Personal finance writers and married baby boomers have been talking and thinking a lot about different ways to maximize total Social Security benefits for the married couple. One of the most frequently discussed approaches is the “claim and suspend” strategy. There is a lot of confusion about how this works.
Here are some potential areas of confusion that may lead to problems or mistakes:
1. Claiming and suspending may work best (if at all) only if the “claim and suspend” spouse has a larger work record and benefit. According to Social Security rules, a person claiming retirement benefits must receive the greater of the benefit to which he or she is “entitled”, either the spousal benefit (e.g., the benefit based on the spouse that has filed and suspended) or based on his or her own record. The maximum spousal benefit is 50% of the suspended benefit. Let’s assume that the husband is entitled to $1,500 a month based on his own work record. His wife is entitled to a $600 a month on her record. The husband can file for benefits at full retirement age then suspend them. The wife can file at full retirement age for a spousal benefit and receive $750 a month, earning the couple an extra $150/month. (A worker who claims and suspends is still technically “entitled” to receive the suspended benefit.)
But watch what happens if the couple have relatively equal earnings histories and each try the “claim and suspend” strategy. In this scenario, let’s assume that the husband is entitled to a suspended Social Security retirement benefit of $1,200 a month. His wife is entitled to receive a benefit of $1,000 a month on her own work record. Thus, in each case, the benefit based on the personal work record is larger than 50% of the potential spousal benefit. ($1,200 is greater than $500, and $1,000 is greater than $600.) If each spouse claims and suspends, neither spouse would qualify to receive any benefit because his or her own benefit (now suspended) would be larger than the spousal benefit. The entire strategy backfires.
2. Claim and suspend only works at full retirement age. Under existing SSA rules, a worker can claim and then suspend a retirement benefit only after reaching full retirement age. The delayed work credits then accrue at 8% annually until age 70, at which time you should “unsuspend.”
3. The spousal benefit can be permanently reduced. If one spouse is younger and the older spouse “claims and suspends” there is a potential problem with the strategy. If the younger spouse files a claim for a spousal benefit before reaching full retirement age, the spousal benefit will be less than 50% of the suspended benefit. (Only those who have reached full retirement age can receive a full 50% spousal benefit.) The amount lost will depend on the number of months before full retirement age. What some folks don’t understand (and what I believe to be the case) is that this decreased spousal benefit percentage is permanent. Even if the younger spouse later claims a Social Security retirement benefit based on his or her own work record, that benefit will be reduced by the fact that he or she had previously filed for a spousal benefit before reaching full retirement age.
4. The spousal benefit does not increase with the suspended benefit. Some people believe that the spouse claiming a spousal benefit based on the other spouse’s suspended benefit will get an increased spousal benefit when the other spouse reaches age 70 and “unsuspends.’ My interpretation of Social Security rules is that this is not the case. The maximum spousal benefit is 50% of the “Primary Insurance Amount” which is the benefit at full retirement age, period. (If I am wrong on this, I’m sure some observant reader will tell us in a comment.)
As always, rules can be changed and be subject to different interpretations by those in charge. My point is not to make assumptions that “claim and suspend” will maximize your lifetime Social Security income as a married couple without digging deep into the rules and the numbers.