The decision as to when to collect Social Security benefits can be difficult as many factors enter into the consideration of the multiple payment options. Lemons (2012) explains that these variables include not only the employment history of the worker (and their spouse if any) but also their health history, family longevity, and their financial situation (p. 52). While these variables may lead a worker to consider filing early for their Social Security benefits, the impact on any survivor benefits should be assessed as well.
Early Filing Impact on Survivors
One such critical issue to consider is the impact of a worker’s filing decision on any widow (or widower) benefits to which their spouse may be entitled. Lemons (2012) posits that generally speaking, a surviving widow(er) is entitled to the same monthly benefit amount received by their spouse at their time of death (p. 59).
For example, filing early for a worker benefit (prior to full retirement age (FRA)) would result in a reduced monthly benefit. Upon the worker’s death, the widow(er)’s benefit could not exceed the greater of the reduced worker benefit or 82.5 percent of the deceased worker’s primary insurance amount (PIA) (Lemons, 2012, p. 59).
Conversely, if the worker delayed the start of their worker benefits beyond their FRA, their higher monthly benefit (due to delayed retirement credits) would pass to their widow(er) upon the worker’s death (Lemons, 2012, p. 59). As a result of these guidelines, many researchers suggest that the higher-earning spouse would customarily delay their worker benefits beyond their FRA in order to maximize the potential benefits for the surviving spouse (Lemons, 2012, p. 59).
As with any general recommendation, the advisor should consider the exact circumstances of a specific client before supporting any particular claiming strategy.
Consider Survivor Consequences Before Filing for Social Security Early
Experiencing the death of a spouse is difficult, not only emotionally, but also financially. While a married couple may both receive Social Security benefits, the eventual surviving spouse will receive only one monthly benefit, typically the higher of their worker benefit or the survivor benefit. Thus, the widow(er) will always receive a reduction in their monthly income due to the loss of the second Social Security benefit. The widow(er)’s monthly expenses may decrease marginally due to the loss of their spouse. However, they may not be lowered by as much as their income is reduced.
This loss of net monthly cash flow is further compounded by a potential increase in their income tax liability due to having to pay taxes at the higher “single” tax rates, instead of the “married filing jointly” tax rates. As such, it is critically important that the potential survivor benefit is considered before filing early to receive their worker benefit.
Failure to do so may result in the widow(er) suffering a material degrading of their standard of living due to their income reduction and the potential increase in their income tax liability.