Timing a Social Security claim when you have children

With the high incidence of divorce and remarriage these days, it’s not unusual to hear stories about families headed by older fathers — some old enough to claim Social Security — with school-age children at home. When it comes to timing benefits for minor dependents, deciding when to claim Social Security is a major decision that's complicated by the father’s age and whether he is still working.

Two readers recently asked me similar questions about whether their clients should claim Social Security now to trigger benefits for their dependent children. For one, the answer was a slam-dunk yes. For the other, it is a more complicated not yet.

In the first instance, the client is 66, still working and earns about $150,000 per year. He and his wife have 8-year-old twins. Because earnings restrictions disappear at full retirement age, it makes sense for this client to claim Social Security retirement benefits now, triggering benefits for both children.

Normally, a child is entitled to 50% of a parent’s full retirement or disability benefit. But there is a limit to how much a family can receive. The family maximum payment ranges from 150% to 180% of the parent’s full benefit amount based on a complicated formula. If the total amount payable to all family member exceeds this limit, the Social Security Administration reduces each person’s benefit proportionately (except the parent’s benefit) until the total equals the maximum allowable limit.

Assuming the father’s full retirement age benefit is $2,400 per month, each child would potentially be eligible for an additional $1,200 per month, for a family total of $4,800 per month. The family maximum in this case would be $4,313 per month, so dad would receive his full $2,400 per month and the twins would split the remaining $1,913, netting them each $956.50 per month.

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

Children’s benefits are payable up to age 18, or 19 if the child is still in high school. I have often jokingly referred to this family benefit as the “Viagra college fund,” suggesting that the added income can be a good way for older parents to help pay for college.

Another adviser asked for guidance on whether his 62-year-old client should claim Social Security now to trigger benefits for his 12-year-old daughter and his 55-year-old wife, who cares for their child. The client is still working and usually earns between $50,000 and $70,000 per year.

This situation is more complicated because the client earns significantly more than the annual earnings limit of $18,240 for people who are younger than full retirement age during all of 2020. If he claimed benefits at 62, his benefits would be reduced by 28.33% for claiming early compared to his full retirement age of 66 and 8 months.

So if the client was eligible for a Social Security benefit of $2,400 at his FRA, he would receive about $1,720 per month at 62. But his child’s and wife’s dependent benefits would still be based on 50% of his full $2,400 per month amount, subject to the family maximum limit.

Let’s assume the client expects to earn $65,000 this year, substantially more than the earnings limit for 2020. Social Security would reduce his retirement benefit by $1 for every $2 earned over $18,240 this year. Therefore, his excess earnings of $46,760 would eliminate $23,380 ($46,760/2) in potential benefits, wiping out all of his retirement benefits for the year.

But because two other family members also would be collecting on his earnings record and all of their benefits would be reduced because of the father’s excess earnings, the family would receive about $28,000 for the year after satisfying the earning test reduction.

But it is too late to claim benefits this year because it would take six months of forfeited benefits to satisfy the earnings test, wiping out benefits for the rest of the year. Instead, he should file for benefits to begin in January 2021 and after satisfying the earnings test, the family would begin receiving benefits in the second half of the year.

In addition, Social Security will recalculate his benefit after he reaches full retirement age to give him credit for any month in which he did not receive benefits due to excess earnings.

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