Federal Social Security benefits are very important to individuals and to those who have paid into the Social Security system, and by extension to their family members. When spouses divorce it is critical to understand the underlying rules and assumptions for the lower earning or non-earning spouse who will eventually apply for Social Security at retirement age whether that be age 62 or older. The following blog by Michael Kitces, MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL of Reston, VA provides an easy read of the important points:
One of the key benefits of Social Security is the spousal benefit: a payment at retirement that goes not to the worker who paid into Social Security over time, but his/her spouse. The payment was originally designed to provide retirement support for stay-at-home spouses in a single-income household, and remains relevant for many spouses who take at least some time off from work to raise a family.
However, the spousal benefit is not only available for currently married couples. Single people who were previously married may also be entitled, based on the ex-spouse’s earnings record. And for some divorcees, an even bigger opportunity exists to coordinate claiming the ex-spouse’s spousal benefit first, and switching to the individual’s own retirement benefits later.
ENTITLEMENT AND ELIGIBILITY
To claim a spousal benefit (50% of the working spouse’s Primary Insurance Amount), whether as a current spouse or a divorced spouse, the recipient must be both entitled and eligible for the benefit.
What do those terms mean in the context of spousal benefits? For married couples, “entitlement” means the individuals must have been married for at least one year, must still be married and, most importantly, the worker spouse must have actually filed for his/her own benefits. In other words, the spouse can only receive a spousal benefit when the primary worker is receiving his/her own individual retirement benefit as well.
In a divorce, entitlement rules for spousal benefits are slightly different. For the divorcee to claim, the marriage must have lasted for at least 10 years; the divorce must have been at least two years ago; the divorcee must be currently unmarried (although the ex-spouse may have remarried); and the worker ex-spouse must be at least age 62. Notably, the worker spouse doesn’t have to have actually filed – as is the case when the couple is married. Rather, the breadwinning ex-spouse must just be at least age 62, such that he/she could have filed.
To claim any spousal benefit, however, one must be age-eligible. To be eligible, the spouse/divorcee must be at least 62 to claim, though the benefit is reduced by 8.33% annually for the first three years if claimed early, and 5% annually for each additional year if claimed that early. To receive the full spousal benefit, the spouse/divorcee must be full retirement age (with special eligibility rules that apply if there is a disabled child or a child under 16 in the household).
For example, Mary and Jim were married for at least 10 years before divorcing. As a result, Mary will be entitled to a divorcee spousal benefit when Jim is at least age 62. However, Mary would not be eligible to claim that divorcee spousal benefit until she is also age 62. And Mary must wait until her full retirement age to get the full spousal benefit.
Notably, this means that if Jim were several years younger, Mary might be stuck waiting until her mid-60s or later for Jim to reach age 62. Similarly, if Mary were several years younger than Jim, she might become entitled to a divorcee spousal benefit once Jim turned 62, but she couldn’t claim it (because she wouldn’t be eligible) until she herself turned 62.
In any case, if Mary claims as early as age 62, her spousal benefits would be reduced by 30% for starting four years early. To receive her full monthly benefit, she must wait until her full retirement age. (Though there is no benefit of delayed retirement credits for waiting past full retirement age, in the case of spousal benefits.)
THE IMPACT OF REMARRIAGE
When it comes to an ex’s spousal benefits, the whole point is that they’re intended for an ex-spouse, not someone currently married. If you’re currently married – or in this context, remarried – the law presumes you wouldn’t need an ex-spouse’s benefits because you could get a current spouse’s benefits instead.
Consequently, a divorcee can only have ex-spouse’s spousal benefits as long as the divorcee remains unmarried. If the divorcee gets remarried, the ex’s spousal benefits will stop.
Of course, the newly remarried divorcee may now become re-entitled for spousal benefits based on the current spouse, but that depends on whether the newly married divorcee is actually entitled – and in particular, whether the new spouse is actually taking benefits themselves to render entitlement.
A divorcee can only have ex-spouse’s spousal benefits as long as the divorcee remains unmarried. If the divorcee gets remarried, the ex’s spousal benefits will stop.
For instance, continuing the earlier example where Mary and Jim are divorced but their prior marriage lasted for at least 10 years, Mary will be entitled to a spousal benefit because she is currently unmarried. If Mary remarries Donald though, she will simply be entitled to a spousal benefit from Donald in the future, but could no longer receive an ex-spouse’s benefit from Jim.
On the other hand, even if Jim remarries, Mary will remain entitled to her ex-spouse’s benefit – and Jim’s new wife may be entitled for her own spousal benefit as well. The fact that Mary does or does not claim a spousal benefit has no impact on timing or amount of spousal benefits for Jim’s new wife, or vice versa.
Notably, in scenarios where there are multiple remarriages and multiple divorces, a divorcee may become eligible for multiple ex-spouse benefits as long as the marriage to each ex-spouse lasted for at least 10 years apiece. In such scenarios, the divorcee can receive benefits based on whichever ex-spouse gives the biggest benefit (but not all of them cumulatively).
While a divorcee either will or will not be entitled and eligible for spousal benefits, claiming strategies are still relevant because a divorcee must decide when to claim.
For divorcees solely entitled to ex-spouse spousal benefits – that is, never having worked enough to have individual retirement benefits as well – the only decision is whether to start as early as age 62 or wait until full retirement age. The benefit of waiting is that the spousal payments will be larger; the bad news is that no payments are made during the waiting period, so the divorcee must live long enough to make up for the years’ worth of foregone payments with the higher checks that come with waiting.
Mary’s monthly spousal benefit may be $1,000, but she can only get the full $1,000 if she waits until her full retirement age, 66. If Mary starts at 62, her monthly spousal benefit will be reduced by 30% to only $700.
Accordingly, Mary must decide if it’s preferable to get $700 now, or $1,000 starting in four years, recognizing that if she waits, she’ll miss out on $33,600 in payments – plus a little more for ongoing Cost-of-Living Adjustments (COLAs). This means she’ll need to live long past 66 just to make up the $33,600 shortfall by collecting an extra $300 per month, plus COLAs, for each year thereafter.
This type of breakeven analysis – how many years of larger payments must be received to make up for the early years when no benefits were paid – is necessary for anyone entitled to a Social Security benefit who has to choose the timing of when to begin, whether as an individual retirement benefit or a spousal benefit.
The good news, though, is that because the early benefits reduction is more severe for spousal benefits than for individual retirement benefits, delaying a spousal benefit to at least full retirement age is slightly more valuable for the divorcee, and the breakeven period is shorter.
In essence, as long as the divorcee believes he/she can survive to breakeven age, it’s beneficial to delay an ex-spouse’s spousal benefit. To the extent that the divorcee lives materially longer, inflation is higher and/or market returns are lower, the decision to delay will look even better.
For those divorcees who also worked and are entitled to their own retirement benefit in addition to an ex-spouse’s spousal benefit, there are more benefits available, but not necessarily more flexibility.
The reason is the so-called Deemed Filing Rule, which stipulates that any time someone is eligible for both an individual and a spousal benefit, they are deemed to file for all available benefits. And as usual, any time an individual applies for multiple benefits, they don’t get all the benefits cumulatively. Rather, they get whichever pays the highest amount.
So if the divorcee’s own individual retirement benefit is higher than ex-spousal benefit, the latter is moot. At the point the divorcee is eligible for the spousal benefit, he/she will already be eligible for the higher retirement benefit, and the retirement benefit will subsequently overwrite the spousal benefit.
A special exception to coordinating benefits is available for those entitled to both retirement and spousal benefits, depending on the year in which they were born.
Called a Restricted Application for Spousal Benefits, or just Restricted Application for short, the technique was eliminated under the Bipartisan Budget Act of 2015, but grandfathered if the divorcee was born in 1953 or earlier, or on January 1, 1954. For those born on January 2, 1954 or later, the restricted application rules are simply unavailable, having been eliminated by the rule change.
The Restricted Application rules allow a spouse, including a divorcee ex-spouse, to file for any spousal benefits to which he/she is entitled, but only spousal benefits and not individual retirement benefits. This allows the divorcee to receive spousal benefit payments now, but still earn 8% annual Delayed Retirement Credits on the individual retirement benefits not received. In essence, the divorcee gets to enjoy all the benefits of delaying individual retirement payments to age 70, plus get ex-spouse benefits along the way.
Mary, for example, might choose (if born in 1953 or earlier) to file a Restricted Application to receive the spousal benefit from Jim. As a result, she begins to receive her monthly checks immediately. At age 70, Mary’s individual benefit will have earned 8% x 4 years = 32% in delayed retirement credits, and if that payment is now larger than her ex-spouse’s spousal, she can then switch at age 70 to her individual retirement benefit, and claim the new larger benefit (aided by the Delayed Retirement Credits).
The appeal of the Restricted Application strategy is that the divorcee can earn the entire 32% Delayed Retirement Credit on his/her retirement benefit, even as the spousal benefits are being paid along the way. In the example above, this can dramatically reduce the cost of waiting, resulting in a very short (and easy to outlive) breakeven period.
In fact, even if the divorcee has a substantial personal retirement benefit, the Restricted Application strategy can still be appealing because it still reduces the implicit cost of waiting to earn Delayed Retirement Credits.
Assume now that Mary had a full-time career, and a $2,000 monthly retirement benefit. Normally, this would make Mary’s $1,000 monthly spousal benefit moot, as her $2,000 monthly retirement benefit is already larger. However, Mary can still choose to file a Restricted Application at her full retirement age, and begin to receive $1,000 per month from age 66 to 70. In the meantime, she will earn 32% in delayed retirement credits, boosting her retirement benefit up to $2,640 per month.
Of course, Mary could have simply waited four more years until age 70 anyway to boost her retirement benefit until to $2,640 per month. But doing so would have effectively cost her $2,000/month x 4 years = $96,000. With the Restricted Application, Mary receives $1,000/month x 4 years = $48,000 of payments in the meantime. Consequently, Mary still gets 100% of the Delayed Retirement Credit benefit, but at only half the upfront out of pocket cost.
A key requirement, though, is that to file a Restricted Application, the divorcee must be at least full retirement age. If the divorcee files for benefits early, it will again be a deemed filing application for all benefits, and the opportunity is lost.
FILING FOR BENEFITS ONLINE
Divorcees can file for (ex-)spousal benefits either by visiting a local Social Security office or online via SSA.gov.
If filing online, the Social Security Administration will make a Follow-Up Request for documentation to substantiate eligibility for the ex-spouse’s spousal benefits, including a birth certificate to validate the divorcee’s age; marriage license to validate the marriage; and divorce decree to validate that the marriage met the 10-year requirement, and that the divorce was valid and legal.
For divorcees who intend to do a Restricted Application, be certain to request only the spousal benefit and not individual retirement benefits as well. It’s also advisable to note in the Remarks section of the online application that the intention is to file a “Restricted Application for [only] Spousal Benefits,” and not individual retirement benefits.
Judith F. Sterling is a Certified Divorce Financial Analyst, Certified Public Accountant and Collaborative Financial Specialist practicing in Marin, San Francisco, and Sonoma Counties.