Why many widows lose nothing from taking survivor benefits early

By Larry Kotlikoff

Elderly Couple For many widow(er)s, there’s no advantage to delaying the collection of survivor benefits from a deceased spouse who collected retirement benefits early. Photo by Purestock via Getty Images.

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 here, for free, in its “basic” version

Here is the question that I posed to myself this week.

Question: Dear Larry, is it true that for many widows whose husbands took their benefits early, there may be no advantage at some point several years before reaching full retirement age to waiting to collect their widow’s benefits?

Answer: Dear Larry, I wouldn’t have expected such a brilliant question from you. From Paul, absolutely. But from you? Well, let’s just say you’ve surprised me.

In fact, you are 100 percent right. One of Social Security’s most complicated features involves the calculation of widow(er)’s benefits for widow(er)s whose deceased spouse took his or her retirement benefits early before dying.

But let me first discuss the opposite case of the decedent not taking benefits early, and let me do so via the example of Natalie and Tommy, who got married a ways back. If Tommy doesn’t take his retirement benefit before full retirement age, and dies before making it to full retirement, Natalie will receive, as a survivor benefit, Tommy’s full retirement benefit reduced to the degree that Natalie takes her widow benefit early (before full retirement age). She can start her widow’s benefit as early as age 60. In this case, she’ll receive 71.5 percent of Tommy’s full retirement benefit as a survivor’s benefit.

If Tommy takes his retirement benefit after reaching full retirement age (but before he dies), Natalie’s survivor benefit, before any reduction for taking it early, will equal the retirement benefit Tommy was receiving when he died. This will include any delayed retirement credits he received for suspending the collection of his retirement benefit after reaching full retirement age. Note, therefore, that Natalie’s survivor benefit will equal the retirement benefit Tommy was actually receiving and not the full retirement benefit to which he could have been eligible.

If Tommy dies after reaching full retirement age, but before taking his retirement benefit, Natalie’s survivor benefit, again, before any reduction for taking it early, will equal the actual retirement benefit to which Tommy would have been eligible had he applied for it the day he died.

Now, Larry, let me get to your terrific question. You’re referring to the case in which Tommy takes his retirement benefit before full retirement age and subsequently drops dead. In this case, Natalie’s survivor benefit, inclusive of any reduction for taking it early, is given by this simple formula, which I explain in full below:

Natalie’s Widows Benefit = Min (reduction factor times PIA, max (RIB times DRC, .825 times PIA))

I’ll explain this formula as well as I can. But if I’m unclear, do call your representative and ask him or her to explain it. Congress put or is keeping in place this formula, so they surely understand it.

“Min” stands for minimum. Min (x, y) equals the minimum value of x and y. If x is less than y, Min (x, y) equals x. Otherwise, it equals y. “Max” stands for maximum. Max (x, y) equals the larger of x and y.

The PIA is Tommy’s Primary Insurance Amount, otherwise known as his full retirement benefit, calculated whether or not he survived to full retirement. The reduction factor stands for the reduction Natalie would face from taking her benefits early if reduction x PIA is, in fact, the minimum value of the two values in the Min function.

RIB, or the Retirement Insurance Benefit, is the actual retirement benefit Tommy received when he first started collecting retirement benefits. DRC stands for any additional delayed retirement credits he would have received had he suspended his benefits after attaining full retirement age.

Finally, .825 PIA stands for 82.5 percent times Tommy’s full retirement benefit.

Now that this is crystal clear, let’s consider an example to show you why you are right. Suppose Tommy takes his retirement benefit at 62, so that his retirement benefit (his RIB) is 75 percent of his full retirement benefit. (The 75 percent reflects Tommy’s early retirement benefit reduction factor.)

Now assume that Tommy croaks at 65 just when Natalie reaches age 60. If Natalie takes her widow’s benefit at 60, Tommy’s RIB will equal .75 x PIA. So Natalie’s widow’s benefit will equal Min (.715 times PIA, max (.75 times PIA, .825 times PIA)). This all ends up equaling just .715 times PIA. So Natalie gets a widow’s benefit equal to 71.5 percent of Tommy’s full retirement benefit.

But, and here, thank God, is the punchline. What if Natalie waits until age 62 1/2 to collect her survivor benefit?

In this case, Natalie’s benefit will equal Min (.834 times PIA, max (.75 PIA, .825 times PIA), which equals .825 times PIA. And, if Natalie takes her survivor benefit at any age after age 62 1/2, her survivor benefit will remain at 82.5 percent of her PIA. Hence, Natalie has no incentive after age 62 1/2 to delay taking her survivor benefit. It will never be any larger!

Note that if Tommy hadn’t taken retirement benefits early, Natalie would gain something each month through age 66 by waiting to collect her survivor benefit. But because he did take his benefits early, and, in this example, at age 62, Natalie will just lose money by waiting beyond age 62 1/2 to collect her survivor benefit.

Now Larry, you are probably wondering how the story might change if Natalie had her own earnings history and can collect retirement benefits on her own. Well, the calculation of her survivor benefit doesn’t change. It’s still based on the gory formula I presented that only Paul can love because he thinks politics is messy in a democracy and that formulas like this are somehow a sign of a healthy democracy as opposed to a sign of pure insanity.

But let me not vent about this jaw dropper. Rather, I’ll simply state that if Natalie’s own retirement benefit exceeds her survivor benefit, she will likely do best to take her retirement benefit starting at age 70 when it’s as large as possible and, thus, take her survivor benefit from 62 1/2 through age 70. If Natalie’s own retirement benefit will never exceed her survivor benefit, she would do well to take her retirement benefit starting at 62 and then at 62 1/2 switch over to her survivor benefit.

Read more about the best age to take spousal or survivor benefits in this previous column.

My best,

Charles Coons — Coxsackie, N.Y.: I will be turning 66 in June 2014. Someone told me that I can sign up early even before I reach 66, as long as I don’t make over a certain amount before I turn 66. Is that true?

Larry Kotlikoff: Yes, but your retirement benefit will be permanently reduced if you take it between 62 and 66.

Deborah Checkwood — Oceanside: If I am receiving my own benefit and my spouse dies, can I switch over to survivor benefits? My spouse’s benefit was substantially higher.

Larry Kotlikoff: Yes, but see my explanation of survivor benefits above in the question I posed to myself this week.

Jan — Johnston, Iowa: I have been unemployed for several years and I don’t want those years to be figured into my benefit calculations. Can you tell me how that is done?

Larry Kotlikoff: Social Security looks at all your past covered earnings in each year since you were 16. It indexes to the economy’s average real wage growth all the past covered earnings up through age 60. It effectively lists these annual indexed amounts together with the actual (non-indexed) covered earnings after age 60. Then it takes the 35 highest of these annual values and divides by 35 times 12 to produce what it calls your Average Indexed Monthly Earnings (AIME). This quantity is then fed into a progressive Primary Insurance Amount (PIA) formula to determine your full retirement benefit were you to take your retirement benefit at full retirement age.

If you have, say, 38 years in which you worked in covered employment and five years in which you were unemployed, those five years won’t enter into your highest 35 years, so they won’t impact your benefits.

But if you have fewer than 35 years in which you worked and contributed to Social Security, your years of unemployment will work to reduce your PIA because your highest 35 years of covered earnings will includes years with zero covered earnings.

If, for example, you have only 20 years of covered earnings and were unemployed in all other years, the AIME will be calculated by taking the sum of all your covered earnings in those 20 years and still dividing by 35 times 12, not 20 times 12. The fact that the divisor remains 35 times 12 means those years of unemployment that left you with fewer than 35 years of covered employment will, in fact, come back to bite you because they will lower your average AIME and, therefore, your PIA.

Phillip McArthur — Alexander, Maine: I am 66 and working as of now. Can I get disability Social Security if I am not able to work?

Larry Kotlikoff: No, Phillip, you can’t receive disability benefits after reaching full retirement age. Indeed, as I’ve written in a column discussing disability insurance benefits, those who are on disability automatically have their disability benefit converted to a full retirement benefit when they reach full retirement age, which is now 66.

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.