Married couples should understand the differences between retirement benefits and survivors benefits.
Social Security benefits are generally the largest source of income for people aged 65 and older, according to the Social Security Administration. Therefore, the extent to which seniors understand the Social Security program can have a big impact on their living standards in retirement.
Nationwide Retirement Institute recently reported that 44% of surveyed adults were unaware that, upon the death of a spouse, the bigger benefit would be inherited by the surviving spouse. Misunderstandings of that nature can lead to lost income.
Read on to learn about retirement benefits and survivors benefits.
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How Social Security retirement benefits differ from survivors benefits
Social Security benefits are broken into three categories: (1) retirement benefits, (2) survivors benefits, and (3) disability benefits. Retirement benefits covers two subcategories, retired-worker benefits and spousal benefits. The differences between retirement benefits and survivors benefits are detailed below.
Retired-worker benefits are calculated based on lifetime earnings and claiming age. Specifically, a formula is applied to the inflation-adjusted income from the 35 highest-paid years of a worker’s career to calculate their primary insurance amount (PIA). The PIA is the benefit a worker will receive if they claim Social Security at full retirement age.
Importantly, workers that claim Social Security before full retirement age get a reduced benefit, meaning less than 100% of their PIA. But workers that claim Social Security after full retirement age get an increased benefit, meaning more than 100% of their PIA. The precise reduction or increase depends on how many months early or late payments start.
There are two conditions to those rules. First, workers are eligible for retirement benefits at age 62, so no one can claim earlier. Second, workers can only accumulate delayed retirement credits up to age 70, so it never makes sense to claim later.
Spousal benefits allow spouses to claim Social Security on the work record of a retired partner, provided certain conditions are met. First, the spouse must be at least 62 years old. Second, the partner on whose record they claim must be a Social Security beneficiary. If those conditions are met, the spousal benefit will equal 50% of the retired worker’s PIA if the spouse claims Social Security at full retirement age.
Importantly, spouses that claim Social Security before full retirement age receive a smaller benefit, meaning less than 50% of their retired partner’s PIA. The reduction depends on how many months early benefits start, but it can be as much as 35%. However, there is no advantage to claiming later than full retirement age because spousal benefits cannot accumulate delayed retirement credits.
Survivors benefits are paid to a widow(er) upon the death of their spouse, provided certain conditions are met. Specifically, the survivor must be at least 60 years old, they must have been married to the deceased for at least nine months, and they must not have remarried before age 60. If those conditions are met, the survivors benefit will equal 100% of the deceased’s workers retirement benefit if the widow(er) claims Social Security at full retirement age.
Importantly, survivors that claim Social Security before full retirement age will receive a reduced payout. The precise reduction depends on how many months early payments begin, but it can be as much as 29%.
What happens to your Social Security benefit when your spouse dies
Married couples generally receive two Social Security checks. In some cases, that means two retired-worker benefits. In other cases, it means one retired-worker benefit and one spousal benefit. Either way, when one spouse passes away, one of those revenue streams disappears.
Survivors benefits compensate for that lost income by allowing the widow(er) to keep the larger of the two Social Security checks. If the widow(er) already gets the larger check, nothing will happen to their benefit when their spouse dies. But if the widow(er) gets the smaller check, they can replace their own retirement benefit with that of their deceased partner by applying for survivors benefits.
Here’s an example: John receives a retired-worker benefit of $2,000 per month, and his wife Jane receives a retired-worker benefit of $1,750 per month. If Jane passes away, John gains nothing by applying for survivors benefits because he already gets the larger check. But if John passes away, Jane will receive $2,000 per month (in lieu of $1,750 per month) if she applies for survivors benefits.
Importantly, whereas spousal benefits equal up to 50% of a retired worker’s PIA, survivors benefits equal up to 100% of a retired worker’s benefit. That means any delayed retirement credits — remember, workers that claim Social Security after full retirement age earn delayed retirement credits that increase their benefit (up to age 70) — are passed along to the widow(er) through survivors benefits.
Put differently, a retired worker’s claiming age could have a substantial impact on their spouse’s survivors benefit. In situations where one spouse is significantly older and has a larger PIA — meaning their life expectancy is shorter and their baseline benefit is larger — it may be sensible for that person to delay Social Security until age 70 to ensure their partner gets the largest survivors benefit possible.