Frank Napolitano, J.D., CPF®, CFA®, is a Senior Financial Planner at Sensible Financial Planning. He is a founding member of the San Diego chapter of the National Association of Divorce Professionals and has been a featured speaker at their annual conference.
In this series of articles, I will describe how divorce can affect Social Security benefits. In this first article I will briefly review Social Security and show how divorce impacts benefits based on one’s own earnings. In follow-up articles I will explain how ex-spouses may be eligible for several different parts of the program and how when they file can impact benefits.
Social Security is a very complex system. Some academics spend their entire careers writing about it. At Sensible Financial we have written about it extensively, most recently in an article originally published on Forbes explaining how retirement benefits are calculated. I could never distill all the information that might affect an individual into a single article. Exceptions are numerous and individual situations vary greatly. Navigating the rules takes great care. Therefore, I strongly suggest working with a professional before making any decisions that could impact your benefits.
Several online resources may also be helpful:
- ssa.gov and in particular the section on Retirement Benefits
- Larry Kotlikoff’s Ask Larry column archived on PBS’s website
Social Security’s Many Parts
In Understanding the Benefits, the Social Security Administration describes how Social Security is a “pay as you go” system.
The current Social Security system works like this: when you work, you pay taxes into Social Security. We use the tax money to pay benefits to:
- People who have already retired
- Disabled people
- Survivors of workers who have died
- Dependents of beneficiaries
Tax revenue goes to people currently on benefits. Nobody has a personal Social Security account. When people now working retire, the benefits they receive (hopefully!) will come from people then working and paying into the system.
Social Security comprises several different parts. Retirement benefits are certainly the largest, but other parts are important as well. I find it helpful to think about Social Security benefits in terms of four categories (I’ve excluded Medicare for simplification):
- Retirement benefits – supplemental income in retirement, starting as early as 62
- Disability benefits – an income benefit for those who fit the definition of “disabled” under Social Security
- Dependent benefits – for qualified family members under special circumstances
- Survivor benefits – an income benefit for certain family members upon a covered worker’s death
Retirement and disability benefits are direct benefits in the sense that they are based on each taxpayer’s earnings and the Social Security taxes they paid into the system. The last two categories provide cash benefits to a worker’s family members. These auxiliary benefits are based on the worker’s Social Security record, but do not affect the covered worker’s benefit in any way.
The types of benefits most relevant to divorced spouses are retirement benefits, spousal benefits (a type of dependent benefit), and survivor benefits. The (complex) interplay among these benefits can have a huge impact on a divorced spouse’s lifetime Social Security income.
Divorce Cannot Reduce a Worker’s Retirement or Disability Benefits
Divorce has no effect on a taxpayer’s own Social Security retirement or disability benefits. When a couple divorces, each former spouse keeps their own Social Security earnings history. If a taxpayer were entitled to a retirement benefit on their own record prior to divorce, they would be entitled to that same benefit amount after divorce. The same is true for disability benefits.
Unlike most other property, Social Security cannot be divided or negotiated between divorcing spouses. This is because divorce decrees fall under state law, while Social Security, including benefit eligibility, amount and entitlement, is part of federal law which supersedes state law. Put simply, Social Security is never part of the divorce decree.
Divorce Can Impact Auxiliary Social Security Benefits
By contrast, divorce can impact auxiliary Social Security benefits, such as spousal and survivor benefits. Married spouses are entitled to these benefits with a few restrictions. However, divorced spouses must meet strict requirements to receive benefits on an ex-spouse’s record.
In my next article I will explain Social Security’s requirements for divorced spousal and survivor benefits and illustrate the potentially significant impact these benefits can have on a divorced spouse’s personal finances.