Social Security survivor benefits can serve as a crucial lifeline for widows and widowers. But a newly released report by the Social Security Administration's Office of the Inspector General (OIG) found that more than 100,000 widows and widowers may have received less than they were due.
Individuals are entitled to survivor benefits if they were married at least nine months at the time of the worker's death. The amount of a survivor benefit depends on the widow's or widower's age at the time they collect benefits. A divorced spouse who was married for at least 10 years and who is single — or who waited until at least age 60 to remarry — is entitled to survivor benefits when an ex-spouse dies.
Reduced survivor benefits are available as early as age 60 (50 if the surviving spouse is disabled), but they are worth just 71.5% of the deceased worker's benefit compared to 100% if the surviving spouse claims benefits at full retirement age or later.
Survivor benefits do not increase if collected after full retirement age. Unlike retirement benefits, which grow by 8% per year for every year benefits are postponed beyond full retirement age up to age 70, survivor benefits are worth the maximum amount if collected at full retirement age. And that is the source of the problem, the OIG report found.
Generally, the initial month of entitlement for survivor benefits begins with the month that the surviving spouse applies for benefits. However, a widow or widower who applies for survivor benefits after full retirement age may be entitled to benefits up to six months earlier than their application filing date. In the case of disabled surviving spouses or disabled surviving ex-spouse, the initial month of entitlement could be up to 12 months before the date of application.
In June 2016, an OIG audit identified 218,052 people who were receiving survivor benefits and who may have been eligible for an earlier initial month of entitlement. From that population, the OIG selected a random sample of 200 cases to review.
"Our objective was to determine whether the Social Security Administration had adequate controls to establish a correct initial month of entitlement for widow(er) benefits," the report said.
It turns out, it does not.
Of the 200 cases in the random sample, the OIG found that the Social Security Administration had underpaid half of the surviving spouses by a total of more than $260,000. Projecting the sample results to the population of 218,052 widows and widowers identified in the audit, the OIG estimates that the Social Security Administration underpaid more than 110,000 surviving spouses about $285 million.
In 19% of the sample cases, widows and widowers who applied for benefits after full retirement age were eligible for additional benefits based on an earlier initial month of entitlement. For example, in August 2007, a woman applied for widow's benefits when she was 65 years and 9 months. The earliest initial month of entitlement for which she was eligible was March 2007, when she attained full retirement age of 65 years and six months. However, SSA incorrectly established an initial month of entitlement of July 2007.
"We did not find any information in SSA's systems that an employee informed the widow of the additional four months of benefits, totaling $6,568," the report said.
When a deceased worker claimed Social Security retirement benefits before full retirement age, not only are his or her benefits reduced but so are any potential survivor benefits. For example, if a worker claimed Social Security as early as possible at age 62, he would receive 75% of his Primary Insurance Amount (PIA) compared to 100% if he had waited until his full retirement age of 66 to claim benefits. If this worker later died, his widow would receive a reduced survivor benefit.
But there are built-in protections for surviving spouses who wait until their full retirement age or later to claim survivor benefits. A widow who was at least full retirement age would receive the greater of the deceased worker's benefit (75%) or 82.5% of the worker's PIA. In this example, the widow would receive 82.5% of the worker's PIA. But the OIG report found that 18% of widows and widowers in similar situations were underpaid.
Finally, widows or widowers who are disabled can apply for survivor benefits between ages 50 and 59 and may have an initial entitlement up to 12 months before the date they apply. The report found 13.5% of the disabled survivors in the random sample were eligible for additional benefits.
The OIG's conclusion: Social Security needs to improve controls to establish the correct initial month of entitlement and needs to take appropriate action to reimburse the 101 survivors it identified as entitled to additional benefits.
The Social Security Administration agreed with all the report's findings and recommendations.
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Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.