Given the high rate of divorce and remarriage, it's not unusual for a retirement-age father to have minor dependent children in his second family. And when dad becomes eligible for Social Security retirement benefits, his wife and children may be entitled to benefits, too.
An eligible child can be a biological child, adopted child, stepchild or under certain circumstances, a dependent grandchild.
These auxiliary payments do not decrease the worker's retirement benefit. In fact, the value of the benefits a family may receive, added to the worker's benefit amount, may help determine if claiming benefits sooner rather than later may be more advantageous, the Social Security Administration states on its website.
For example, children are eligible to receive benefits worth up to half of the parent's amount until they are 18, or up to age 19 if they are still in high school. And a spouse of any age may be entitled to benefits, too, if he or she is caring for a child under age 16 who is receiving Social Security benefits on a parent's earnings record.
So a father who is 62, no longer working and who has a 14-year-old child may want to claim Social Security benefits early rather than waiting four years until his full retirement age of 66 when his child would be too old to receive benefits. Of course, claiming early would permanently reduce the father's retirement benefits.
But there is a limit to the government's largesse.
“The Social Security Act limits the amount of monthly benefits that can be paid on any one record,” SSA spokesperson William “B.J.” Jarrett explained in an e-mail.
The total varies, but generally, the total amount you and your family can receive is 150% to 180% of your full retirement benefit.
Here's how it works. First, SSA subtracts the worker's benefit amount from the family's total benefits. The retired worker's benefit is not reduced.
Then, if the remaining benefits exceed the family maximum limit, the adjustment is made by proportionately reducing all the dependent family members' monthly benefits.
That prompted an interesting question from an InvestmentNews reader. What happens when a parent, who is at least full retirement age, files and suspends his Social Security benefit in order to trigger benefits for his wife and dependent child while allowing his own benefit to accrue delayed retirement credits? Since the father is not actually collecting benefits, does that mean his family members can receive a larger benefit?
“When we compute an auxiliary [spouse and children] benefit, we subtract the worker's benefit from the family maximum, regardless of the worker's payment status,” Mr. Jarrett explained.
“The remaining amount is divided by the auxiliaries on the record,” he said. “Therefore, the worker's suspended benefit is included in the family maximum computation.”
There are a few other things to remember about Social Security benefits for dependent family members.
The caregiving parent's benefits will stop when the youngest child turns 16, even though the child's benefits will continue until age 18 or 19 if still in high school. That parent would then face a blackout period where he or she is ineligible for Social Security benefits until reaching the minimum retirement age of 62.
In addition, family members receiving Social Security benefits are subject to earnings cap restrictions. For 2014, beneficiaries who are under full retirement age for the entire year lose $1 in benefits for every $2 they earn over $15,480. A family member's earnings would affect only his or her own benefits, not the benefits of any other family member.