Center for Retirement Research at Boston College - April 27, 2009

Introduction

Under Social Security, married individuals are entitled to a retired worker benefit based on their own earnings and/or to a spousal benefit equal to one half of their spouse’s benefit claimed at the Full Retirement Age (currently 66). If a married individual claims before the Full Retirement Age, the Social Security Administration assumes that the individual is claiming both types of benefits, compares the worker and spousal benefits, and awards the highest. Upon reaching the Full Retirement Age, individuals can choose which benefit to receive. As a result, married individuals can claim a spousal benefit at 66 and switch to their own retired worker benefit at a later date. This approach allows a worker to begin claiming one type of benefit while still building up delayed retirement credits, which will result in a higher worker benefit later.

In the past, providing these benefit options for spouses was not particularly valuable, since those who postponed benefits beyond the Full Retirement Age were giving up expected lifetime benefits. With the recent advent of an actuarially fair delayed retirement credit, lifetime benefits are roughly the same whether claimed at the Full Retirement Age or at age 70. As a result, today the availability of benefit options has real value for couples and therefore inevitably increases the cost of the Social Security program.

This brief describes how the procedure can benefit married couples, estimates how much it could cost the Social Security Administration on an annual basis, and characterizes those most likely to take advantage of the option. The conclusion is that the procedure could cost as much as $9.5 billion per year and a significant amount of that additional money would go to households in the upper portion of the income distribution.

Calculating Spousal Benefits

Under current law, married individuals are entitled to retired worker benefits based on their own earnings or, if they have no earnings, they receive 50 percent of their spouses’ Primary Insurance Amount (PIA). If they have some earnings, the spousal benefit is used to “top up” the worker benefit so that the total equals 50 percent of the spouse’s. The amount can be lower if the individual chooses to receive either the retired worker benefit or the spouse’s benefit before the Full Retirement Age (see Table 1). However, spouses’ benefits are not affected by the age at which the worker-beneficiary claims benefits.

Prior to reaching the Full Retirement Age (FRA), when a married individual files for benefits, he or she is subject to a “deemed filing” provision. Under this provision, it is assumed that the individual is filing for both the spousal benefit and the benefit based on his/her earnings record. The Social Security Administration then compares the two benefits and awards the higher. After reaching the FRA, deemed filing no longer applies, giving the individual the ability to choose which benefit he or she receives.

Originally, we thought that “claim now, claim more later” would involve the wife receiving the spousal benefit in two-earner couples with roughly equal earnings. For example, consider a two-earner couple in which the husband is three years older than the wife (the typical age difference according to the Health and Retirement Study). Both husband and wife had originally planned to delay claiming until age 70 in order to receive the highest possible monthly benefit. But, instead, once the husband claims his benefits at age 70, the wife – now 67 and no longer subject to deeming – can file for just a spousal benefit. The wife then continues working and contributing to Social Security. At age 70, she files for her own retired worker benefit, which has now reached its maximum amount due to the delayed retirement credits, and stops receiving the spousal benefit. In this situation, the wife gains three years of spousal benefits that she would not have enjoyed under the conventional claiming approach.

But it turns out that those most likely to receive a spousal benefit while using “claim now, claim more later” are the husbands in two-earner couples. The reason stems from the results of an earlier study that showed married women will maximize the couple’s expected lifetime benefits by claiming early.1 The intuition for this somewhat counter-intuitive finding is that women’s planning horizon for how long they will receive their own retired worker benefit is from the date of their retirement to their husband’s death. When their husband dies, they are entitled to their husband’s benefit as a widow. Therefore, optimal claiming in most cases has the woman claiming benefits at 62 and the husband delaying until 69.2 As a result, the way an optimizing couple would use “claim now, claim more later” is for the wife to claim at 62 and, once her husband reaches age 66, he would claim a spouse’s benefit based on his wife’s earnings. At age 69, he would claim the maximum amount of his own retired worker benefit due to the delayed retirement credits, and stop receiving the spousal benefit. Of course, if the woman is the higher earner, the story works in reverse.

The Cost of “Claim Now, Claim More Later”

One can get a rough idea of the potential annual cost by considering how many participants are eligible to use this strategy and how much they will gain from it. In 2006, roughly 650,000 husbands had higher earnings’ histories than their wives.3 The typical wife’s Primary Insurance Amount – the unreduced benefit that serves as the basis of the spousal benefit – is about $900, so the husband would have received 50 percent of $900 for 36 months for a total of $16,200. Multiplying the number of men eligible (650,000) times $16,200 yields a total cost of $10.5 billion. Doing the same exercise for the 10 percent of cases – roughly 80,000 – where the wife has higher earnings than the husband yields an additional cost of $1.3 billion. Thus, a rough estimate of the annual cost incurred by households making their joint claiming decisions is about $11.8 billion.4

A more sophisticated approach to estimating the total cost to the program is to compare for each couple their optimal claiming ages and value of benefits under conventional claiming and under a scenario where “claim now, claim more later” is added to their options. This approach allows for couples with different age differences and different ratios of husband’s to wife’s earnings.

See the entire brief in PDF here…

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