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Losing Your Breadwinner with Kids: How to Maximize Benefits

Claiming benefits as the caretaker of a deceased spouse’s children is a matter of timing. Photo courtesy of Thanasis Zovoilis/Flickr via Getty.

Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version

Danielle M. — Lake Charles, La.: My husband passed away at the age of 31 in 2011. Our four children, ages 12, 7, 5 and 3, receive survivor benefits based on his record. I was told that I might be able to receive a benefit as the parent of the minor children, but that it would reduce the amount that they receive. How does that work, and is there anything else available to help us?

Larry Kotlikoff: It’s a joy to help people with their Social Security questions, but also heart-wrenching because life has hit so many people so very hard. There is, sadly, a maximum to the amount of benefits you and your children can receive on your husband’s earnings record. Each child can receive 75 percent of the basic benefit rate, which is your husband’s Primary Insurance Amount (PIA). But the maximum all the children, plus you as a surviving mother of young children, can receive is generally equal to 150 to 180 percent of this PIA. If we multiply four kids by 75 percent, that’s 300 percent of the PIA, which surely means your family is already receiving maximum benefits at the moment. So were you to file to collect benefits as a surviving spouse with children under age 16, you would simply move some of their benefits from them to you.

But (there are always buts with Social Security), the family maximum benefit can, in some cases, exceed 180 percent of your husband’s PIA. Jerry Lutz, a former Social Security technical expert, who checks over my answers each week, tells me that the family maximum benefit can be as high, if not higher, than 225 percent of your husband’s PIA.

So, while we’re both quite sure you are already maxed out on your family benefits, we both think applying for your benefit won’t hurt except for one thing, which I’ll get to.

Assuming your children aren’t disabled, they will, over time, exceed the age cutoff for receiving child survivor benefits. At the point where three of your children, and certainly when only two of your children, and most certainly when only one of your four children, are under age 18 (19 if still in elementary or secondary school), you should apply for your survivor benefit based on caring for a deceased worker’s children.

You will be able to collect survivor benefits as a mother at some point. But if you are working, you may lose some or all of these benefits to the earnings test if your income is over a certain limit. If you get hit by the earnings test while collecting benefits and your family benefit is at the maximum, don’t worry. Social Security won’t give you and the kids jointly less than the family maximum benefit. Instead, they will reallocate any benefits you lose via the earnings test to your children.

Now for the above “but.” The only way you can get hurt by applying for your benefit as a surviving spouse with children in your care is via federal income taxation of the benefits you would receive. If, for example, your kids are already jointly being paid the family maximum benefit and you apply for your benefit, some of the same total family benefit will be reallocated to you and get reported to the IRS as potentially taxable income.

For more on the topic, see one of my earlier columns, “How Unfair is Social Security’s Maximum Family Benefit.”

Mary Hom — San Mateo, Calif.: I am 63 and my husband is 52. We have been married for 21 years and he works full time. I worked over 30 years and can get my own Social Security checks now at age 63. My question regards our age difference: Can I collect on my husband’s benefit, which is substantially higher than mine?

Larry Kotlikoff: Unfortunately, you can’t collect a spousal benefit until your husband files for his retirement benefit, and the earliest he can do that is age 62. In your situation, you may do best to wait until age 70 to collect your highest possible retirement benefit. And your husband may do best to wait until full retirement age to collect a full spousal benefit. (That benefit will equal half of your full retirement benefit — not half of what you’ll be collecting, which will be your full retirement benefit augmented by the delayed retirement credit.) He should then wait until 70 to collect his highest possible retirement benefit.

Margaret — Charlotte, N.C.: At age 58, I am divorced and work part time. What financial help is there for me when I’m not able to work?

Larry Kotlikoff: Unfortunately, you can’t collect a spousal benefit based on your ex’s earnings record unless you were married for 10 years, have reached age 62, or your ex is either collecting a retirement benefit or is over 62 and it’s been at least two years since you divorced. In your case, if your ex is older than you, you’ll be able to collect a reduced excess spousal benefit starting at age 62. But if you wait until full retirement age (66), you’ll be able to get a full spousal benefit and then delay taking your own retirement benefit until 70. The full spousal benefit is half of your ex’s full retirement benefit. The excess spousal benefit is the full spousal benefit less your own full retirement benefit.

Furthermore, thanks to Social Security’s deeming provisions, if you take your divorced spouse retirement benefit before full retirement age, you’ll be deemed to be applying for your own retirement benefit as well. This will condemn you to collecting a reduced retirement benefit for the rest of your life (unless you suspend your retirement benefit after reaching full retirement age and start it up at or before age 70, when it will start up again at its former level, apart from an inflation adjustment, but inclusive of a delayed retirement credit for the months you weren’t collecting).

What’s more, there’s a very nasty Social Security gotcha that can get you if you take your divorcée spousal benefit early or, indeed, at any point after you file or are forced to file for your own retirement benefit. In this case, your divorcée spousal benefit may be partially or fully wiped out because, recall, it will be the excess spousal benefit, which is your full spousal benefit reduced, potentially to zero, by your own full retirement benefit.

Now, let’s look at my answer. You asked a simple question. But for me to answer it fully, I had to write something that you or anyone else will surely find very hard to follow unless you read it several times. And I spend quite a while trying to make it as easy to read as possible. It’s just insane that the system is this complicated. It turns retirement planning into a near impossibility. But I have no choice but to give you the full spiel. Were I to give you a shorthand answer of the type you’ll find on Social Security’s website, you could end up thinking you could do X or get Y and learn, at the end of the day, that this wasn’t the case. This, in addition to the fact that Social Security is 32 percent underfunded (see Table IVB6 of the most recent Social Security Trustees’ Report) is why I advocate freezing the system in place, paying off what’s owed to current retirees and workers, and setting up the Purple Social Security Plan.

Sheldon Stromberg — Rushford, N.Y.: I am 63 and my wife is 62. We have roughly equal lifetime earnings, and neither of us has yet filed for benefits. If we are divorced prior to my 64th birthday, at age 66 (my full retirement age) can I file for spousal benefits, which would be half of her benefits at her age of 65? Can she, one year later, at her full retirement age, file for spousal benefits, which would be half of my benefits at my age of 67?

Can we then each, upon reaching age 70, file for our own benefits, which presumably will have been increasing all along? In addition, will the death of either former spouse during the period we are each receiving spousal benefits affect those benefits, or the ability at age 70 to file for our own full benefits? In short, will divorce under these circumstances allow us each to receive spousal benefits, and then allow each of us at age 70 to switch to our own, higher benefits?

Larry Kotlikoff: Yes, once you are divorced for two years, you can both, at full retirement age, file just for a full spousal benefit and then both take your own retirement benefits at 70 and, thereby, have it start at its highest possible value. The ability for you both to receive full spousal benefits is an advantage provided to divorced spouses. In the case of married couples, only one can collect a full spousal benefit because to do so, the other spouse has to have filed for his or her own retirement benefit, and once someone files for his or her own retirement benefit, the ability to get a full spousal benefit is forever eliminated. What’s possible for married couples is for one spouse to receive a full spousal benefit and then once that spouse files for his or her own retirement benefit, have the other spouse collect an excess spousal benefit (if it’s computed to be positive).

Finally, your getting divorced and taking your full spousal benefits will have no impact on your ability to collect survivor benefits (which will likely be higher than the spousal benefit if you aren’t taking your retirement benefit at the same time) based on your ex’s work history.

Caron Coache — Apple Valley, Calif.: My domestic partner worked for the state of California but had Social Security deducted from her pay. Since she has passed on, am I able to receive Social Security benefits now that things have changed on a federal basis for domestic partners and same sex spouses?

Larry Kotlikof: No, not as far as I know. The Social Security survivor benefits are provided to former married spouses only. Sorry to convey this. If you do get married and stay married for one year, you’d qualify to apply under the right conditions (age 62 or over or have children under age 16) for spousal benefits on your new spouse’s earnings records.

John — North Fort Myers, Fla.: Like a lot of folks, I have been out of work for 20 months. I will be 62 in August of 2014. If I take Social Security at 62 and later find a job, can I stop withdrawing my benefits? My goal is now and has always been to not draw until my “normal age” which is 66, but I don’t know if we can live on my wife’s income until age 66.

Larry Kotlikoff: First, best of luck in finding a new job. Second, if you draw early, you can’t stop drawing until you reach full retirement age (66 in your case), at which point you can suspend your benefit and start it up again, say at 70, when it will begin at a 32 percent higher level adjusted for inflation.

But if you do find a job and earn enough so that your reduced retirement benefits are fully or partially wiped out by Social Security’s earnings test, you’ll get compensated, indeed, more than compensated by being given higher benefits starting at full retirement age via Social Security’s “recomputation of the reduction factor.” This means that a single person who takes retirement benefits starting at 62, then earns enough to lose all those benefits until he or she reaches full retirement age, will be treated by Social Security the same as someone who never applied for benefits. Furthermore, such a worker can suspend his benefits at full retirement age and start them up again at 70 (as long as he or she pays Medicare premiums out of pocket) and be treated, at age 70, just like someone who never applied for retirement benefits before age 70.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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