Social Security Q&A: Can Unearned Income Hurt My Wife’s Benefit?

Happy retired couple
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This week’s question is from Sheldon:

Let’s say a wife is 62, retired and wants to claim her Social Security benefit. The husband is younger and still working. The wife now has no wages, but together with the husband has significant interest and dividend income.

How will the earnings test work? Is it just on her individual wages (none), or does unearned income count as well?

How interest and dividends impact benefits

Sheldon, the good news here is that only earned income is subject to the earnings test. Interest and dividends do not affect your Social Security benefits.

However, there are several other aspects to your question that are important when understanding the couple’s situation, and how it can impact their benefits.

First, the wife cannot claim her spousal benefit until her husband claims his benefit first. Since the husband is not yet 62, he cannot claim his benefit yet. Therefore, she cannot get a spousal benefit.

Secondly, even when he reaches 62, it may be unwise for him to claim his benefit. He will be subject to the earnings test, and this will also affect her spousal benefit.

Until he gets close to his full retirement age (FRA), any earnings above $17,640 will be subject to the earnings test, and benefits will be reduced by $1 for every $2 earned. That figure is based on 2019 limits set by the federal government.

Let’s suppose the husband would get a benefit of $2,000 per month and his wife $1,000 per month for a total of $36,000 per year. If he makes more than $89,860, then the family benefits would be reduced to zero until he gets close to his FRA.

Once the husband reaches FRA, he is no longer subject to the earnings test. But the wife, because she is older than her husband, will have to wait until his full retirement age before she is no longer subject to the earning test.

If the husband does claim before his FRA and experiences a reduction because of the earnings test, he will get a larger benefit when he reaches FRA. The formula for this adjustment is complicated, but the basic idea is that for every month he loses a benefit, the benefit at full retirement age will be adjusted upward.

In the example above where he loses his entire benefit, the benefit he would receive at FRA would be the same as the benefit he would have received if he claimed at FRA instead of the benefit he would have received if he claimed earlier.

There is no equivalent adjustment for the spousal benefit. The money the wife loses because of the earnings test is just lost.

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About me

I hold a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. I now do the same at Gallaudet University.

In 2009, I co-founded, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.

Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the Social Security Administration alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.

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