How Social Security Works for Couples

How does Social Security work for couples where both people worked? Do you receive benefits based on combined incomes or two separate incomes?

Matt

Hey Matt,

Social Security is a benefit of incredible importance to a significant number of people in this country, so it's a bit odd that very few people understand how it works. I promise you, Matt, you're not in the minority when it comes to wondering how (and even why) you end up with the benefit you get. I could answer your question with just a few sentences, but I think there is a greater value in going a bit deeper on this topic. Hang with me until the end, though, and you'll not only get your answer but also be a step ahead of most of your friends when it comes to understanding Social Security.

First, Social Security is funded by both you and your employer. You pay 7.65% of your gross income each check towards your Social Security/Medicare benefit. That means that if you’re an entrepreneur, you’re not only going to pay the “employee” side of the bill, but the “employer” side as well. Good times! Once you make more than $128,400 (in 2018), you no longer have to pay the Social Security tax on income above that amount. Medicare, however, is a different story. You’ll need to pay that tax on every penny you earn (as will your employer).

If you’re paying this tax, it most likely means you’ve got a job. But, just because you’re paying this tax doesn’t mean you’re eligible to receive a benefit when you retire. Yeah, you read that right. Not only do you have to pay the tax, you have to pay it long enough to gather the required “work credits”. (Gathering work credits sounds like it could be the object of the worst video game ever.) Prior to 1978, employees would gain a credit for each quarter of the year they earned an income of $50 or more. The dollar amount required to qualify for credit is now tied to a separate calculation, and workers can now potentially earn the maximum of 4 annual credits in one quarter of the year.

“So, how many credits do I need to be eligible for a benefit when I retire?”

Forty. You’ll need to accumulate a minimum of 40 credits during the course of your life in order to receive a benefit that you contributed to without choice. Again, that previously meant 40 quarters, or 10 years, of work. Theoretically, you could now gain the qualification with one month of work in 10 separate years.

Next, now that you’ve paid into the fund and qualify for a benefit, it’s reasonable to want to know what your benefit is going to be based on. Your benefit will be calculated on your previous 35 highest years of earnings indexed to account for changes to the average wage. That means if you work for 40 years, the 5 years with the lowest indexed wages won’t be considered for the calculation, thereby increasing your average wage. Once the 35 years in question are determined, the average indexed monthly earnings (AIME) are calculated. Finally, the AIME is run through yet another calculation that determines your monthly benefit, or Primary Insurance Amount. The interesting thing about this formula is that the more money you make, the smaller the percentage of your income is covered. For example, someone making $30,000 will receive a benefit that replaces a much higher percentage of their income in retirement than someone who makes $110,000.

What you probably noticed in that last paragraph was that the benefit calculation is based on your individual earnings over your lifetime and not a combination of you and a spouse. I could easily end this response there and it would be accurate. However, you should know that it is possible to apply for, and receive, a “spousal benefit” if you are a current, widowed, or ex-spouse based on your spouse’s benefits. Yes, that’s right. There are circumstances under which a person may claim a benefit based on their ex’s benefit.

Finally, the much-anticipated answer to your question is this: if both people have worked and earned their “credits,” then their monthly benefit will be initially calculated based on their individual earnings history. If a spousal benefit is available to the person, and the eligible spousal benefit is larger than their own full benefit, then Social Security will pay them the larger of the two. In other words, the benefit calculations are based on two separate incomes... unless it’s more advantageous to base it off of one.

Simple, right?