5 Things Women Need to Understand About Social Security

Jay Gershman |

As a demographic, women derive more benefit from Social Security than men. But to take full advantage of those benefits, they need to be more savvy about Social Security’s special features.

Social Security is an extremely valuable retirement resource for women. It’s valuable for men too, of course, but as a demographic, women derive more benefit from this government-sponsored retirement program. To gain these benefits, however, women need to understand some of Social Security’s special features in order to take full advantage of them.

The lifetime value of monthly benefits

Social Security is one of the few sources of retirement income that keeps up with inflation and continues for life. The longer you live, the more benefits you stand to receive over your lifetime. To fully understand this benefit, women should consider their claiming decision in the context of their life expectancy.

Claiming reduced benefits at 62 may give a woman a few more checks in her 60s, but it will not give her the most lifetime income if she lives into her 80s or beyond. The following chart shows how much more in total benefits she could receive if she were to claim at 70 rather than 62. One should resist the temptation to grab benefits as early as possible and choose the strategy that will give them the highest lifetime benefits.

Figure 1: The Long-Term Value of Waiting to Take Social Security Benefits

Source: Elaine Floyd

The value of extra work

Social Security benefits are based on an individual’s lifetime earnings. If women have had some gaps in their earnings record due to low-paying jobs earlier in their career or taking time out of the work force to raise children, they may have an opportunity to significantly improve their Social Security benefit.

Let’s look at two hypothetical women, Susie and Sally, who are both 62 now. Both women worked for three years immediately after college and then stopped working at age 25 to stay home with their children. At age 43, they each went back to work earning about $95,000 in today’s dollars (75% of the Social Security wage base). When their Social Security Primary Insurance Amount (PIA) is calculated at age 62, it comes out to $1,049.

That is, if they were to stop working now and file for benefits at their full retirement age (FRA) of 66, they would receive $1,049 per month (not counting cost-of-living adjustments, or COLAs, between now and then). But let’s say they understand the value of lifetime benefits if they delay to age 70. If they file at 70, their benefit, including cost-of-living adjustments and four years of 8% annual delayed credits, will be $1,700. That’s if they stop working at 62.

But let’s say Sally decides to keep working to age 70. As long as she continues to work, her Social Security benefit will be recalculated. When she turns 70, her new PIA will be $2,449. Adding the delayed credits gives her an age-70 benefit of $3,233 compared to Susie’s $1,700. If both women live to age 95 and COLAs average 2.6%, Susie’s income will now be $2,841 per month compared to Sally’s $5,401.

As for total lifetime benefits, by age 95 Susie will have received a total of $560,577 compared to $1,065,786 for Sally. By understanding the value of extra work, Sally was able to greatly increase her Social Security benefits and make up for some of those lost wages when she stayed home with her kids. (And this analysis doesn’t even consider the earnings themselves, which may have allowed Sally to add to her personal retirement accounts.)

The value of spousal and survivor benefits

When Social Security was first instituted in 1935, most married women didn’t work. So in 1939, spousal and survivor benefits were added to give non-working wives a Social Security benefit based on the earning records of their husbands. Today, most women do work. But they still may be eligible for spousal and/or survivor benefits based on the earnings record of their current or previous husband.

For example, if a woman was born before Jan. 2, 1954, she may be able to collect a spousal benefit (or divorced-spouse benefit, if her previous marriage lasted at least 10 years and she is currently unmarried) while her own benefit builds delayed credits to age 70. This could give her as much as $60,000 in additional benefits. Or, a widow, regardless of her birthdate, may be able to take a survivor benefit and switch to her own higher benefit later—or vice versa. These auxiliary benefits can give women extra income and also allow them to maximize their own retirement benefit.

But the rules are complicated and they are not consistent for everyone, so women will very likely need some information and guidance.  A qualified advisor can help them understand the benefits available to them and the strategies that will enable them to maximize those benefits.

Why the husband’s claiming decision directly affects the wife

The age at which a woman’s husband claims his Social Security benefit has a direct bearing on the survivor benefit she may receive after he dies. Let’s face it: men have shorter life expectancies than women. If he dies first, she may step into his Social Security benefit as her survivor benefit, assuming it is higher than her own benefit.

How can a husband maximize his benefit—first for himself and then for his widow? By starting it at age 70. Husbands in poor health may want to claim early to get all the checks they can while they are still alive. But this causes their widow’s survivor benefit to be substantially less than if they claimed at 70 (or if they die before claiming, if before age 70). The Social Security claiming decision for both spouses should be up to the spouse expected to live the longest. Usually that’s the woman.

The rising cost of Medicare

Maximizing Social Security becomes all the more important when you consider that Medicare Part B premiums, which are taken out of Social Security benefits, are rising faster than inflation. Although there is a hold-harmless provision that prevents your Social Security check from going down in any year that the Medicare premium rises by more than your COLA amount, your Social Security benefits are likely to be eroded over time by higher Medicare premiums.

HealthView Services, a maker of health care projection software, projects that health care inflation will rise an average of 5.47% annually for the foreseeable future. That is almost triple the recent historical U.S. inflation rate and more than double the annual projected Social Security COLAs. These trends underscore the value for women of working longer in order to stay on their employer health plan as long as possible (assuming it’s a better plan than Medicare), delay the start of Social Security to maximize those benefits, and add to their own retirement savings for an extra cushion later on, when they might need it.