Moe's full retirement benefit. But then if Larry suddenly dies (God forbid), she can flip to taking a survivor benefit based on Larry's earnings record, which would be larger than the spousal benefit on Moe's. And if she starts taking the survivor benefit based on Moe's earnings record at or after reaching her own full retirement, it will not be reduced.