×

Social Security offers a 'Viagra college fund'

As Social Security turns 80, you'd be amazed at how it's kept up with the times. Wonder what President Franklin Roosevelt would say about a provision financial planners have come to know as the "Viagra college fund."

To maximize the benefit to child and parent, the strategy works like this: The parent, usually a father, who reaches the magic age of 66 can file and suspend retirement benefits, triggering a 50 percent monthly payment to any minor dependent children, until the child reaches 18 (or 19 if still in high school). That way the parent can get both the dependent benefit and the delayed retirement credit of 8 percent per year up to age 70.(Tweet This)

The number of children receiving Social Security retirement benefits has increased nearly 30 percent since 2000 and stood at 330,865 as of July 2015.

The idea of this strategy, called "file and suspend," came into play in 2000 as part of a law aimed at helping couples plan their retirements and picked up speed as people started looking for higher returns in the face of the financial crisis. Mary Beth Franklin, a journalist and speaker on retirement issues, first coined the "Viagra college fund" phrase in 2012.

"So let's say the dad's entitled to $2,000 a month at age 66, he files and suspends, he gets nothing, the child gets $1,000 a month, half of his $2,000 every month up until age 18 and the dad at 70 takes his own full benefit," Franklin said. "Put that in a 529 plan and you've saved for Harvard."

There are limits to what any one family can collect, based on a complicated formula, up to 180 percent of what is due at full retirement age.

Despite Social Security's well-known financial problems, doing away with this benefit is a political nonstarter because the savings would be a drop in the bucket toward solving the trust funds' projected insolvency.

"It seems like with Social Security, people either want to do all or nothing. If they can't get the credit for really improving the solvency, it doesn't seem like it's worth it to make small changes," said Marc Goldwein, who worked on Social Security reform at the National Commission on Fiscal Responsibility and Reform and is now senior policy director at the Committee for a Responsible Federal Budget. "If you want to get to solvency, you have to do some big options, like raise payroll tax rate, raise the retirement age or significantly readjusting the benefit formula."

The day of reckoning for Social Security retirement benefits is looming, but the trust fund assets won't be depleted until 2034. However, the latest Social Security trustees report predicts the disability trust fund will run out by the fourth quarter of 2016, which could be a more immediate driver for reform.

Without that, Goldwein said, Congress is unlikely to make changes to Social Security because "it's a lot of flak for very little gain, either politically or actuarially."