Chris Stein, CFP®
How Does A Family's Social Security Benefit Affect A Child's Social Security Benefit?
A reader from North Carolina would like to know how the family's maximum Social Security benefit affects a child's Social Security benefit.
"I retired in February 2021 at the age of 63 and 4 months. My 2020 SSA statement says my PIA is $2,280, and my maximum family benefit is $3,929 a month. I have an 11-year-old child who my wife is caring for. My monthly benefit is $1,792. I am told that my PIA must be subtracted from the maximum family benefit and the remainder split between my wife and child. Is this right? How can you use an amount which I am not receiving to calculate their benefit? That is, if the maximum is truly $3,929, how do they justify paying a total benefit of $3,441? It seems that they are twisting the math to their advantage and not to the letter of the law."
We've talked about Social Security’s family maximum benefit before. But we haven't really talked about how the family maximum benefit is implemented.
As background, an earnings record is created by someone who participates in Social Security. Multiple benefits can be paid on that one record, including your own retirement benefit and benefits for a disability, plus benefits for your children, spouse and survivors. Social Security has a maximum that it will pay on one number holder's record. (A number holder is someone who holds a Social Security number.)
Disability benefits have their own family maximum calculation, which we won't go into here. For retirement benefits, the family maximum varies between 150% and 188% of your PIA, or Primary Insurance Amount. Your PIA is your benefit at Full Retirement Age (FRA).
By my calculation, you were born in 1957, so your FRA is 66 years and eight months. If you waited until then to claim, you would have received your PIA or $2,280 per month. According to your 2020 SSA statement, the maximum benefit that they will pay to all claimants that are eligible on your record is $3,929. By my math, that is a little over 172% of your PIA, right within the 150-188% range.
Why is there a range? A formula is used, which is beyond the scope of this response, but you can look it up if you're curious.
A spouse's benefit and a child's benefit are each 50% of PIA if the maximum payment allows. With the maximum payment being a range between 150% and 188% of PIA, one person claiming benefits (what we call an auxiliary benefit) in addition to you will never hit the maximum. But two or more will. In your case, both your spouse and your child are entitled to 50% of PIA, but together with your PIA, that equals 200% of PIA. That exceeds the general maximum of 188% and your specific maximum of 172%.
So how do they calculate what they pay? Well, your own PIA is considered first, regardless of when you claimed your benefits. They don't adjust the family maximum for claiming early or late. The family maximum is always a percentage of your PIA.
You argue that you claimed early, so they shouldn't be subtracting the whole PIA ($2,280) from your family maximum because you don't receive that. Well, that's what they do. But notice that by their calculation, using your full PIA of $2,280, your family maximum is $3,929. If they had calculated the same 172% on your current benefit of $1,792 (which you think is what they should subtract from the family maximum), the maximum would only be $3,088, or $841 lower.
You think their method is unfair, but I don't think you're looking at the whole picture. Their calculation actually benefits you.
Using your $2,280 PIA, the total amount available to you and your family each month is $3,441. It equals your benefit ($1,792), plus the difference between the family maximum ($3,929) and your PIA ($2,280), or $1,649.
If they subtracted your actual benefit instead of your PIA, you should use your actual benefit when calculating the family maximum as well. If you did so, the total amount available would be $3,088. It would equal your benefit ($1,792), plus the difference between the lower family maximum ($3,088) and your benefit ($1,792), or $1,296. The total monthly payment available to your family would be $353 lower.
Only by taking advantage on both sides of the calculation – subtracting your actual benefit but using the PIA to calculate the family maximum – would you get the full amount: $3,929.
But the reason you're collecting less is that you claimed early. If Social Security didn't consider that fact and you only subtracted your $1,792 benefit, there would be no penalty for claiming early. If you received the full $3,929 even though you claimed three years and four months early, what's the penalty for filing early? None.
If I phrase it that way, I think you'll see that there has to be some penalty for claiming early, and you're experiencing it. You see a total available benefit that is $488 less than the absolute maximum because you claimed 40 months before your FRA.
On the other hand, if you had delayed claiming beyond your FRA and were receiving a benefit higher than your PIA, they don't use that higher benefit in their calculation. Let's say you waited until age 68 or 70 to claim. Your benefit would be larger than the $2,280 PIA. But they still subtract the PIA from your family maximum to determine what's left for the auxiliary beneficiaries.
Back to how the family maximum calculation works: it's true that Social Security will reduce the family maximum by your own PIA first and look at what's left. Then, because you have two auxiliary beneficiaries, and your spouse and your child are owed the same sized benefit, Social Security will apply the reduction equally. (If you have three children and a wife, they will split what's left evenly between the four of them.)
So, how Social Security calculates family maximum payments is not unfair, as I see it. They are following the rule, in fact, the letter of the law. The numbers you shared seem to be correct.
We've always talked about how Social Security sets the maximum, but never in this level of detail about how they actually calculate and pay it out. I'm glad you asked this question because it allowed us to clear up a few things.