Chris Stein, CFP®
Social Security Child Benefits
We recently received an e-mail question from a blog post listener who wrote: I am 63 and still work with a salary that would cancel my Social Security benefits if I were to file. But I also have an eight year old daughter. Should I file so she can receive minor benefits? Or would my earned income prevent her [from] receiving any benefits?
There’s a lot of moving parts to this e-mail question, and to adequately address our listener’s concerns we must first begin with a basic understanding of how Social Security child benefits work. An eligible child may receive up to half of a working parent’s full retirement benefit, subject to a family maximum limit. Under this family limit the Social Security Administration (SSA) will restrict the amount of benefits paid to a family. The family maximum benefit calculation is a bit convoluted, but is essentially capped at 150 to 180 percent of the working parent’s full retirement benefit amount.
Criteria for Social Security Child Benefits
The inherent purpose of providing Social Security benefits to children is to help provide for the necessities of life for a family of a retired or deceased worker, and to help ensure the child of a worker or deceased worker has the means to complete high school. These are laudable goals for sure, but in order for your biological, adopted or dependent stepchild to receive a Social Security benefit based on your earnings the following criteria must be met:
1.The parent is presently retired or disabled and is eligible to receive Social Security retirement or disability benefits or the parent died after working long enough to pay Social Security taxes.
2. The child is unmarried and younger than age 18 or under the age of 19 if enrolled as a full time elementary or high school student.
(Note: a child over the age of 18 but fully disabled before age 22 is eligible to receive Social Security child benefits.)
Did you notice the rules require the working parent upon whose earnings the child will receive their benefit to be both retired and eligible to receive Social Security benefits? This is an important distinction because in our listener’s situation although he was eligible to receive a Social Security benefit, he was not yet retired!
Earning Limit Test and Child Benefits
Also as our listener rightly pointed out, if he should “retire” and begin collecting Social Security benefits early (early means prior to reaching his Full Retirement Age) in order to activate his daughter’s eligibility to receive Social Security benefits, the Earnings Limit Test would effectively eliminate his entire retirement benefits because he is still working. His main question concerned whether or not the Earnings Limit Test would reduce his daughter’s Social Security child benefit as well.
In short the answer is yes. The Earnings Limit Test will not only reduce the Social Security benefits of a retiree who continues to work, but all family benefits associated with that worker’s earnings. Furthermore the reduction of a worker’s benefits (both retirement and family) is imposed equally. In other words, the SSA doesn’t apply the reduction to the worker’s benefit first, and then to the family benefits. Instead they reduce both simultaneously on a pro-rata basis.
In addition, a worker whose retirement benefit is reduced by the Earnings Limit Test will have their retirement benefits recalculated higher when they reach their Full Retirement Age. The SSA does this recalculation in order to compensate the worker for losing their benefits. However, any associated family benefits that were lost because of the Earnings Limit Test are never adjusted higher. They are lost forever.
Continue to Work
In our listener’s situation we suggest he continue working and not file for benefits until reaching his FRA in three years. His daughter will only be 11 at that time and still eligible to receive Social Security child benefits for another seven or eight years. More importantly he will no longer be subject to the Earnings Limit Test if he were to keep working. (He will still be subject to the family maximum limits) In addition, upon reaching his FRA he is eligible for a claiming strategy known as “File and Suspend” where he could file for his benefits, thereby making his daughter eligible to receive her child benefits and then immediately tell the SSA to suspend his benefits! By suspending his benefits he will still be eligible to receive the 8% annual Delayed Retirement Credits for the next four years. When he reaches age 70 he would stop suspending his benefits and begin receiving his maximum Social Security retirement amount. All the while his daughter will be receiving her child benefit.
What our listener ultimately chooses to do will depend upon when he intends to retire and whether or not he wants to maximize his personal retirement benefits. The important facet for him to remember is if he files for his benefits today at age 63 he would lose most of his flexibility and claiming options.
And what about his daughter and her benefits? Well, what she does with them is truly up to her and her parents; but in our humble opinion it would make for a very good college savings account!
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