Social Security Choices

Impact of Working on Spousal Benefits

Excess earnings by a spouse (including a divorced spouse) reduce spousal benefits if the recipient's age is less than full retirement age. Moreover, there is no compensatory benefit increase when the spouse reaches full retirement age (as there is with retirement or widow(er)'s benefits). In other words, spousal benefits lost due to excess earnings are lost forever. Further, by waiting to claim benefits you get larger annual benefits up to your full retirement age. For example, spousal benefits at full retirement age (66) are 43 percent higher than at age 62. Consequently, in general it is financially unwise to claim spousal benefits if those benefits will be reduced due to excess earnings. The financially smart choice is to claim benefits when working no longer leads to benefit reductions. For many, this occurs the year that full retirement age is reached, when the excess earnings threshold jumps from $15,480 to $41,400. Once full retirement age is reached, there is no benefit reduction for working.

Recommendation: if you are eligible for spousal benefits but you want to continue working at a job that generates excess earnings, you should probably wait to claim your spousal benefits until excess earnings fall to zero. (Note: there are exceptions to this recommendation; see below.)

Detailed Example:

What follows is a detailed example that illustrates the general points made in the preceding paragraph. Feel free to skip this example, especially if you find it too complicated or confusing.

Fred and Mary are the same age. They each have a short life expectancy, say, because of health problems. Both decide to claim benefits at age 62 (which is their optimal claiming age, given their short life expectancies). Fred's annual benefit is thus $18,000 (75 percent of his $24,000 annual benefit at full retirement age). Mary' spousal benefit at 62 is $8,400 (70 percent of her $12,000 spousal benefit at full retirement age).

Suppose that Mary continues working past age 62. She earns $21,080 a year, so she has excess earnings of $5,600 (= $21,080 - $15,480). Since she loses $1 for every $2 in excess earnings, her spousal benefits are cut by $2,800 a year from age 62 through age 64. In the year in which she turns 65, the earnings threshold jumps to $41,400. This threshold is far above her earnings level, so she gets the entire $8,400 in spousal benefits. In this example, working causes an overall benefit loss of $8,400 (= $2,800×3). Since Mary receives only spousal benefits, there is no compensatory increase in her benefit amount when she turns 66. (Note that Mary's excess earnings have no impact on her husband's retirement benefits.)

In this example, Mary could do better financially by waiting to age 65 (or slightly thereafter depending on her birth month) to claim benefits. By waiting until 65, Mary gives up $5,600 (= $8,400 - $ 2,800) a year for three years (for a total of $16,800). In exchange, starting at age 65 she gets $11,000 a year for the rest of her life. (This is the spousal benefit she would receive by claiming at 65.) This is an extra $2,600 (= $11,000 - $8,400) for the rest of her life. So, she would recover (in discounted present dollars) the $16,800 she gives up by waiting to claim at age 65 by the time she reaches age 72.

Despite the general advice we gave above, there are circumstances in which it makes financial good sense for Mary to claim her spousal benefits even though her earnings exceed the excess earnings threshold. Specifically, if the work-related losses in Social Security benefits are relatively small, it may well pay to claim spousal benefits at age 62, particularly since Mary's life expectancy is relatively short (76 years).

To illustrate, suppose that Mary's earnings are $16,480. By working, she would lose $500 each year in spousal benefits up to age 65 (since she is $1,000 above the $15,480 earnings threshold). To avoid that loss, she could wait to claim spousal benefits at age 65. By doing that, she gives up $7,900 a year (= $8,400 - $500) in spousal benefits for three years, for a total of $23,700. In exchange she gets $11,000 in spousal benefits at 65 (or $2,900 more than the $8,100). Recovering the forgone $24,300 (in terms of discounted present dollars) would take about 12 years, which exceeds Mary's life expectancy by a couple of years. So, in this instance, it likely makes good financial sense for Mary to work even though her spousal benefits are reduced by a relatively modest amount.