Social Security underpaid older children by nearly $60 million

A financial adviser in Texas asked me for help in determining whether a recently widowed client and her two children were eligible for Social Security survivor benefits. It was a timely question as the Social Security Administration’s Office of Inspector General recently issued a new audit report documenting the agency’s failure to pay some older children nearly $60 million in benefits that they deserved.

The 42-year-old widow’s husband died in January at age 49. The couple have two children.

“When can I collect survivor benefits?” the widow asked her financial adviser. “Now? When I reach my full retirement age? Or when my husband would have turned 70?”

“And what about benefits for my children who are 9 and 19 years old?” she asked. The adviser turned to me for guidance.

[More: How children can reap the benefits of Social Security]

Children may receive Social Security dependent benefits if they are younger than age 18 and their parent is entitled to retirement or disability benefits or dies. The child’s benefit is worth up to half of the parent’s full retirement or disability benefit amount, or 75% of their late parent’s basic Social Security benefit.

During 2020, the Social Security Administration paid an average of $2.8 billion of monthly benefits to 4 million children because one or both of their parents were disabled, retired or deceased.

Children may also qualify for benefits if they're 18 or older and still in elementary or secondary school. And a child with a physical or mental disability can receive dependent benefits for the rest of their life, assuming the disability began before age 22.

Therefore, the widow’s 9-year-old is entitled to dependent benefits worth 75% of his or her late father’s basic Social Security benefit amount (even though the father died before reaching his full retirement age). The child can collect dependent survivor benefits every month until he or she turns 18 — or 19 if still in high school.

Unfortunately, the 19-year-old is probably too old to qualify for benefits — unless he or she is still attending high school or another educational institution full-time, which is defined as at least 20 hours a week. College doesn't count for dependent benefits eligibility.

Normally, a child receives a notice three months before his or her 18th birthday that benefits will end. If the child is still a full-time student, they must complete a statement of attendance certified by a school official. The benefits will continue until the child graduates or until two months after reaching age 19, whichever comes first.

But that exception regarding the ability to collect dependent benefits when children are older than 18 if they're still full-time students is apparently a difficult nuance for the Social Security Administration to process. A recent audit by the Social Security Administration’s Office of the Inspector General identified 16,632 beneficiaries who were entitled as children but whose benefits ended when they turned 18, even though they were still full-time students.

“SSA did not have adequate controls to ensure children who reached age 18 and still attended school received benefits,” the report found. “SSA did not properly continue benefits for 87 of the 100 students in our sample once they reached age 18, which resulted in $357,872 in underpayments.”

Based on the sample results, the OIG estimated SSA underpaid 14,470 beneficiaries approximately $59.5 million. It blamed the inappropriate termination of benefits on human error and an inadequate computer system that “did not create alerts instructing SSA employees to determine whether students were still due benefits past age 18.”

The OIG report said the SSA “must improve its controls to ensure beneficiaries who reach age 18 and still attend school receive benefits to which they are entitled.” The report included five recommendations of corrective actions for SSA to take, and it said the agency agreed with all of the recommendations.

Even though most widows and widowers must wait until at least age 60 to claim survivor benefits, parents of any age may be eligible for benefits if they're caring for a child who's under age 16 or a disabled child of any age. However, anyone who claims any type of Social Security benefits, including survivor benefits, before full retirement age is subject to earnings restrictions. If their wages or self-employment income exceed $19,560 in 2022, they would lose $1 in benefit for every $2 earned over that limit.

There's also a limit to how much any one family can receive in Social Security benefits. The maximum family payment ranges from 150% to 180% of the parent’s full benefit amount. If the total amount payable to all family members exceeds this limit, SSA reduces each person’s benefit proportionally until the total equals the maximum allowable amount.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s new 2022 ebook at Maximizing Social Security Benefits)