How is the Spousal Benefit actually calculated?
Calculating the Spousal Benefit
Here’s how the Spousal Benefit is calculated:
First of all, the Spousal Benefit is based upon a differential – between 50% of the other spouse’s Primary Insurance Amount (PIA) and his or her own PIA.
So what’s the calculation? Let’s look at an example:
Let’s say there’s a couple, both the same age with a Full Retirement Age (FRA) of 66, and the wife has a substantially lower wage base (and therefore a lower benefit) than the husband. At age 62, she files for the her own reduced benefit based on her own record, from a PIA of $800. Her benefit is reduced to $600 due to filing early.
The husband’s PIA is $2,000 per month.
Later on, when they reach age 66, the husband files for his Social Security benefits. The wife is now eligible for a Spousal Benefit, because one of the enabling factors for a Spousal Benefit is that the other spouse has filed for his or her own Social Security benefit. The Spousal Benefit is based on the differential between 50% of the husband’s PIA ($2,000 X 50% = $1,000) and her PIA ($800). The PIA is used to calculate this differential, not her benefit, even though her benefit is reduced since she filed early. The differential between those two factors is $200 ($1,000 minus $800). The differential is then added to her reduced benefit for a total benefit of $800 (reduced benefit of $600 plus the differential of $200). For simplicity, COLAs have not been included in this example.
Let’s adjust the example: Same couple, only now the wife waits until her FRA to begin drawing her own benefit, which is the same time as the husband. Now her Spousal Benefit differential will still be $200 (the differential between 50% of his PIA and her PIA), so her total benefit will now be $1,000 (her unreduced PIA of $800 plus $200 differential).
Now, what if the wife is younger? As long as she’s at least age 62, she can begin receiving the Spousal Benefit once her husband applies for benefits. It’s important to know though, that if she decides to file for the Spousal Benefit prior to her FRA, the Spousal Benefit factor is correspondingly reduced (as would be her own benefit if she filed early).
Instead of 50% of her husband’s PIA, at her age 62 the Spousal Benefit factor would be reduced to 35% of her husband’s PIA, and then the differential calculated as explained before. At age 63 the Spousal Benefit factor would be 37.5%; at age 64, 41.7%; and at age 65 it would be 45.8%. This reduction is calculated as 25/36ths of one percent for each month before her FRA up to 36 months, plus 5/12ths of one percent for each month more than 36 before FRA. The reduction factor is then taken against the original 50% factor to determine the actual percentage of the husband’s PIA to be used in calculating the Spousal Benefit differential.
In this manner, the reduction is 25% for the closest 36 months to FRA, and then an additional 5% for each year more than 3 before FRA that the filing for Spousal Benefits is completed. If you file for Spousal Benefits exactly 4 years before your FRA, the Spousal Benefit factor is reduced by 30%, as an example. So instead of 50%, the most your Spousal benefit could be is 35% (which is a reduction of 30% applied to the original 50%).
In all cases except for someone born before 1954*, filing for a Spousal Benefit deems filing for your own benefit. Also, whenever eligible for a Spousal Benefit, if you file for your own benefit deemed filing requires that you have also filed for the Spousal benefit. This can result in unexpected reductions to both types of benefit if you weren’t prepared for this.
*If born before 1954 and you’re over FRA, it is possible to file solely for Spousal Benefit while delaying your own benefit to a later date. If you file for a Spousal benefit before reaching FRA, deemed filing applies to you no matter what your date of birth is.
Keep in mind that the examples above denoted the wife as the spouse receiving the Spousal Benefit – but the roles could be reversed, depending upon the circumstances.
I hope this clears things up a bit. It’s a very confusing component to understand, but this should have helped to clear things up – let me know if you have any questions, as always!