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Social Security has been described as the one product all Americans buy yet none understand. In 2012 the Social Security Administration paid benefits to over 56.3 million Americans, the overwhelming majority of whom had no idea how eligibility is determined, the manner in which payouts are calculated or the extent to which family members may collect on the earnings record of the primary breadwinner. CPAs have a great opportunity to fill the education gap, especially with an important and interesting feature called the spousal benefit.
Spousal benefits allow one spouse to collect a retirement benefit based on the working record of the other spouse, regardless of his or her own earnings history. Take a married couple, Mr. and Ms. Smith; the husband is employed while the wife stays at home to maintain the household. Social Security regulations allow Ms. Smith at full retirement age (currently 66 for those born in 1943 through 1954) to receive a spousal benefit of 50 percent of Mr. Smith's payout, even though she has no record of employment outside the home. Had Mrs. Smith worked during her lifetime to earn enough credits for Social Security coverage, she would then be entitled to the greater of all of her own or half of her husband's.
According to the Bureau of Labor Statistics, in 2012 both spouses were employed in 47.4 percent of American "married couple" families; this rate increases to 59.0 percent for "married couple with children" units. With reductions in benefits for filing before full retirement age and delayed credits (until age 70) for applying afterward, many married couples now have a wide variety of collection options they can choose. What is the best choice in a particular situation?
Mr. and Ms. Smith may want to choose "file and suspend." With this strategy, Mr. Smith applies for his benefit, permitting Ms. Smith to collect her spousal benefit, and then immediately postpones his payout until needed. The advantage to him in suspending collection is that he receives a delayed credit of 8 percent a year while he waits, and an 8 percent guaranteed return is nothing to dismiss in the current climate of low interest rates. This delaying tactic is doubly rewarding in that it locks in a higher survivor benefit for Ms. Smith if she outlives Mr. Smith.
On the other hand, a "restricted" application strategy is suitable when both spouses have similar earnings records yet one wants to delay collecting. Let's assume now that Ms. Smith has worked enough to have earned her own benefit. She wants to collect, while Mr. Smith does not. Ms. Smith will file for and claim her own benefit. By filing for a "restricted" benefit, Mr. Smith can collect his spousal benefit while again postponing his own and receiving a delayed credit of 8 percent a year.
Key points to consider with these approaches is that the party who "files and suspends" or applies as "restricted" must have reached full retirement age, and that a husband and wife cannot collect a spousal benefit on each other - a married couple is limited to one spousal benefit only.
Spousal benefits add another layer of complexity to an already challenging question: "When should someone take Social Security benefits?" There is no one-size-fits-all answer. The many nuances of the program, combined with an individual's lifestyle, health status, and financial resources are all factors incipient retirees need to consider before reaching such an important decision. Yet while perplexing, Social Security is too important a topic to be ignored. Taxpayers have generally spent decades paying into the system; it's an excellent idea for accountants, who are already familiar with their clients' financial situation, to advise them on the best way to tap into this important retirement income stream.
About the author:
Daniel G. Mazzola, CPA, CFA, is an investment advisory representative with American Portfolios Advisors Inc. He is a Chartered Financial Analyst, Certified Public Accountant, and Certified Financial Planner.