Sometimes life is not fair – and neither is Social Security

I met with a financial adviser from Virginia the other day. She had some questions about Social Security benefits for her mother, who is in poor health and who has been living with her for several years. The adviser's parents had been married for more than 30 years and divorced for 10 years. Her mother is 63 years old and her father, who has since remarried, will soon turn 66. During their marriage, her mother worked for her husband's small business. For many years, she took no salary and paid no Social Security taxes. Her father claimed the maximum allowable deductions for his home-based business, substantially reducing his taxable income and his self-employment tax. Now that her mother is old enough to claim Social Security, the benefits based on her own earnings are a meager $480 per month if collected at her full retirement age of 66. But because she needs the income now, she decided to claim benefits three years early, slicing her benefit by about 19%. As a divorced spouse who was married for more than 10 years and who has been divorced for at least two years, her mother is also entitled to claim a spousal benefit, even though her ex-husband has not yet claimed his. For a divorced spouse to claim benefits on an ex's earnings record, the ex merely needs to be eligible for Social Security, that is, at least 62 years old. The most a divorced spouse can receive is 50% of her ex-husband's benefit at his full retirement age. However, because she is collecting her benefits three years early, that amount is also reduced. The combination of her retirement benefits, topped off by her spousal benefits, equals about $750 per month. Her paltry income creates another problem. Because she is too young for Medicare, she has to buy health insurance on her own. Luckily, the new Affordable Care Act allows her to purchase private health insurance without regard to her pre-existing condition — but that doesn't mean she can afford to pay for it. With an annual income of about $9,000 per year, she falls below the national poverty level of $11,400 for a single-person household, so she won't qualify for a federal tax credit designed to help those whose incomes range from 100% to 400% of the poverty level pay for their private health insurance. Technically, her income places her in Medicaid territory, but my home state of Virginia is one of the states that chose not to expand Medicaid eligibility as part of the Affordable Care Act. Without a tax subsidy, her private health insurance premium would nearly equal her annual Social Security benefit, her daughter told me. So this divorced woman is stuck in no-man's land. Meanwhile, her former husband is a poster child for what I like to call the “Viagra college fund.” Remarried to a substantially younger woman, he now has a 3-year-old son, and he continues to work as a college professor. But his Social Security situation is much different than that of his former spouse. When he turns 66, he can file and suspend his Social Security benefits, triggering dependent benefits for his son and spousal benefits for his wife. Each will be entitled to benefits equal to 50% of his full retirement age benefit. Meanwhile, he can defer collecting his own retirement benefits up until age 70. Four years' worth of delayed retirement credits will boost his benefits by 32%. His son will be eligible to collect Social Security dependent benefits until he turns 18 (or 19 if he is still in high school at the time) and his new wife can collect benefits as a caregiving spouse until the boy turns 16. However, she is subject to earnings cap restrictions, so if she earns more than the prescribed limit, which is $15,120 in 2013, she could forfeit some or all of her benefits. No one ever said life was fair. Social Security merely reflects the reality and inequalities of real life. Unfortunately, many women grow old alone, often due to divorce or widowhood. Social Security is a crucial safety net for those living on the edge. Meanwhile, older men often remarry and start second families and all of their eligible dependents are entitled to Social Security benefits. While most experts pin Social Security's long-term financial shortfalls on the declining number of young workers relative to the increasing numbers of retirees, I suspect that divorce and second families play a role, too.