Survivor Benefits: Social Security s Life Insurance for Surviving Spouses, Children and Parents

Transcription

1 Survivor Benefits: Social Security s Life Insurance for Surviving Spouses, Children and Parents

2 Workers that have family members that depend upon them for financial assistance may have a life insurance policy they never knew they had. That s because Social Security Survivor benefits act a bit like a life insurance policy and can provide monthly survivors benefits to: Widows/widowers, and/or former spouses; Unmarried children; And dependent parents They can also provide a one-time, lump sum payment to a spouse or children. Note: Survivor benefits do not require that the worker be drawing Social Security benefits at time of death nor does the worker have to reach retirement age before his or her family can receive benefits. Unlike retirement benefits, neither the dependent survivors nor the deceased worker need to be drawing Social Security benefits to collect survivors benefits. Social Security benefits depend upon your average lifetime earnings. To get estimates of benefits, workers can go to my Social Security at Some benefits are not retroactive so family members must act quickly. Family members should file for benefits in the month of death, if eligibility requirements are already met. (A family friend or family member can apply to start the claims process for survivors. It does not need to be handled by the survivors.) 1 For a family to receive survivor benefits the worker needs to meet one of two requirements: be at fully insured status or at currently insured status. 2 Filing for survivors benefits is one of those things people can do for a survivor when they offer assistance. Fully insured status: This is the most comprehensive coverage available for the worker s family and provides benefits to survivors of all types including dependent parents, spouses caring for your dependent children and spouses over 60-years old. 3 A worker who has earned enough credits to fall under fully insured status must have accrued a certain amount of work credits. Those credits vary depending upon the age of the deceased worker requiring more credits as the age of the worker increased. For instance, a 28-year old worker would have needed to have accrued 6 credits at time of death in order for his or her family to benefit from survivor benefits. At the other end of the age demographic, a 62-year old worker would need to have earned 40 credits (the same number needed to collect retirement benefits) before his or her family can benefit. Once a worker has 1. Social Security: The Inside Story Edition. Andy Landis 2. Social Security: The Inside Story Edition. Andy Landis 3. Social Security online. Insured Status Requirements. 2 Page

3 acquired the required 40 credits, he or she becomes permanently insured and will not lose that status even when he or she stops working. Currently insured status: If the worker has not earned enough credits to be fully insured, he or she may still be covered under currently insured status. This status is achieved if the worker has at least six work credits in the previous 13 calendar quarters (1.5 years of work in the past three years). This benefit status works only when surviving children are involved or for the Lump Sum Death Benefit (explained below). Dependent parents and spouses without children in their care receive no lump sum death benefits. Roy Hinkley died at age 28. He had earned five work credits. To be fully insured he needed six work credits. While he didn t meet the requirements for full insured all five of his work credits were from the last three years and so he met the requirements for current insured status thus ensuring that his wife Mary Ann can get Social Security until his youngest child is 16. Mary Ann will not be able to qualify for widow benefits when she reaches 60 because the current insured status does not provide that benefit. Because of his limited work history, payments to Roy s family will most likely be fairly low. Regardless of whether the surviving spouse was married or divorced, if children (either under age 16 or disabled) from the deceased spouse are being cared for (and receiving benefits) by that individual, he or she can qualify for benefits. The most common type of survivor benefit is for widows and widowers. Social Security defines a widow(er) as someone who was married to a worker for at least nine months prior to his or her death. A widow(er) can apply for benefits at age 60. Surviving spouses (including divorced spouses) must be currently unmarried or cannot remarry until after age 60. About 5 million widows and widowers receive monthly benefits from Social Security. 4 By far, the largest percentage of survivors was widows. According to the Administration on Aging, 37 percent of women 65 and over in the United States were widows in Not only do women tend to live longer than men by an average of five years 6 but men tend to marry younger women. 7 While those statistics are changing, the odds are that if you are a woman, you will experience extra-long life (as compared to men) and therefore face some unique challenges including aging single, lower annual retirement income, greater health care costs, and caregiving responsibilities according to a MetLife Study of Women, Retirement and the Extra-Long Life. 4. AARP. Social Security Survivor Benefits. Stan Hinden. February info /social_security_mailbox_survivor_benefits.2.html 5. Administration on Aging. A Profile of Older Americans: Marital Events of Americans: 2009American Community Survey Reports. Diana B. ElliottandTavia Simmons. August Kreider, Rose M. and Jason M. Fields Number, Timing, and Duration of Marriages and Divorces: Fall Current Population Reports, P U.S. Census Bureau, Washington, DC AGING ( Page 3

4 Why claiming Social Security benefits early hurts spouses Although widowhood in developed countries is nowhere near the deplorable conditions experienced by widows in developing countries, the standard of living for widows continues to leave them vulnerable to economic forces. Regardless of country of origin, poverty rates rise with the duration of widowhood. 9 In the United States, the poverty rate for elderly widows has persistently been three to four times higher than for their married counterparts. The last 20 years have brought many changes to the work force; however, the husband remains the primary breadwinner making those women, who worked outside the home either very little or not at all, dependent upon their spouse s lifetime earnings record. One study found that widows experienced a 40 percent decline in Social Security benefits, a 60 percent decline in pension benefits and a 16 percent decline in bequeathable wealth while only experiencing a 20 percent reduction in costs.10 As a result, those whose incomes may have been just over the poverty line prior to their spouse s death may fall below it. Widows bear the brunt of the resulting loss of income when husbands claim their Social Security benefits early While it may seem morbid, husbands and wives should prepare for the wife s eventual widowhood to help avoid future financial calamities. One way to do this is to delay taking Social Security until at least full retirement age (FRA). According to the Social Security Administration, 70 percent of Social Security beneficiaries apply for benefits before they reach their FRA. Widows bear the brunt of the resulting loss of income when husbands claim their Social Security benefits early. 11 On the whole, Social Security benefits drop by one-third when one spouse dies (they can fall by as much as 50 percent but a decline of one-third is typical). 12 But those benefits play such an important role in the finances of the surviving spouse that for 46 percent of non-married beneficiaries, Social Security made up 90 percent or more of their income. 13 Today, although the old-age poverty rate is less than one-third of what it was in the middle of the 20th Century, widowhood remains a vulnerable risk factor for transitioning into poverty. 14 A 1939 amendment to the Social Security Act gave benefits to widows (65 and older) of retired and deceased workers but it wasn t until the mid- 60s and early 70s that survivor benefits were made available to survivors of either sex at age MetLife Mature Market Institute. The MetLife Study of Women, Retirement and the Extra-Long Life. September The Economic Consequences of a Husband s Death: Evidence from the HRS and AHEAD. David R. Weir, Robert J. Willis & Purvi A. Sevak Strengthening Social Security Benefits forwidow(er)s: The 75 Percent CombinedWorker Benefit Alternative. Joan Entmacher Why do married men claim Social Security benefits so early: Ignorance or Caddishness? Steven A. Sass, Wei Sun, and Anthony Webb. October Changing Social Security Survivorship Benefits and the Poverty of Widows. Michael D. Hurd and David A. Wise Administration on Aging. A Profile of Older Americans: Page

5 Let s look at how an early claiming impacts the Social Security benefits of a married couple. David Jeffrey s is 62. His wife Susan is also 62. Susan has never worked outside of the home. David and Susan s FRA is 66. If David starts collecting benefits at age 62, he ll receive only 75% of his full payment of $2,225 or $ If Susan waits until she s 66, she ll receive half of David s benefit or $ per month (if she opts to start at 62, she ll only receive 35% of his payment). If, on the other hand, David had waited until his FRA, David would receive $2,225 a month and Susan at half David s benefit would receive $ a month. Those are their permanent benefits. Now suppose that David had waited until age 70 before claiming. If David had delayed claiming, his payment would include a permanent raise. Instead of claiming $2,225 a month, David would receive $2,937 a month. Susan s benefits will therefore be $ (note: Susan will never make more than half of David s benefits under the Spousal benefits since she has no work record of her own.) Now suppose that David started collecting Social Security at age 62 but at age 66, David dies. When David opted to begin collecting Social Security at age 62, he was in effect opting to reduce Susan s widow payment. Susan will receive a payment reduced to 82.5 percent or whichever is greater (in this case, Susan will receive 82.5 percent). Her widow s benefit will therefore be $ (Note: This looks like a raise since Susan would have been collecting only $ if David were still alive however; Susan s income has actually decreased from a couple s benefit of $ to a widow s benefit of $ , a reduction of $ or a slightly more than 25 percent reduction in household income from Social Security.) If instead, David had waited until FRA or had died before ever receiving Social Security benefits, Susan would have received $2,225 a month (100% of the full payment amount). Say that David made it to age 70 before he died AND he hadn t begun collecting yet, Susan would be eligible for $2,937 per month. Survivors who receive their benefits no earlier than their FRA, will receive a benefit no greater than whatever the benefit would have been or was paid to the deceased worker. 15 According to the Social Security Administration, women in households that are least prepared financially for widowhood are at the greatest risk of a husband s death because of a strong relationship between mortality and wealth. 16 Advanced age 14. The Poverty of Widows: How do they become the poor? Lee, Youngae, Lee, Jinkook. papers/ Widowhood: Economic Issues. Encyclopedia of Aging Encyclopedia.com. 11 Jun Holden, Karen C. A.; Kim, Meeryoung AGING ( Page 5

6 often does not allow for widows to financially adjust by traditional methods such as returning to work or by cutting costs. However, existing Social Security provisions provide options to substantially improve the economic well-being of claimants through delayed claiming. Delaying claiming of Social Security benefits past early eligibility dates significantly boosts retirement benefits and security for widows. Ignoring those options and making a decision to collect early benefits has long term implications for the surviving spouse and jeopardizes that spouse s future financial health even in the case of women who have some accumulated wealth. The same benefit that widows can expect is also available to widowers and former spouses if the marriage lasted at least 10 years. The length of the marriage is not called into question if the former spouse is caring for a child that meets the requirements for surviving child (see below). Those benefits do not affect the benefit rates of other survivors. Thurston Howell divorced his wife of 12 years nine years ago. His ex-wife died two years ago. He turned 60 this month. He can begin collecting now, however his benefit will be reduced by a small percentage each month until he reaches his full retirement age at age 66 so he may be better off waiting to collect as over time it may result in a significant reduction in monthly benefits. Surviving children must be (a) unmarried; (b) either under 18 OR under 19 and still attending either elementary or secondary school OR 18 or over and begun receiving total disability prior to reaching age 22; and (c) the legitimate, natural, legally adopted or stepchild of the deceased worker. Social Security pays more benefits to children than any other federal program. In fact, according to the Social Security Administration, 98 of every 100 children could get benefits if a working parent dies. 17 Natalie Schafer was widowed 10 years ago when her children Willy and Alan were 3 and 4 years old. She s engaged to get married and her fiancé Russell Johnson wants to adopt her two boys. Natalie, Willy and Alan receive survivors benefits but when Natalie remarries because she won t be 60 years old yet, Natalie will lose her survivors benefits. However, Willy and Alan will continue to receive benefits. If Natalie had been 60 (or 50 and disabled) remarriage would not have affected her ability to collect benefits based on her former spouse s work. If a surviving spouse was already collecting benefits before the death of the spouse, when the death is reported to the Social Security Administration, the office will check to see which is the higher value of the benefit and will 16. U.S. Social Security Administration/Office of Policy. Perspectives: The Economic Consequences of a Husband s Death: Evidence from the HRS and AHEAD. Bulletin, Vol 65 No /2004. David R. Weir & Robert J. Willis. 17. Social Security Administration. Survivors Benefits. 6 Page

7 change payments to equal the higher value if the surviving spousal benefit would have been larger. The Social Security Administration requires an application and a copy of the death certificate to make the switch. To be eligible for benefits as a surviving dependent parent, the parent of the deceased worker must be either a natural parent or have become the step parent or adoptive parent of the deceased worker before he or she turned 16. To meet the requirement for dependent, the parent must receive half his or her financial support from the worker before he or she died or became disabled. The parent must also have reached at least 62 years of age. If a worker supports a parent, that parent, at the death of the worker, may claim a payment of 82.5 percent of the worker s full benefit. This benefit is probably the least well known of all the survivor benefits available. If the worker supported both parents, each parent can claim at most 75 percent of the worker s full benefit. The benefit is limited to the family maximum (between 1.5 and 2 times the worker s full payment amount). Bob Johnson is 66. His monthly stipend is too small to pay his rent so his son Russell Johnson helps him out by paying more than 50 percent of Bob s monthly bills. Because Russell s mother is not claiming to be dependent on him, Bob s monthly payment will be 82.5 percent of Russell s basic Social Security benefit. Since Russell s full benefit was $1,500, Bob will receive a monthly payment of $1,237. If Russell s mother had also claimed benefits, they each would have received monthly payments of $1,125. For Russell s family, Social Security determined that his family maximum payment was $2,250 (or 1.5 times Russell s full benefit). Since the family maximum payment is equal to the total benefits of Russell s parents they will receive full benefits. However, if Russell also had a child who could receive survivors benefits, each of his three dependents would receive a monthly check of $750. The special one-time death benefit There is one other type of benefit available to survivors. Some survivors are also able to collect a special one-time death benefit. They may be eligible for a lump sum death payment (LSDP) of $255 if: The individual is the surviving spouse who lived with the deceased worker at the time of death (this is loosely defined in that the individual may have had a temporary absence due to work or medical treatment); The individual was married to the deceased worker and was eligible for survivor benefits even if the individual did not live with the deceased worker; The deceased worker had no spouse and a child or children of the deceased worker was eligible for benefits in the month of death (the benefit would be split amongst the children) AGING ( Page 7

8 This benefit must be filed for within two years of the worker s death and cannot be paid to former spouses or funeral homes. 18 Social Security provides a level of financial stability to families undergoing change due to hardship such as death or disability. Couples planning for the future should look at their Survivors Benefits from both sides if both individuals earn a wage. Survivor benefits cannot be applied for online. Individuals who have recently lost a worker should call the Social Security toll-free number at or TTY or call or visit a local office (it s best to make an appointment if applying in person). Be prepared with the documents listed at Social Security s website at in addition bring a check book or other document that shows an account number for direct deposit of any benefit checks. Social Security will also ask a long list of questions that survivors should be prepared to answer. 19 The Social Security website provides more detailed information on the questions and documents a survivor will need for applying for benefits. That information is available at gov/survivorplan/howtoapply.htm#ht=1. Since time is of the essence, if information about any of the preceding is difficult to find, the Social Security office can in most cases verify information with the Bureau of Vital Statistics at no cost. If the survivor is already getting benefits on the worker s life, the survivor should report the worker s death to the Social Security Administration by calling the number listed above or by calling or visiting a local Social Security office. If the survivor is getting their own benefit, he or she will still need to apply for survivor benefits to check to see if a higher benefit is available as a widow or widower. 18. Social Security: The Inside Story Edition. Andy Landis. 19. Social Security Administration. Survivors Planner: How you apply for survivors benefits. survivorplan/howtoapply.htm#ht=1 About AgingOptions AgingOptions is a holistic elder care company helping families plan for, pay for, and coordinate the long-term care of elderly loved ones. AgingOptions services are geared towards retirees and those thinking about retirement and concerned about: Losing independence & having to move to a nursing home. Losing your assets to uncovered medical or long term care costs. Becoming a burden on your loved ones. AgingOptions Sixth Avenue South Federal Way, WA PROTECTING ASSETS PRESERVING QUALITY OF LIFE AGING ( ) Info@AgingOptions.com 8 Page