Correct formula for determining reduction in SS spousal benefit

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bestoftimes
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Correct formula for determining reduction in SS spousal benefit

Post by bestoftimes »

I thought I understood how spousal benefits were calculated when the spouse claiming spousal benefits files prior to their FRA, but became confused when I encountered what appeared to be contradictory methods for determining the reduction. I am hoping that someone here can help me to understand how this should be done. I had thought the formula was fairly straight forward, and maybe it is, and I am just missing a simple point and confusing myself. (it wouldn’t be the first time)

Using these metrics for example:


Spouse A born 1958 - PIA $3000

Spouse B born 1955 - PIA $1000

Spouse B files in 2021 for own benefits 7 months prior to FRA and receives a reduced benefit of $961
(7 months times a 5/9 percent reduction for each month for a total reduction of 35/9%)

In 2023 Spouse A will file for own benefits at age 65 and Spouse B (who has reached FRA) will then claim spousal benefits


How is the total benefit (spousal plus own) for spouse B to be calculated?

I thought that the method (or formula) to determine the total benefit for spouse B was: (1/2 spouse A’s PIA - spouse B’s PIA) + spouse B’s reduced benefit. Very simply:
($3000 / 2 - $1000) + $961 = $1461

However, using the calculator on the SS website https://www.ssa.gov/OACT/quickcalc/spouse.html gives a different total benefit for spouse B. There it shows that the total benefit for spouse B would be 47.57% of spouse A’s PIA. The result being:
$3000 * 47.57% = $1427

Adding to my confusion, is my (mis)understanding of the second example shown here https://articles.opensocialsecurity.com ... lculation/ on Mike Piper’s website, where it seems to show that the percentage of reduction for filing early be applied to the difference of half of the higher earner’s PIA and the lower earner’s PIA, then that amount being added to the lower earner’s benefit. Which, using my example data above would, I believe, look like:
($3000 / 2 - $1000) * (100% - 7 * 25/36%) + $961 = $1437

(Note: I am by no means attempting to in any way denigrate Mr. Piper’s example or explanation. I am sure that my confusion regarding his example is just that, my confusion and lack of understanding. I have nothing but respect for Mr. Piper who is so generous with his knowledge, and so willing to freely provide the tools and resources on his website.)

I suspect that possibly there is a distinction between a spouse filing early for their own benefits, then filing at or after their FRA for spousal benefits, and a spouse filing prior to FRA for both their own and spousal benefits at the same time, that accounts for the different ways of calculating the reduction in benefit. I just haven’t been able to find a clear (to me) explanation to this effect.

Thank you for your help.
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David Jay
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Re: Correct formula for determining reduction in SS spousal benefit

Post by David Jay »

bestoftimes wrote: Sun Dec 05, 2021 1:27 pmAdding to my confusion, is my (mis)understanding of the second example shown here https://articles.opensocialsecurity.com ... lculation/ on Mike Piper’s website, where it seems to show that the percentage of reduction for filing early be applied to the difference of half of the higher earner’s PIA and the lower earner’s PIA, then that amount being added to the lower earner’s benefit. Which, using my example data above would, I believe, look like:
($3000 / 2 - $1000) * (100% - 7 * 25/36%) + $961 = $1437
You appear to have used the second section, entitled: "Spousal Benefit Reduction Due to Early Entitlement" (meaning filing for spousal before FRA). Mike's example is for filing for spousal before FRA. When filing before FRA, there is a double reduction. One reduction for personal benefit ($961 instead of $1000) for filing for personal benefit before FRA and a reduction in spousal benefit (4.86%) for filing 7 months before FRA.

The section that covers your question is the first section, entitled: "Spousal Benefit Reduction Due to Own Retirement Benefit". When filing for spousal @FRA (or later), I believe that your formula is correct.

[Edit] It appears that the SSA page also is referencing filing for Spousal prior to FRA, because it also references 25/36% per month, which is the reduction for claiming spousal before FRA (note it is the same as Mike's fraction).
Last edited by David Jay on Sun Dec 05, 2021 8:41 pm, edited 3 times in total.
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David Jay
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Re: Correct formula for determining reduction in SS spousal benefit

Post by David Jay »

BTW, what Laker is that in your avatar?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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bestoftimes
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Re: Correct formula for determining reduction in SS spousal benefit

Post by bestoftimes »

David Jay wrote: Sun Dec 05, 2021 8:31 pm You appear to have used the second section, entitled: "Spousal Benefit Reduction Due to Early Entitlement" (meaning filing for spousal before FRA). Mike's example is for filing for spousal before FRA. When filing before FRA, there is a double reduction. One reduction for personal benefit ($961 instead of $1000) for filing for personal benefit before FRA and a reduction in spousal benefit (4.86%) for filing 7 months before FRA.
Thank you for pointing this out. I wasn't clearly understanding the example, but it makes sense to me now. Somehow, I was conflating filing early for one's own benefit and filing early for a spousal benefit. I hadn't come across an explanation before that made me think of it as a double reduction. Thanks for your clarification.

The laker in my avatar is none other than the Edmund Fitzgerald. It's from a pencil drawing by artist Tony Strublic.

Will
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David Jay
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Re: Correct formula for determining reduction in SS spousal benefit

Post by David Jay »

My wife began collecting SS @62, I am delaying. My “Just in case” letter explains that she should wait to FRA to collect widow’s benefits to avoid the early filing penalty.

I knew the ship was of that era with the forward pilot house, but there are a lot of Lakers - we normally visit the Soo locks when we’re in the U.P.
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Re: Correct formula for determining reduction in SS spousal benefit

Post by #Cruncher »

bestoftimes wrote: Sun Dec 05, 2021 1:27 pm
  1. I thought that the method (or formula) to determine the total benefit for spouse B was: (1/2 spouse A’s PIA - spouse B’s PIA) + spouse B’s reduced benefit. Very simply:
    ($3000 / 2 - $1000) + $961 = $1461
  2. However, using the calculator on the SS website https://www.ssa.gov/OACT/quickcalc/spouse.html gives a different total benefit for spouse B. There it shows that the total benefit for spouse B would be 47.57% of spouse A’s PIA. The result being:
    $3000 * 47.57% = $1427
  3. Adding to my confusion, is my (mis)understanding of the second example shown here https://articles.opensocialsecurity.com ... lculation/ on Mike Piper’s website, where it seems to show that the percentage of reduction for filing early be applied to the difference of half of the higher earner’s PIA and the lower earner’s PIA, then that amount being added to the lower earner’s benefit. Which, using my example data above would, I believe, look like:
    ($3000 / 2 - $1000) * (100% - 7 * 25/36%) + $961 = $1437
  1. $1,461 is correct.
  2. I believe the $1,427 assumes $0 PIA instead of $1,000.
  3. Confirming David Jay above, $1,437 assumes spousal as well as own benefit begin 7 months before Full Retirement Age (FRA). If I tell Open Social Security to begin spousal after FRA -- as you assume -- it gets the same $1,461 total benefit ($11,533 + $6,000 per year). To see, click here, click [Submit], then enter following for specified claiming ages and re-submit: [ * ]

    Code: Select all

    Your month/year to claim retirement benefit:           12/2028
    Your spouse's month/year to claim retirement benefit:   5/2027
    Your spouse's month/year to claim spousal benefit:     12/2028
* When I tried using the ages from the original post, the Open Social Security calculator asked for ages to suspend and then unsuspend benefits. To avoid this complication I used the equivalent months of birth and claiming shown here:

Code: Select all

                ----- OP Case -----     --- Equiv Case ----
                Spouse A   Spouse B     Spouse A   Spouse B
PIA                3,000      1,000
Born            Dec 1958   Dec 1955     Dec 1963   Dec 1960

FRA               66 8mo     66 2mo       67         67
Age claims        65         65 7mo       65         66 5mo

FRA mo          Aug 2025   Feb 2022     Dec 2030   Dec 2027
Month claims    Dec 2023   Jul 2021     Dec 2028   May 2027
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Re: Correct formula for determining reduction in SS spousal benefit

Post by bestoftimes »

#Cruncher wrote: Mon Dec 06, 2021 12:43 pm A. $1,461 is correct.
Thank you for confirming this.

#Cruncher wrote: Mon Dec 06, 2021 12:43 pm B. I believe the $1,427 assumes $0 PIA instead of $1,000.
That makes sense now. If spouse B's PIA is $0:
($3,000 / 2 + 0 ) * (100% - 7 * 25/36%) = $1,427

#Cruncher wrote: Mon Dec 06, 2021 12:43 pm C. Confirming David Jay above, $1,437 assumes spousal as well as own benefit begin 7 months before Full Retirement Age (FRA). If I tell Open Social Security to begin spousal after FRA -- as you assume -- it gets the same $1,461 total benefit ($11,533 + $6,000 per year). To see, click here, click [Submit], then enter following for specified claiming ages and re-submit: [ * ]

Code: Select all

Your month/year to claim retirement benefit:           12/2028
Your spouse's month/year to claim retirement benefit:   5/2027
Your spouse's month/year to claim spousal benefit:     12/2028
Yes, that also makes perfect sense now. If I take it one step further and alter the inputs thusly:

Code: Select all

Your month/year to claim retirement benefit:           5/2027
Your spouse's month/year to claim retirement benefit:   5/2027
Your spouse's month/year to claim spousal benefit:     5/2027
It then too, confirms that having the spousal and one's own benefit beginning 7 months before FRA yields the $1,437 amount ($11,533 + $5,708 per year).


#Cruncher wrote: Mon Dec 06, 2021 12:43 pm
* When I tried using the ages from the original post, the Open Social Security calculator asked for ages to suspend and then unsuspend benefits. To avoid this complication I used the equivalent months of birth and claiming shown here:

Code: Select all

                ----- OP Case -----     --- Equiv Case ----
                Spouse A   Spouse B     Spouse A   Spouse B
PIA                3,000      1,000
Born            Dec 1958   Dec 1955     Dec 1963   Dec 1960

FRA               66 8mo     66 2mo       67         67
Age claims        65         65 7mo       65         66 5mo

FRA mo          Aug 2025   Feb 2022     Dec 2030   Dec 2027
Month claims    Dec 2023   Jul 2021     Dec 2028   May 2027
My attempt at altering the ages to get around the "suspend and unsuspend" advice was not nearly as successful, but looking at your example I see now where I was going wrong.


Thank you both, #Cruncher and David Jay, for sharing your knowledge and taking the time to patiently explain this to me in a way that I could understand.

Will
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