Image: SSA.
Social Security is a complicated program, serving not only tens of millions of workers in retirement but also providing millions of spouses, children, and other family members with various types of related benefits. In many cases, taking those additional family benefits into account can make a huge difference to your optimal Social Security strategy. But in considering how much money you'll actually receive, it's crucial to take into account what's known as the Social Security family maximum: the highest amount of money that the Social Security Administration will pay based on one worker's earnings history. Let's take a closer look at the family maximum provision, and how, in some cases, it can lead to you and your family receiving less in total benefits than you otherwise would.
How Social Security's family maximum benefit can hurt you
To understand how the family maximum can reduce your benefits, you first have to understand how the provision comes into play. Social Security provides many different benefits to families, including retirement and disability benefits for workers, spousal benefits to spouses during the worker's lifetime, children's benefits for certain minor or disabled children of workers, and survivors' benefits to surviving spouses as well as some children and parents of deceased workers. As a result, it's possible in some cases for a large number of family members to be entitled to benefits under one person's work history.
The family maximum benefit puts a limit on Social Security's total payouts in those circumstances. The formula is unnecessarily complicated, with bend points that make the exact amount dependent on your specific primary insurance amount. However, for retirees, the following graph will give you an idea of what the maximum is for the family of a worker who turns 62 in 2015 or dies this year prior to reaching age 62:
Source: Author calculations based on SSA figures.
As you can see from the chart above, the bend points at around $1,000 and $1,500 in primary insurance amount prevent the determination of the family maximum from being a straight-line calculation. However, in general, the amount runs between 150% and 185% of the worker's primary insurance amount.
For disabled workers, a different calculation applies. There, the family maximum is equal to 85% of the worker's average indexed monthly earnings. However, the maximum can't be less than the worker's primary insurance amount, and it can't be more than 150% of the PIA.
Who takes the hit?
The family maximum doesn't always affect everyone's benefits equally. Certain rules govern whose benefits are reduced and whose remain unchanged.
The most important rule is that the worker's own retirement or disability benefit is never reduced due to the family maximum. It's only the benefits that go to secondary beneficiaries, such as spouses and minor or disabled children, that are subject to possible reduction.
In addition, families in which the only people claiming are a worker and the worker's spouse don't have to worry about family maximums. That's because the spousal benefit during the worker's lifetime is capped at 50%, and the worker's benefit is counted as 100% for these purposes even if the worker claims benefits earlier or later than full retirement age .
When the maximum does apply, Social Security takes the total benefits that family members other than the worker would be entitled to receive without a family maximum. It then compares that to the remaining maximum family benefit. If a reduction is required, then the family members share that reduction in proportion to what they'd be entitled to get. For instance, a surviving spouse and three surviving children are each entitled to a 75% benefit, then they'd all suffer an equal reduction due to the family maximum.
Interestingly, benefits that divorced spouses receive aren't counted against the family maximum. As a result, in some cases, divorced spouses will receive more than a current spouse does, as family maximums could reduce the current spouse's benefit.
Social Security can be a generous program, but it does have limits in the amount of benefits it will pay out. By knowing the impact of the family maximum benefit, you can make sure you and your loved ones have realistic expectations about what Social Security will provide when you need it.
