Archives for August 2012

A reader writes in, asking:

“Most articles about Social Security assume that the two spouses are the same age or just a few years apart. But my husband is 13 years older than me. How does the conventional wisdom about Social Security change when there’s a big age difference?”

Which Spouse is Older?

As you might expect, the answer is “it depends.” Most importantly, it depends on which spouse (older or younger) has the higher earnings record.

Married couples generally get a better deal from having the spouse with the higher earnings record delay benefits than from having the spouse with the lower earnings record delay benefits. That’s because:

• Having the spouse with the higher earnings record hold off on taking benefits increases the amount the couple will receive as long as either spouse is alive (because, if the lower-earning spouse outlives the higher-earning spouse, the lower-earning spouse’s widow/widower benefit will be increased by the fact that the higher-earning spouse waited to claim benefits), whereas
• Having the spouse with the lower earnings record hold off on taking benefits only increases the amount the couple will receive as long as both spouses are alive.

This is generally true whether the spouses are the same age or not. What changes is simply a matter of degree (e.g., how good of a deal is it?).

For example, consider a married couple Amy and Arthur. Amy has a higher earnings record, and she is 15 years older than Arthur.

• When Amy reaches age 62, having her delay benefits is an especially good deal (better than it is for the higher earner in a same-age couple) because it increases benefits as long as either spouse is alive, and given that her spouse is 15 years younger than she is, it’s likely that that will be a long time.
• When Arthur reaches age 62, having him delay benefits is a worse deal than it would typically be for the lower earner in a same-age couple, because it only increases benefits as long as both spouses are alive, and, at that point, given that Amy is already age 77, the couple has a shorter first-to-die life expectancy than a couple who are both age 62.

Now let’s switch things around. This time we have Belinda and Bob. Belinda has the higher earnings record, but she is 15 years younger than Bob.

• When Bob (the lower earner) reaches age 62, having him delay benefits is a better deal than it is for the lower earner in a same-age couple. That’s because, when he reaches age 62, Belinda will only be age 47, meaning that they have a longer first-to-die life expectancy than a couple where both spouses are age 62.
• When Belinda (the higher earner) reaches age 62, having her delay benefits is not as good of a deal as it typically is for the higher earner in a same-age couple. That’s because, by the time Belinda is 62, Bob will be 77, meaning that their joint life expectancy is less than that of a same-age couple.

Or, to put it differently, for a couple who are very different ages:

• The older spouse (whether the higher or lower earner) gets a better deal for delaying benefits than he/she would in a same-age couple, and
• The younger spouse (whether the higher or lower earner) gets a worse deal for delaying benefits than he/she would in a same-age couple.

Fewer Clever Tricks

One other thing that changes for couples who are many years apart is that there’s less room for clever strategies between full retirement age and age 70. For example, in a same-age couple, provided that the lower-earning spouse has filed for his/her own benefit, the higher earner can file a “restricted application” for just a spousal benefit at full retirement age, thereby allowing him/her to collect something while still allowing his/her own retirement benefit to grow until age 70.

If the spouses are more than 8 years apart, that strategy isn’t an option, because by the time the lower earner reaches age 62 (the minimum age to file for retirement benefits, which the lower-earning spouse must do in order for the higher earner to file for spousal benefits), the higher-earning spouse will already be age 70 and collecting his/her own retirement benefit.

Social Security is sometimes described as “actuarially neutral,” meaning that, at a program-wide level, the government should be indifferent to whether people claim earlier or later, because the reduction in monthly benefits that results when people claim early should be approximately offset by the fact that those people are collecting for a greater number of months.

But from the perspective of an individual person, the decision of when to claim Social Security is only neutral under a very specific set of circumstances. Much more often, there is a compelling reason to claim either earlier or later, depending on circumstances. (The most obvious example: You’re 62, and you absolutely need the money right now.)

Social Security’s Built-in Interest Rate

Consider an unmarried person, age 62, trying to decide whether to take benefits right away and invest them or wait until age 70 to claim benefits. If this person lives until exactly the average life expectancy for somebody already age 62 (i.e., 82.9 years, according to this table from the Social Security Administration), the break-even inflation-adjusted rate of return would be approximately 2%.

In other words, if this person were to live to just shy of 83 years, she would have been better off taking benefits at age 62 if she could get an inflation-adjusted return better than 2%, and she’d have been better off waiting until age 70 if she didn’t think a 2% inflation-adjusted rate of return was sufficiently likely.

Given current interest rates (with TIPS yields negative all the way up to 20-year maturities), 2% after inflation is a heck of a lot better than you can do from safe investments. And that makes delaying Social Security more attractive than it would be in a time when interest rates are high.

What’s Your Life Expectancy?

The life expectancy figure I mentioned above is an average of both men and women. For men, the actual figure is 81.4 years. For women, it’s 84.3 years. As a result, it’s generally more advantageous for unmarried women to delay Social Security benefits than for unmarried men to do so (because women who hold off on taking Social Security will, on average, receive their increased benefits for a greater number of months than men who hold off on claiming will).

And if you have any other reasons to think you have a life expectancy that’s meaningfully shorter or longer than average (e.g., a medical condition on the one hand or a family history of people living into their 90s on the other hand), that should affect your decision as well. The longer you expect to live, the better it is to delay Social Security.

Are You Married?

Consider Allan and Liz, married, both age 62. Because Liz spent many years out of the paid workforce to raise their children, Liz has a significantly lower earnings history than Allan. (And, therefore, Allan’s own retirement benefit is significantly greater than Liz’s.)

After either Allan or Liz dies, the surviving spouse will be receiving an amount equal to Allan’s benefit. (If Liz is the surviving spouse, it will be in the form of a widow’s benefit.)

As a result, if Allan chooses to hold off on claiming his own retirement benefit, he increases not only his own benefit while he’s alive, but also Liz’s widow’s benefit in the event that he predeceases her.

In contrast, if Liz holds off on claiming Social Security, the amount the couple receives is only increased during the period of time that they’re both alive.

Takeaway: It often makes sense for the higher-earning spouse to delay claiming his/her own benefit as long as possible, and for the lower-earning spouse to take his/her benefit at an earlier point.

Bonus tip: When the higher-earning spouse reaches full retirement age, if the lower-earning spouse has started taking his/her benefit already, the higher earning spouse can file a restricted application to claim only spousal benefits. This allows the higher earning spouse to at least receive something for a few years, while allowing his/her own benefit to continue growing until age 70.

In short, while Social Security may be “actuarially neutral” at a program level, most real-life people do stand to gain something by taking the time to consider whether claiming early, late, or somewhere in the middle is the best for their own particular circumstances.

Editorial note: Just last night I came across a paper (shared by BobK on the Bogleheads forum) that takes a more academic look at this same topic. The authors (John B. Shoven and Sita Nataraj Slavov) reached very similar conclusions. Also, if you’d like to check my math regarding the 2% inflation-adjusted return figure I quoted above, here’s the spreadsheet I used.