Social Security’s Unintended Consequence

It’s interesting how sometimes even good things can have unintended consequences.

You may have heard that part of the Social Security system includes providing benefits to a surviving spouse, as long as certain conditions are met.  You heard correctly.  Generally speaking, if you were married longer than nine months, and your deceased spouse worked long enough to qualify for retirement benefits, you could qualify for survivor benefits if you’re at least age 60, and you’re still single at that point.

Here’s where many people start to get confused, especially if they were already receiving a Social Security retirement benefit of their own when their spouse died.  A common misconception is that you receive a survivor benefit ALONG WITH your normal Social Security retirement check.  That’s not true.  When a spouse dies, you either continue to receive just your own benefit, or you receive the one based on what your late spouse was entitled to – whichever is higher.  But not both.

This fact leads us to Social Security’s unintended consequences.

Let’s take a hypothetical example of a married couple, roughly the same age, receiving roughly the same Social Security benefits – call it $2,300 per month for one, and $2,100 per month for the other.  Almost $53,000 per year.  And let’s just say they’ve got another $20,000 annually in guaranteed pensions, which they’ve set up to last until the second of them dies.  So that’s $73,000 of income.  Everything looks great – until the first spouse passes away.

When that happens, the way Survivor benefits work, the smaller of the two benefits goes away.  Doesn’t matter which spouse dies – only the larger benefit will continue.  That means that the survivor in this example takes a $2,100 cut in pay each month, or about $25,000 per year.  That’s a 34% cut in total income.  That could be a real problem if this hypothetical couple relied on all of their income to get by each month.  And if they didn’t have any pensions or any other income, just Social Security, then it’s almost a 50% cut!  That hurts.

Now, if one spouse had a $2,300 benefit and the other only had an $800 benefit, then losing the smaller one isn’t quite as big a deal.  Not great, but probably workable.  Survivor benefits were put in place back in 1939, to make sure a surviving spouse would continue to have an income.  Because back then, usually only one spouse brought home a paycheck.  These days, with both spouses often working and thus relying on a benefit check at retirement, the Survivor benefits have less of a positive effect, especially when we’re dealing with spouses with roughly equal benefits.

So what can you do about this?  Have a plan.  In some cases, life insurance can help solve the problem, or you could look at pensionizing some of your income.  It all depends on your individual circumstances.  We deal with these kinds of issues and dilemmas every day at Lucia Capital Group, so if you want to find out how much at risk you might be in this area, just give us a call.  We’re here to help.