MAKING SENSE -- June 27, 2013 at 7:31 AM ET
The Social Security Payoff to the Supreme Court's DOMA Decision
After Wednesday's Supreme Court ruling invalidating a key section of the Defense of Marriage Act, married same-sex couples will be eligible for the same federal benefits as heterosexual married couples. Photo courtesy of Flickr user Elvert Barnes.
The Supreme Court's decision to rule a key section of the 1996 Defense of Marriage Act (DOMA) unconstitutional, thereby extending federal benefits to legally married same-sex couples, represents an enormous advance for our country.
No one has a monopoly on language, and if same-sex couples wish to use the word "marriage" to solemnize their devotion to one another and legalize their financial commitments, they should have every right in the world to do so.
And after the court's ruling Wednesday, they have that right in the 13 states and the District of Columbia where same-sex marriage is legal, now including the biggie -- California. Now it's time for the other 37 states to fall in line.
But there's more good news for same-sex couples. Unmarried same-sex couples in the 13 states, as well as those who move to those states, can, as of now, cash in on a potentially very large Social Security bonanza.
It may not be widely known, but married folk get treated better -- a whole lot better -- than single folk by Social Security. Specifically, Social Security provides spousal and survivor benefits to one's spouse. And you only have to be married one year to get spousal benefits and nine months to get survivor benefits. Moreover, if your partner has a child under age 16, you can collect spousal benefits regardless of your age.
To illustrate the potential financial benefits of same-sex couples tying the knot in one of what will surely be called "The Original 13 States," I just hopped onto my company's ESPlannerPLUS financial planning program and ran the case of Jerry and Ken, who are both 55 and live in California. They both earned middle class salaries until now, have a modest home with a mortgage and $500,000 in regular assets. But Ken recently retired because Jerry got a big raise and is now pulling down $200,000 a year. Jerry likes his job and will stick with it until age 65.
If Ken and Jerry play their Social Security cards right, (see my three rules for maximizing Social Security benefits), they can rake in an extra $60,000 in Social Security spousal benefits -- just by getting married!
To maximize their benefits, Jerry should file for his retirement benefit at 66 and suspend its collection, permitting Ken to take just his spousal benefit based on Jerry's earnings record. When Jerry and Ken reach 70, they should both begin taking their retirement benefits, which thanks to Social Security's delayed retirement credit, will start at the highest possible values.
Getting married has another financial advantage for Jerry and Ken, at least for a while. The couple can lower their income taxes by $3,000 to $5,000 over the next nine years because Jerry would otherwise get nailed filing as a single, given his high earnings. So for this couple, there is a singles penalty, not a marriage penalty, during the years Jerry works.
The downside here is that once Jerry retires, Jerry and Ken do face a marriage penalty and end up paying from $1,000 to $2,000 more in federal taxes for many a year. But the two are better off on balance over the rest of their lives.
Indeed, their sustainable discretionary spending rises from $78,595 per year to $82,010. That's a permanent increase of $3,415 each year, measured in today's dollars. Let me say this differently: Jerry and Ken can spend a few minutes in front of a justice of the peace or go for a supersized wedding and raise their living standard by 4.3 percent with no risk whatsoever!
I'm not saying every same-sex couple who marries will receive such a big financial bonus. Some will get less and some more. What's clear, though, is that with the right moves, Wednesday's Supreme Court decision can make a significant material difference to millions of same-sex couples.