Social Security and our world of no-fault divorce
Social Security was set up so that a married couple that put $X in would get more cash than a single worker who put $X in (see Social Security: How do you run a retirement system for people who spend like drug dealers? for how this tends to make Social Security a system that takes from the poor and gives to the rich; part of how we tax the rich more heavily than almost any other country, but don’t really help the poor).
Back in 1935 when Social Security was established, however, Americans couldn’t envision the world of no-fault (“unilateral”) divorce that would be established by 1980 in nearly every state (see “History of Divorce”).
What happens when you combine Social Security with a no-fault, no-shame divorce system? Get What’s Yours: The Secrets to Maxing Out Your Social Security” explains:
Social Security provides incentives, sometimes very strong incentives, to change your marital status. There are, depending on your circumstances, reasons to get married, reasons to stay married, and incentives to divorce, to remarry, and not to remarry. These decisions hinge on many factors, of course. But play your Social Security marital status cards right and it can mean making or keeping more money, and, in some cases, a lot more money. Play them wrong and you can get seriously singed for the rest of your life.
It turns out that, for Americans who get divorced, the median length of first marriages—the length of time by which 50 percent of them end—is 8 years. That means more than half of the divorced may be making a big, if not huge, financial mistake with regard to future Social Security benefits, especially our female readers. Women currently file roughly two-thirds of divorce cases in the United States, but women are the prime beneficiaries of sticking out a marriage for 10 years. The simple fact is that you need to stay married 10 years and not a day less to be able to collect divorced spousal and divorced survivor benefits as an ex. So, we caution you not to officially unhitch before a decade’s up without at least considering these costs.
The new [Obama-era] law encourages divorce, as we’ll explain in Chapter 11. It’s true that Paul and Jan would have benefited had they gotten divorced, because each could have taken spousal benefits on the other’s record. But the way the law reads now, the only way for same-aged couples who were 62 by January 1, 2016, to do what Paul did (collect a full spousal benefit while waiting till 70 to take his retirement benefit) is to get divorced two years before they reach full retirement age—an amicable divorce (amicable to the point of intimate, even). Then, after six years of equally amicable cohabitation, they can reunite, maybe even throw a new wedding to celebrate. Want to guess how much they could afford to spend on the event just from having collected spousal benefits on each other for the four years between full retirement age (66) and age 70? If both were top earners, $128,000 in 2016 dollars. If they were not top earners, but getting only the average benefit these days—$15,000 a year—they would still have collected $60,000 over the four years.
People who divorced after being married for 10 or more years—and thus became eligible for ex-spousal benefits—have an advantage over married couples under the new law, provided they are grandparented against post-FRA deeming. If they were at least 62 before January 2, 2016, they can file for a full ex-spousal benefit when they reach their FRA and then wait till 70 to collect their retirement benefit, which will have grown all the while. They can do this only if their ex is at least 62 and they’ve been divorced for two years when they do this, or if their ex already is receiving retirement or disability benefits or has filed for retirement benefits and suspended them. So then does it pay to get divorced?
As before, Gene and Joan were both too young to file and suspend before the end of April 2016. But, being 62 before January 2, 2016, they are both grandparented so that neither will be deemed when they reach FRA. If they remain married, as we’ve said, one will have to file for their retirement benefit earlier than 70 to enable the other to file a restricted application just for spousal benefits, while letting their own retirement max out until age 70. However, as we suggested in Chapter 1, they could cook up some irreconcilable differences and get divorced at age 64. Then, at age 66, each could collect full divorced spousal benefits on the other’s work record while letting their own retirement benefits grow. If they were very high earners, this could mean $120,000 more just for getting divorced. After 70, they could reconcile those irreconcilable differences and remarry. Meanwhile, between 64 and 70, they could remain together. If anyone asks why, they could say they were attempting to patch up their relationship.
THE THIRD INCENTIVE IS A PERVERSE ONE: TO GET REMARRIED EVERY DECADE Having been married for a decade, once you get divorced, you retain the right to potentially collect divorced spousal and divorced survivor benefits from your ex’s work record. After being married for a decade, staying married won’t increase what you can receive based on your spouse’s earnings, whether dead or alive. So, the gold diggers out there might consider shopping for a second spouse, preferably a high-earning one, to marry for a decade and then divorce. Social Security generally won’t let you collect more than one benefit at a time. But if you have multiple exes on whom you can collect, you can collect on the one who provides the highest benefit available at any given time. Will getting remarried and staying remarried wipe out your ability to collect spousal and survivor benefits on your prior spouse’s work record? Yes, when it comes to divorced spousal benefits; no, when it comes to survivor benefits, provided you remarry after 60. And if you remarry before 60 and an ex dies, you can get divorced if it pays to receive a survivor benefit from that first ex. Then you remarry after turning 60.
And one of the best parts of spouse-hopping is this: when you start collecting early on a different former spouse’s work record, Early Retirement Reductions from taking benefits on another spouse at an earlier date don’t carry over, as we will illustrate shortly.
Why would anyone not want to remarry? Because remarrying wipes out your ticket to divorced spousal benefits on any ex’s work record to whom you were married for at least a decade. Remarrying before age 60 also wipes out your eligibility for survivor benefits on any deceased former spouse’s work record for as long as you stay remarried. So be careful before you strategically remarry.
A group of people who stay married will receive less cash from the government than a group that divorces:
Divorce Benefits Are Not Subject to the Family Maximum Benefit Benefits to divorced ex-spouses are not restricted by the FMB and don’t affect what your current spouse and children can receive. This secret means that the spousal benefit for your divorced ex-spouse may be higher than for your current spouse.
How can it work in practice?
It is time at last for the story of William H. Gigolo, our hypothetical master of Social Security’s marital status game. He worked not a day in his life (so any excess spousal benefit will also be a full spousal benefit), but instead lived off the relatively high earnings of three lovely ex-wives—call them Sarah, Sally, and Suzie. In each case, William waited until their 10th anniversary, chose a romantic restaurant, and over dessert, announced he was filing for divorce. Positing William as a sociopath, we picture him pleased to have lived off successive exes and helped himself to half their assets thereafter. Now 62 and single for 2 years, he remains attractive to women,
Since a wife has to be at least 62 for the husband to collect spousal benefits, William was careful to marry at least one ex older than himself. This ex, Sarah, is 64 and the lowest earner. The next-highest earner is Sally, 60. Suzie is only 56, but she’s earned more than the others. To maximize his lifetime Social Security benefits, William files for a divorced spousal benefit at 62 and starts to collect half of Sarah’s full retirement benefit, although reduced by 30 percent because he takes it early. Then, after 2 years, when Sally turns 62, William files for a divorced spousal benefit based on her earnings record. And why not? Since he’s now eligible to collect on two exes, he can file for benefits on both. He won’t get two divorced spousal benefits—just the larger of the two. But since Sally’s full retirement benefit is larger than Sarah’s, he gets hers. And here’s another advantage from William’s perspective: he’ll be able to collect half of Sally’s full retirement benefit, but it will be reduced by only 13.3 percent, not 30 percent! Why? Because William is now 64 and his early claiming reduction is smaller; that is, the reduction in a spousal benefit from claiming early does not carry over from one ex to another. Yes, he claimed 4 years early (before his FRA) on the divorced spousal benefit provided by Sarah, but he is doing so only 2 years early on the divorced spousal benefit provided by Sally. So far, so good, as long as you have no scruples. We have already stipulated that William doesn’t. So his cash-out plan is working. And here’s a yet more perverse part three. When Suzie reaches 62 and William hits 68, he can start collecting a completely unreduced divorced spousal benefit on Suzie’s heftier earnings record since he doesn’t start collecting this particular benefit (which exceeds the other two) until or after he reaches his FRA. (In William’s case it’s after.) Is William done with his optimization? Not necessarily. Let’s fast-forward to his 70th birthday and suppose that Sally, who waited until FRA to start collecting her benefit, dies. Sally’s full retirement benefit, while lower than Suzie’s, exceeds the half of Suzie’s on which William has most recently been collecting. So William can now file for and begin collecting a completely unreduced divorced widower benefit on Sally’s record. That benefit would be equal to 100 percent of Sally’s full retirement benefit. Fast-forward again. William is now 76 and Suzie dies, having also waited until FRA to collect her retirement benefit. What might William do? He files for an unreduced survivor benefit based on Suzie’s earnings record. Fast-forward one last time. William is now 88. He’s met a very lovely 94-year-old named Sandra, who earned more than any of the exes and is on her last legs. William realizes that he can marry Sandra and, after 9 months, qualify for survivor benefits on Sandra’s earnings record. He whisks Sandra off to Las Vegas for a quickie marriage and, 9 months to the day after their nuptials, Sandra falls and breaks her hip. Her last leg gives out. So does the rest of her. William leaves the funeral early in order to get to the local Social Security office before it closes and file for a full (unreduced) widower benefit on Sandra’s account. This appears to be William’s last Social Security play, but who knows? He’s still got his looks and, as you read this, he’s on Match.com checking out his options. Considering that there were 3.2 million women aged 85 and older in 2012, and only 1.8 million men of those ages, William’s pickings are far from slim.
One of the authors says this whole system has developed too many special cases. Certainly the designers don’t seem to have imagined the day when Americans would be marrying or divorcing with an eye to the cash incentives. The author
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