When Social Security is a family affair

Normally, delaying Social Security benefits until they are worth more when claimed at an older age makes sense for clients who want to maximize their lifetime benefits. But when minor children are eligible for dependent benefits, sometimes claiming early makes sense.

During one of my recent seminars instructing financial professionals on how to maximize Social Security benefits under new claiming rules, one adviser proposed an interesting case study. The husband is 62 and retired and the wife is 54 and still working. The couple have 14-year-old twins. The adviser asked whether the husband should claim Social Security benefits now even though they would be worth 25% less than if he waited until his full retirement age of 66 to claim them.

Absolutely! In this case, when the husband claims his Social Security benefits as soon as he is eligible at age 62, it will trigger dependent benefits for his two minor children.

A child is eligible to collect dependent benefits on a parent’s earnings record up to age 18 or 19 if still in high school. A disabled adult child who was permanently disabled before age 22 is entitled to dependent benefits for life. About 4.4 million children receive approximately $2.5 billion in Social Security benefits each month because their parents are disabled, retired or deceased.

Even though the father’s retirement benefit would be reduced by 25% because he claimed his benefits four years early, the children’s benefits would still be based on the father’s full retirement age amount.
This scenario works particularly well because the father is retired. If he were still working and collected Social Security benefits before his full retirement age, he would be subject to earnings restrictions, losing $1 in benefits for every $2 earned over $15,720 in 2016. Depending on his earnings, the father could forfeit all of his retirement benefits to the earnings caps and so could his kids whose benefits are based on his earnings record. (A worker’s benefits lost to the earnings cap are restored at full retirement age.)
But because the father is retired, it is the perfect scenario to collect reduced Social Security benefits early and to trigger benefits for his sons. If he waits four years until he turns 66 to collect, his twins would be 18 and no longer be eligible for dependent benefits.

Let’s assume the father’s full retirement age benefit is $2,000 per month at his full retirement age of 66. But if he claims as soon as he is eligible at age 62, his benefit will be reduced by 25%. So he will receive $1,500 per month in retirement benefits.

Each of the children are eligible for dependent benefits worth up to 50% of the father’s full retirement age benefit (or 75% in the case of a deceased parent). So, in theory, each child could collect $1,000 per month (half of the father’s primary insurance amount, or PIA, of $2,000 per month).

But there is a limit to how much any one family can collect on a single worker’s earnings record. Generally, a family’s total benefits cannot exceed 150% to 180% of the parent’s full benefit amount based on a complicated family maximum formula. For the benefit geeks among us, here is how the Social Security Administration (SSA) would calculate the family maximum for retirement or survivor benefits for a worker who turns 62 in 2016 or dies in 2016 before attaining full retirement age.

• 150% of the first $1,093 of the worker’s PIA, plus
• 272% of the worker’s PIA over $1,093 through $1,578, plus
• 134% of the worker’s PIA over $1,578 through $2,058, plus
• 175% of the worker’s PIA over $2,058.

Assuming a PIA of $2,000 per month, the family maximum benefit based on the above formula for 2016 would be $3,524.18. If the family maximum limit applies, the retired worker’s benefit is not reduced but the dependent benefits are reduced proportionately.

First, SSA would subtract the worker’s PIA from the family maximum limit ($3,524.18 – $2,000 = $1,524.18). The two dependent children would share the remaining benefit which each of them receiving $762.09 per month.
And here’s an added benefit to this strategy: Four years from now when the father reaches his full retirement age of 66 and the twins turn 18, the father can voluntarily suspend his benefits. Even after new Social Security claiming rules take effect on April 30, 2016, individuals will still be able to suspend their benefits when they reach full retirement age. What is different under the new rules is that no one — not the worker, his spouse or dependents — can collect benefits during the suspension period.

Under this scenario, the father would receive nothing for up to four years, but in the meantime his reduced benefit would earn delayed retirement credits worth 8% per year between 66 and 70. At 70, he could start collecting a larger benefit worth approximately 99% of his full retirement age amount (75% x 1.32).

(Questions about new Social Security rules? Find the answers in my new ebook.)

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.

Related Topics: Social Security Rules