Author: Sean Williams | May 14, 2019
Social Security ins and outs are difficult to understand
When it comes to America’s top social program, Social Security, there are two givens.
First of all, it’s important. Of the roughly 63 million Americans receiving a benefit today, more than a third count on their monthly payout to lift them out of poverty. Further, 62% of retired workers lean on their guaranteed monthly stipend to account for at least half of their income. According to an analysis from the Center on Budget and Policy Priorities, the elderly poverty rate would be more than four times higher today (i.e., greater than 40%) if Social Security didn’t exist.
The second certainty about Social Security is that it’s a difficult, if not tricky, program to understand. In May 2018, MassMutual released an online, five-question, true/false quiz for adults aged 50 and over. Presumably, since those people were at or near their eligible Social Security claiming age, they should have done well and “passed” with a score of four or five questions correct. Instead, 47% failed to receive a passing grade, proving that we still don’t understand Social Security all that well. And what we don’t understand can cost us dearly.
If you'd like to avoid that pain and get the most out of the program, you'll want to get a handle on these 10 tricky rules.
1. How to calculate your benefit at full retirement age
Arguably nothing about Social Security is more complex or tricky than calculating your benefit. Your payout takes a number of key figures into account, including your work history, earnings history, claiming age, and full retirement age (i.e., the age at which you become eligible to receive 100% of your payout, as determined by your birth year).
To determine your monthly benefit at full retirement age, the Social Security Administration (SSA) will average your earnings across your 35 highest-earning, inflation-adjusted years, then divide by 12 to arrive at your average indexed monthly earnings, or AIME. Your AIME is then plugged into a three-part formula, which often changes from year to year. For workers born in 1957, who’ll become eligible for retired worker benefits in 2019, the formula looks like this:
- 90% of the first $926 in AIME, plus
- 32% of AIME greater than $926, but less than $5,583, plus
- 15% of AIME greater than $5,583
Take note that when calculating your benefit, you’ll want to use the bend points (i.e., the $926 and $5,583 figures above) that are applicable to your first year of Social Security eligibility and not simply the current years’ bend points (for those born in 1957) if you want an accurate calculation. Also, don’t fret, the SSA factors in cost-of-living adjustments into previous years’ bend points.
2. There’s a cap, and a minimum, on what you’ll be paid
Next, it’s important for eligible recipients -- i.e., workers who’ve earned the 40 lifetime credits needed to receive a retirement benefit -- to understand that there are special minimum benefits and maximum benefits payable by the program.
In 2019, Social Security’s maximum monthly benefit at full retirement age is $2,861, which is $73 a month higher than it was in 2018. Regardless of whether you averaged $140,000 a year in income or $10 million annually over the 35 years the SSA takes into account to determine your AIME, $2,861 is the highest monthly benefit you can expect to receive at your full retirement age in 2019.
By a similar token, low-wage workers who have at least 11 years of eligible work will receive a progressive minimum monthly benefit. At 11 years, the special minimum benefit is only $41.90 a month. But it jumps to $435.30 a month with 20 years of eligible work coverage, $653.80 monthly for 25 years, and $872.50 a month for 30 or more years of coverage.
3. You don’t actually have to work to receive a benefit
Generally speaking, a majority of folks who’ll wind up receiving a Social Security benefit will earn that benefit as a result of their work history. However, one of the tricky rules about Social Security is you don’t actually have to work in order to receive a benefit.
For example, a spouse who has never worked a day their life has the opportunity to collect benefits based on their partner’s work history. As long as the nonworking spouse has reached age 62, the initial age of eligibility for benefits (barring special circumstances, such as the nonworking spouse raising a child younger than 16, or a child that is disabled), he or she may be eligible for up to half of what their working spouse’s benefit would be at full retirement age. But keep in mind that spousal benefits can be reduced if they’re claimed before the nonworking spouse reaches their full retirement age.
4. Kids may be eligible for benefits, too
Here’s another monkey wrench to add to Social Security’s complexity: Not only can non-workers qualify for benefits, but you don’t even need to be an adult to qualify for a monthly payout, under the right circumstances.
When eligible Americans who qualify for retired worker benefits (i.e., age 62 or older) have young children, those children, or even dependent grandchildren, may qualify for a benefit. According to the SSA, in order to receive benefits a child must:
- Be unmarried; and
- Be under age 18; or
- Be 18-19 years old and a full-time student (no higher than grade 12); or
- Be 18 or older and disabled from a disability that started before age 22.
Best of all, the added benefits received by a child won’t reduce the primary benefit of the retired worker, which means your kids could actually boost your monthly take-home from Social Security.
5. Benefits can begin before age 62, under certain circumstances
To continue building on these tricky qualifying rules, it’s also possible to receive a Social Security benefit prior to age 62 -- and no, I’m not talking about child benefits.
For instance, assuming there are no eligible children, a surviving spouse of a deceased worker may be eligible to begin taking benefits at age 60, which is two years earlier than the minimum age for retired worker benefits. This could come in particularly handy for a survivor spouse who hasn’t ever worked, or who doesn’t have a long enough work history to qualify for a retired worker benefit. As you might imagine, survivor benefits are reduced if taken prior to the surviving spouse reaching their full retirement age.
Additionally, the minimum age for benefits drops to 50 if the widow or widower is disabled.
6. Staying married longer can (literally) have its benefits
Another relatively tricky quirk of Social Security is that it may reward divorcees who stayed married for at least 10 years.
According to the SSA’s laundry list of qualifications, your ex-spouse can receive Social Security benefits based on your work and earnings history if:
- The marriage last 10 years or longer;
- Your ex-spouse is unmarried (Note: you can get remarried, and it won’t affect the payout eligibility of your former spouse);
- Your ex-spouse is age 62 or older;
- You are entitled to either a retired worker or disability benefit by Social Security; and
- The benefit your ex-spouse would receive from their own work record is less than they’d receive based on your work and earnings history.
As with child benefits described earlier, an ex-spouse receiving benefits based on your work record won’t lower your primary benefit, which makes it a win-win for all involved.
7. The SSA can withhold some or all of your benefits, under certain conditions
Working while receiving Social Security benefits can also get a bit tricky, thanks to the little understood retirement earnings test.
The retirement earnings test allows the SSA to withhold some, or all, of your Social Security benefit if you begin taking your payout prior to your full retirement age, and you earn above certain income thresholds. It’s important to note that the retirement earnings test no longer applies once you reach your full retirement age, even if you began taking your payout early.
If you’re currently receiving a Social Security benefit, but won’t reach your full retirement age in 2019, the SSA can withhold $1 in benefits for every $2 in earnings above $17,640, which works out to $1,470 a month.
Meanwhile, if you will reach your full retirement age in 2019, but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earnings above $46,920.
The silver lining here is that, unless you pass away early, you’ll get these withheld benefits back in the form of a higher monthly payout once you reach your full retirement age. Nevertheless, it’s something that must be considered if you plan to claim benefits early and work.
8. Public-sector jobs could mean a reduced payout
Where you work can also have an impact on what you’ll receive from Social Security.
Whereas most Americans pay into the Social Security system through a private employer, this isn’t always the case. For instance, certain state and federal workers in the public sector don’t pay into the Social Security system and are, instead, set up to receive a pension when they retire. The confusion that can occur is when a person jumps between private- and public-sector employment during their lifetime. If this is the case, or you have a spouse that worked in the private sector while you worked in the public sector, certain provisions exist that may allow the SSA to reduce your benefit.
The Windfall Elimination Provision (WEP) is what allows the SSA to reduce your benefit if you jumped between the public and private sectors during your career. If you earned money in the public sector that avoided Social Security’s payroll tax, and these earnings also netted you a public pension, the WEP simply ensures that you don’t receive an unfair windfall (i.e., the ability to double-dip via pensions and a full Social Security benefit).
Also, the Government Pension Offset (GPO) can allow the SSA to reduce your spousal or survivor benefits if you’re also receiving a pension from a public-sector employer. The GPO rule is simple: It reduces your Social Security benefit by two-thirds of what you receive from your public pension, with no limit. This means the GPO can completely eliminate your Social Security benefit, if you have a large enough pension payment.
9. Social Security has a built-in do-over clause
Mulligans aren’t just for the golf course! Social Security has one, too.
Form SSA-521, or as it’s officially known, the “Request for Withdrawal of Application,” is the ultimate do-over clause for recent retirees. If filed with the SSA and approved, it allows a person receiving a Social Security retired worker benefit to undo their application. In layman’s terms, it would be as if they never claimed benefits in the first place, which would then allow their monthly payout to begin growing again by as much as 8% per year, until age 70.
Of course, there are two catches. First, the time limit on this do-over clause is only 12 months from when you first receive benefits. This means you’ll need to determine pretty quickly if you’ll want to undo your claim. And secondly, you’ll need to repay every cent you’ve received in benefits back to the SSA.
Form SSA-521 could be particularly beneficial to older Americans who’ve struggled to find a job, and who filed for Social Security early in order to generate income. If these folks do find a well-paying job within the 12-month window, they can potentially undo their claim, pay back their benefits, and allow those benefits to grow over time.
10. Yes, you can be taxed on your benefits
A final tricky Social Security rule you should be aware of is the fact that, yes, Social Security benefits may be taxable at the federal and state level.
In 1983, the Reagan administration passed the last major overhaul of the Social Security program, and in the process introduced the taxation of Social Security benefits (which went into effect in 1984). Single beneficiaries whose modified adjusted gross income (MAGI), plus one half of benefits, exceeds $25,000, or $32,000 for couples filing jointly, can have up to half of their benefits taxed at the federal level.
In 1993, under the Clinton administration, a second tier was added that allowed up to 85% of benefits to be taxed if a single beneficiaries’ MAGI plus one-half benefits exceeds $34,000, or $44,000 for a couple filing jointly. None of the income thresholds set in 1983 or 1993 have ever been adjusted for inflation, which means that around half of all senior households owe tax on their Social Security benefits today.
And if that wasn’t enough, 13 states also tax Social Security benefits to some varied degree.
Knowledge is power
As you’ve plainly seen, Social Security is full of tricky rules and is highly complex. However, taking the time to understand how its ins and outs can impact you and your family should go a long way toward helping you to maximize your lifetime payout from the program. The more informed you are, the likelier it is you’ll get the most possible out of Social Security.
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