Social Security Family Benefits Mess

Most of people think of Social Security as a government managed savings program similar to a 401k plan: you pay into the system when you are working; you draw from the system when you retire.

More informed people will point out it isn’t so. It’s a pay-as-you-go inter-generation transfer program. The money you (and your employer) pay today supports today’s seniors. When you retire, the younger generation supports you. It’s a social contract. Because mom and dad supported grandma and grandpa, you will support mom and dad.

That sounds good to me. However, because it’s an inter-generation support system, there ought to be some fairness between generations. What should one generation ask the next generation to shoulder and what shouldn’t? I see a breakdown to this question in the area of Social Security spouse and family benefits.

Investment advisor and author Larry Swedroe posted a very interesting article on his blog yesterday: What You Can Learn from Donald Trump’s Wives About Social Security. It uses Donald Trump as an example to show who are eligible for Social Security benefits based on his work history. Here’s a summary:

Person Relationship Benefits
Donald Worker 1X at Full Retirement Age, reduced if taken early
Ivana Former spouse #1 If not remarried, 0.5X at Full Retirement Age, reduced if taken early
Marla Former spouse #2 None, because marriage didn’t last 10 years
Tiffany Daughter 0.5X until age 18 or 19
Melania Current spouse caring for minor child 0.5X until child reaches 16; 0.5X at Full Retirement Age. Subject to family maximum.
Barron Son 0.5X until age 18 or 19. Subject to family maximum.

For the time being, I’m setting aside the question whether Donald Trump needs Social Security. Those who support the idea of "means testing" argue that since Donald Trump has enough money to support his former spouses and his family, the benefits should be saved for those who need the money more. I see a point.

I would also say since Donald Trump paid Social Security tax like everybody else to support the seniors in his time, there’s no reason to punish him just because he made money elsewhere. His success is orthogonal to the inter-generation transfer system: you support the previous generation; the next generation supports you.

I’d like to focus on the spouse and family benefits. Suppose there’s another guy Tom who paid the maximum Social Security tax every year, just like Donald Trump did, but Tom never married. Only Tom himself would receive Social Security. Tom’s benefits will be the same as Donald’s. Why? Tom’s family life decision saved the next generation a bundle but he’s not getting any credit.

Now suppose Tom decides to marry a woman right before he takes Social Security. Tom’s new wife all of a sudden will get on the payroll from the next generation. That makes Tom a hot guy. Whoever convinces Tom to say yes will have an income stream coming. It’s a head-scratcher to the next generation: how come their bill goes up by 50% just because Tom decides to marry?

Donald Trump married three times. The next generation pays benefits to his two spouses (three if the other marriage also lasted ten years). If Tom marries only once, the society pays benefits to only one spouse. Why does someone’s love life doubles or triples the bill to the next generation?

Donald Trump has minor children when he takes Social Security. The minor children and his current wife will also receive benefits. If Tom’s children are grown when he retires, he gets none of that. It costs money to raise kids, but if you have kids late in your life, you get help from the next generation; if you have kids early, you don’t. Why?

I can’t make any sense out of these. If we are talking about the possibility of cutting Social Security benefits for workers, we ought to take a serious look at these spouse and family benefits. Is it fair for the next generation to pay more just because someone decides to marry, divorce, or have children late in their life?

Make the benefits payable solely to workers who supported the previous generation. If there are spouse and kids to care for, the money ought to come from the worker’s benefits. That’s fairness. If we just do that, maybe we won’t have to raise the retirement age or change the benefits indexing formula.

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  1. KD says

    It does not stop there. Uncle Sam collects Social Security from H1-B and other temporary workers even though they are legally barred from collecting any benefit unless they become/are U.S. citizens when its time to collect the benefits. Moreover, they cannot even sponsor themselves for a green card much less citizenship. I digress.

    I agree with what you say. But the U.S. tax code takes family as a unit of taxation and not an individual. So in practice, what you say won’t happen – not because its politically unpalatable but because the way taxation system is designed.

    Canada, on the other hand, considers individual as unit of taxation and it might be good check out their system.

  2. Harry Sit says

    Family as a unit of taxation is a carryover from the old days when only husbands worked and wives stayed at home. Time has changed. Society has changed. Now both spouses work in most families. Relationship isn’t just marriage. People marry, divorce, live together for a long time without marrying each other; same-sex couples aren’t allowed to marry in many places or recognized for federal tax purposes even if they are allowed to marry in their state. Tying a tax system to marriage is very antiquated. Treating one person as a 50% attachment to another person is degrading. When will we catch up to modern times?

    Good suggestion for checking out Canada’s retirement system. I bet it doesn’t have this mess.

  3. J says

    Personally, I would prefer reduced Social Security monthly income for myself than taking away benefits of vulnerable Americans.

    A friend of mine chose to stay at home to raise the kids. When a terrible event took her husband away from her, I wondered how she could support her children until they could support themselves. I was deeply relieved when I found out Social Security would protect the children until they were old enough for college.

    “It does not stop there. Uncle Sam collects Social Security from H1-B and other temporary workers even though they are legally barred from collecting any benefit unless they become/are U.S. citizens when its time to collect the benefits.” — KD

    I don’t think foreign workers have to become U.S. citizens to collect Social Security and Medicare. They just need permanent resident status (green card).

  4. Harry Sit says

    @J – Note I’m not talking about survivor benefits. If a worker dies, his or her kids get support from Social Security — that’s perfectly fine and morally sound. The children’s benefits I referred to in the post are received when the worker retires, not dies. The next generation paying the bill has their own kids to support, why should they also be paying for retirees’ kids?

  5. Andy says

    Although social security is not means-tested, it is somewhat “need-based” (i.e. bigger family means more money since more people need to be supported), which kind of makes sense since its purpose is to keep people out of poverty during retirement or in the event of disability.

  6. KD says

    TFB, I completely agree with you. That change needs a whole lot of political will, elegant communication and an understanding populace. All of which are absent today.

  7. RZ says

    Social Security has not been pay-as-you-go for about a quarter century now. Workers have been overpaying into that system and purchasing Treasury securities. Future retirees are creditors to the U.S. government, just like Goldman Sachs or the Chinese government are for buying T-bonds.
    I realize your post moves in a different direction, but I think the pay-as-you-go idea is incredibly inaccurate and misleads policy debate.

  8. Harry Sit says

    @RZ – It depends on whether you believe the SS trust fund is real or fictitious.

    If you believe the trust fund is real, it means the baby boomers not only supported their previous generation but also at least partially prepaid their own benefits. In other words workers have been overpaying. However, it also means that baby boomers incurred a lot of debt. That debt paid for something — men on the moon, cold war arm race, Iraq war, and what have you. If the government weren’t allowed to borrow from the SS trust fund, baby boomers would’ve paid a lot more income taxes. Now the question is who should pay off that debt. Gen-X and Gen-Y? Paying off debt incurred by the previous generation just so baby boomers can claim they funded their own retirement?

    If you believe the SS trust fund is just an accounting gimmick, the workers didn’t really overpay. The extra payroll taxes they paid went to the things they wanted: men on the moon, cold war arm race, Iraq war, and what have you.

  9. molly, san clemente, ca. says

    Your needs-based argument is bogus. Trump’s family doesn’t need the cash more than a single person with limited income and no inheritance. His trophy wife got to be a trophy wife because she didn’t need to work. This is ridiculous. Working women have to support an ex-supermodel who married an older man and had a baby with him when he was way too old.

  10. molly, san clemente, ca. says

    TFB– you need to learn your history. Older baby boomers did pay higher taxes, as much as 70 percent before 1986.
    The current generations of workers, myself included, got huge breaks from the Bushies and Reagan and even that phony, Clinton. Those breaks are the reason that we keep hearing about a crisis in Social Security.

  11. Bret Varcados says

    Social security is a RETIREMENT INSURANCE program to protect the elderly and disabled. Its purpose, regardless of what anyone’s perspective or opinion was created with the 3 R’s of president FDR, It’s purpose was to provide INSURANCE for the elderly and disabled, In the event and eventual time that a person suffers a LOSS OF WAGES due to age or disability, and could no longer work or provide an income to support them self,

    They would be INSURED an income to survive on. If you are still receiving an income of more then the average median family then technically you don’t need the INSURANCE and claiming it would be fraudulent and depriving the disabled people that do need it which for some reason the Social security Administration has decided to deny 65% of. This subjecting them to further stress and hardship while they take a minimum of 6 months and sometimes over 2 yrs to collect on a claim when they have no income. If you want my opinion ANYONE who claims retirement insurance while still collecting an income should be prosecuted for fraud, or at least fined and removed from the system. The fact that the social Security system currently pays every claim after the age of 62 -67 depending on their birth date(which is illogical and unfair as well 62 should be a standard for retirement regardless of when you were born) is the issue and problem that is dooming Social security to failure.

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