Decisions regarding Social Security can be deviously complicated. There are thousands of rules, thousands upon thousands of additional codicils to clarify the rules, annual changes, and recent legislation, the Bipartisan Budget Act of 2015 (BBA), which drastically modified the planning landscape. Each day 10,000+ “baby-boomers” reach retirement age and many other individuals of pre-retirement age make critical choices impacting their potential Social Security benefits. These decisions involve when to claim benefits, what kind of benefit to request, and when to marry, divorce, or remarry. Too often people are misinformed and mislead when they make these assessments. We need to be aware of certain fundamental concepts in order to get the maximum benefits from Social Security and avoid costly mistakes. After all, we have paid for these benefits, and we should get what we are entitled to.
This article is the first of a series of articles that will highlight factors we need to consider to make better choices with respect to claiming Social Security. This particular article will discuss two concepts, eligibility and full retirement age. It will also describe the first two steps to start the Social Security decision-making process.
To qualify for retirement benefits, individuals must accumulate 40 credits. Credits are a function of dollars earned and not calendar quarters worked. In 2018, a worker earns 1 credit for each $1,320 earned, up to a maximum of 4 credits per year. Once the worker is eligible, so may his/her current spouse, ex-spouse(s), young and disabled children, and even parents qualify for auxiliary benefits.
The best starting point for Social Security decision-making is to obtain an estimate of benefits by setting up an online account at: https://www.ssa.gov/myaccount/. It is recommended that you periodically check your earnings record as compiled by the Social Security Administration using this site. Sometimes the SSA makes errors or misses earnings; it is essential for the worker to timely correct those mistakes.
FULL RETIREMENT AGE (FRA)
The second important step for Social Security decision-making is to understand the implications of Full Retirement Age (FRA). There are three key time frames to consider when claiming Social Security retirement benefits: prior to FRA, at FRA, and at age 70. If retirement benefits are collected before full retirement age, the recipient may be subject to an earnings penalty, an Early Retirement Reduction (ERR), and a loss of flexibility due to “deeming” (discussed later). In 2018, a recipient who begins collecting Social Security before FRA may earn income up to $17,040, without experiencing the earnings penalty. The earning penalty not only affects worker benefits but it also may impact spousal, survivor and child benefits. Social Security benefits are reduced by $1 for every $2 earned beyond the yearly maximum. For 2018, the earnings threshold in the year of FRA is increased to $45,360 and in that year the reduction is $1 for every $3 over the limit. The earnings thresholds are adjusted annually to reflect inflation. The earnings penalty impacts not only the benefits of the worker but also benefits of other family members. In most cases, the earnings penalty on worker, spousal and survivor benefits is more of a nuisance than a punishment. When a worker or spouse reaches full retirement age, the Social Security Administration can recompense recipients for the loss of benefits due to the earnings penalty.
For those individuals born in 1937 and prior, the FRA was 65 and gradually increased to 66 for those born from 1943 to 1954. For those individuals born after 1954, the FRA creeps up year by year in 2 month intervals until those born in 1960 have a FRA of 67. The early retirement penalty also increases as the FRA lengthens. The early retirement penalty decreases to 0% gradually (but not linearly) as the recipient’s age gets closer to full retirement age.
The earliest age to claim worker and spousal benefits is age 62. Survivor benefits can start at age 60 or age 50 if disabled. For recipients with a FRA of 66, workers collect 75% of their FRA benefits if started at age 62 and spouses collect 35%. For recipients with a FRA of 67, workers collect 70% of the FRA benefits if started at age 62 and spouses collect 35%. Regardless of FRA, survivors collect 71.5% of the FRA benefits when commencing at the earliest age. If a worker files and collects Social Security at FRA, there is no earnings penalty, no early retirement penalty, and if age 62 by January 1, 2016, he/she is largely not subject to “deeming”(see below). The reduction for early filing is hefty, generally permanent, and it reduces the spouse’s survivor benefits.
If a worker delays collecting Social Security post FRA, benefits accrue a Delayed Retirement Credit (DRC) for each month until reaching age 70. The DRC is 2/3% per month or 8% per year (not compounded). For individuals born from 1943 to 1954, forgoing benefits until age 70 increases worker benefits and survivor benefits by 32%. The decision of when to commence collecting Social Security is a function of a great many variables. The current monthly maximum Social Security benefit at age 66 is $2,788 and at age 70 is $3,680 per month.
DEEMING AND THE BIPARTISAN BUDGET ACT OF 2015 (BBA)
Deeming is a major obstacle for individuals filing for worker and spousal benefits before full retirement age. This rule requires claimants to collect the higher of the benefits based upon their own record or eligible spousal benefits. This means that a spouse or ex-spouse cannot elect to file (a procedure called filing a “restricted application”) to collect spousal benefits while their own worker benefits grow via delayed retirement credits. Switching to delayed worker benefits at age 70 would be prudent if they are greater than the spousal benefits. The passage of the BBA of 2015 extended the deeming rule from full retirement age to age 70 for individuals who had not attained age 62 by January 1, 2016. Deeming will be discussed more in future articles.
There are a great many factors to consider when deciding when to claim Social Security. This article discussed eligibility and full retirement age. The best starting point for Social Security decision-making process is to obtain an estimate of your potential benefits. The second step is developing an appreciation of FRA. For a FRA age of 66, FRA worker benefits are 33.3% higher than age 62 benefits. The benefits at age 70 are 76% higher than the worker benefits at age 62. It is generally recommended for workers to wait at least to FRA before commencing benefits. Of course, life expectancy, retirement resources, potential auxiliary benefits for spouses and dependents, and a plethora of other factors need to be considered. Unfortunately, the majority of the recipients commence collecting benefits at age 62 and 63. Patience when collecting Social Security can result in higher lifetime benefits for the worker and the widow(er). Many other Social Security issues will be discussed in upcoming articles. The next article will discuss how benefits are determined and the following article will explain the different types of benefits.
By Francis C. Thomas, CPA/PFS