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A reader from Ohio asks how inflation adjustments apply when a reduced Social Security benefit converts to a spousal benefit.
“If my wife’s Full Retirement Age (FRA) benefit is $1,500 and her early benefit at 62 is $1,000, her $1,000 benefit will grow with inflation. (I have rounded numbers to make it easy.) For my question, assume that my FRA benefit will be $4,000.When I start collecting Social Security at 70, she will get half of my FRA benefit ($2,000). Since she is receiving a reduced benefit, will her benefit be reduced by a static $500 per month, or will the $500 be adjusted upward for inflation? Or does the spousal benefit get reduced by 30%?”
Instead of answering your questions directly, I will describe how this situation works. I think that will be the most straightforward explanation to follow.
So, your wife is clearly eligible for a potential spousal benefit of $2,000. Where do I get that? You state your Full Retirement Age (FRA) benefit is $4,000, so she is eligible for $2,000, whether she has her own benefit or not.
The next question is, “Does she have her own benefit?” She clearly does. If her benefit is greater than the spousal benefit, greater than $2,000 in this case, she would never get a spousal benefit under the current rules. She would instead collect her own.
If her benefit is less than the spousal, which at $1,500 it is, they will pay her the $1,500 first and then pay her a $500 additional “spousal offset” to get her up to the full $2,000 once you have claimed. Now, to get these amounts, she has to have reached her FRA before claiming. Most of you realize your Social Security is reduced if you claim it early (before your FRA). That’s the situation you are describing, where she’s claiming at 62 instead of 67, getting only $1,000 of her $1,500.
But later, when you claim at 70, that unlocks the door to her getting a spousal benefit. Well, that spousal offset of $500 is still what she will be awarded on top of her benefit, but her benefit has been reduced. So she will get her own $1,000, plus the $500 spousal offset, assuming she’s at her FRA or older when you unlock the door to the spousal benefit. I’m assuming that’s the case since you’re waiting until 70. However, if she is much younger than you, even the spousal might be reduced if she claims it before 67.
So, think of them as two separate things, each with their own claiming age. One or the other (or both) could be reduced.
In your scenario, only her portion of the benefit is being reduced from $1,500 to $1,000. However, when you claim, she doesn’t bump up to the full $2,000 she could potentially receive because she has now permanently reduced her benefits by claiming at age 62 instead of 67. Social Security uses “PIA” in its formulas: the Primary Insurance Amount, or the amount one would be eligible for at the time of one’s FRA. In your case, they’ll grant her the original $500 offset she is eligible for because half of your $4,000 PIA ($2,000) is $500 more than her $1,500 PIA.
So that’s what’s going to happen. Your wife will get $500 added to her $1,500. Now, as time goes by, both of those numbers are increased by inflation. None of this is static, so these benefits – spousal benefits, your own benefits, all benefits – increase with Cost of Living Adjustments (COLAs) in the years post-62. All of this will be adjusted over time. We’re talking in today’s terms to walk you through it.