(This article previously appeared on Money.com.)
Social Security benefits include a surprising array of payments beyond your own retirement benefit. These so-called auxiliary benefits, which are geared to your earnings record, may provide income to your spouse (or former spouse), your children and even your parents. If you’re disabled, another set of Social Security benefits to your present and former family members may kick in.
(MORE: The New Social Security Statements)
This is, overall, a good deal. (And it’s a reason why delaying your own benefits is a thoughtful way to increase benefits to your loved ones.) But there is a big, big catch — it’s called the Family Maximum Benefit.
What the Family Maximum Benefit Does
This rule limits total Social Security payments to you and any eligible family members to a percentage of your own Social Security benefit.
And it’s arguably one of the trickiest aspects of figuring out the best Social Security claiming strategy for you and your family.
Basically the Family Maximum Benefit limits total payments to you and eligible family members to a total of 150 to 187 percent of the payments you alone would receive. It thus sets a ceiling on total family benefits — often, a very low ceiling. Here’s how it works:
Let’s say your spouse applies for Social Security spousal benefits based on your earnings and the payout is equal to 50 percent of your retirement benefit. Already we’re up to 150 percent of your retirement benefit. Now let’s say you have other family members who qualify for benefits — perhaps dependent children. In all, these payments would cost Social Security 300 percent of your benefit.
This is where the Family Maximum Benefit ceiling comes in. If yours is 175 percent of your retirement benefit, then the rule will require the agency to reduce everyone’s benefit (except yours, which cannot be reduced) to a total of 75 percent of your benefit. Your family members will have to take nearly a two-thirds’ haircut in their benefits.
For those who want to get deeper into Social Security math — the rest of you can skip ahead — the Family Maximum Benefit ceiling is based on what’s called your Primary Insurance Amount (PIA). This is the monthly retirement benefit you would receive if you started payments at what’s known as Social Security’s Full Retirement Age , which is age 66 for those born between 1943 and 1954. (The Full Retirement Age then will rise by two months a year for those born between 1955 and 1959, finally settling at 67 for anyone born in 1960 or later.)
How the Family Maximum Benefit Formula Works
If your Primary Insurance Amount is projected to be $2,500 in a few years, and you’re using this number for making auxiliary benefit decisions, here’s the way this year’s Family Maximum Benefit formula would work:
- 150 percent of the first $1,042 of your Primary Insurance Amount (or $1,563)
- 272 percent of the Primary Insurance Amount between $1,042 through $1,505 (or $1,259)
- 134 percent of the Primary Insurance Amount over $1,505 through $1,962 (or $612)
- 175 percent of the Primary Insurance Amount over $1,962 (or $942)
The sum of these four numbers — 4,376 — is the monthly Family Maximum Benefit for all Social Security claims based on your earnings record. It equals 175 percent of your Primary Insurance Amount. (There is a separate formula covering Family Maximum Benefits for disabled persons and it can produce very small benefits for lower-income claimants.)
How to Get Around the Family Maximum Benefit
Is there a way around the Family Maximum Benefit ceiling? Yes, but only if your family is flexible.
Since the Family Maximum Benefit limits apply to total benefits being collected on your earnings record in a given year, consider staggering the timing of your family’s claims. That way, they may be able to stay under the ceiling.
Here’s one example: Say you have a spouse and younger children who qualify for benefits. If your Family Maximum Benefit would seriously reduce all these benefits, it might be best for your husband or wife to hold off on claiming the spousal benefit and take the child benefits only.
The amount of money your family receives might not drop much, if at all. And the child benefits likely will expire when the kids are older. Your spouse can make a claim at a later date, when the benefit also may have risen in value, depending on your age and the age of your significant other.
Clearly, when it comes to strategizing benefits, Social Security is a family affair.
Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at [email protected] or @PhilMoeller on Twitter.