Wells Fargo Advisors LGBT Insight: Social Security and Domestic Partners

David Helverson, who holds the Accredited Domestic Partnership Advisor designation and is a Vice President Investment Officer with Wells Fargo Advisors in Chicago, addresses the unique financial challenges faced by domestic partners. This is the sixth article in a continuing series.

For most of us, the Social Security system provides a bedrock source of retirement income. According to a U.S. News & World Report article from 2011, Social Security makes up 38 percent of the total income of people age 65 and older and is the largest source of any type of retirement income. For nearly two-thirds of Americans age 65 and older, Social Security comprises more than 50 percent of their retirement income. Because Social Security is a federal program, the 1996 Defense of Marriage Act (DOMA) limits Social Security’s spousal benefits to legally married couples composed of one man and one woman. This limitation may require same-gender couples and unmarried domestic partners to consider income-replacement strategies for the surviving partner of a deceased Social Security recipient.

If both partners in a same-gender partnership worked and generated the qualifying 40 quarters of coverage, then each is considered “fully insured” and entitled to his or her own individual benefit. However, in 2010, 26 percent of women age 62 or older received a spousal benefit on the basis of her husband’s earning record. A nonworking spouse of full retirement age in a legally recognized marriage can qualify for a spousal retirement benefit equal to one half of the working spouse’s full retirement amount. However, under DOMA, this spousal benefit would not be available to a same-gender partner who chooses to remain out of the workforce to raise children or tend to housekeeping and home maintenance. Income-replacement strategies such as life or disability insurance might be considered to reduce or eliminate the potential loss of income.

The Primary Insurance Amount (PIA) is the basis for the retirement or disability benefit that is paid to an individual. This amount, in turn, is determined by a figure known as Average Indexed Monthly Earnings (AIME). It is not unusual for two individuals’ PIAs to be different due to different average compensation over each participant’s respective working life or the age at which the participant chose to receive the benefit. In legally recognized marriages, a surviving spouse will continue to receive his or her own monthly retirement benefit or that of the deceased spouse, whichever is higher, as well as a one-time death payment of $255. Because of DOMA, these provisions and benefits are NOT available to a surviving domestic partner. Recognition of such distinctions before and during retirement may require same-gender couples to plan their estates to replace a potential loss of income for the surviving partner.

There are situations in which a family composed of domestic partners could receive survivor benefits. If two partners have adopted children together and one partner dies, the eligible child’s benefit will be based upon the deceased parent’s PIA. Should the surviving partner subsequently die and the child is eligible for the second partner’s benefit, then the child will receive a benefit based on the partner with the higher PIA.

Although more extensive information can be found on the Social Security Administration’s website (www.ssa.gov), each person’s situation and finances are unique and involve different choices. Same-gender couples and unmarried domestic partners might benefit from a thorough discussion with a trusted advisor familiar with Social Security provisions and benefits.

Wells Fargo Advisors is not a tax or legal advisor. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and separate nonbank affiliate of Wells Fargo & Company, No. 25 on the 2013 DiversityInc Top 50.

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