Social Security Planning

What Is Social Security?

Social Security is a system of social insurance benefits available to all covered workers in the United States. Begun in 1937, the Social Security system covers a wide range of social programs. The term "Social Security," as it is commonly used, refers to the benefits provided under one part of the system, known by its acronym, OASDI, or Old-Age, Survivors, and Disability Insurance. 

OASDI benefits are funded primarily by payroll taxes paid by covered employees, employers, and self-employed individuals. Both the OASDI portion of the payroll tax, as well as that part of the tax that goes to finance hospital insurance, HI (Medicare), are provided for under the Federal Insurance Contributions Act, FICA. 

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Insured Status 

To qualify for benefits, a worker must be either "fully" insured or "currently" insured. An insured status is acquired by earning "credits", based on the wages or self-employment income earned during a year. In 2023, an individual must earn $1,640 in covered earnings to receive one credit and $6,560 to earn the maximum of four credits for the year. 

A worker becomes fully insured by earning 40 credits, typically by working 10 years in covered employment. To be considered currently insured, a worker must have at least six credits in the last 13 calendar quarters, ending with the quarter in which he or she became entitled to benefits. 

All benefits are available if a worker is fully insured. Some benefits are not available if the worker is only currently insured. Unique requirements apply to disability benefits. 

What Benefits Are Available?

• Worker's benefit: This is a monthly income for a retired or disabled worker. 
• Spouse's benefit: Refers to monthly income for the spouse or former spouse of a retired or disabled worker.
• Widow(er)'s benefit: Refers to monthly retirement income for the surviving spouse or former spouse of a deceased worker. 
• Child's benefit: A monthly income for the dependent child of a deceased, disabled, or retired worker. To qualify, a child must be under age 18, or 18 or 19 and a full-time elementary or high school student, or 18 or over and disabled before 22. 
• Mother's or father's benefit: Monthly income paid to a surviving spouse who is caring for a workers dependent child who is under age 16 or disabled before age 22. If under age 62, the spouse of a retired worker receives the same benefit. 
• Parent's benefit: Monthly income paid to the surviving dependent parent or dependent parents of a deceased worker. 

On What Is the Amount of a Social Security Benefit Based?

In general, a covered worker's benefits, and those of his or her family members, are based on the worker's earnings record. The earnings considered are only those reported to the Social Security Administration (SSA), up to a certain annual maximum known as the "wage base." The wage base is indexed for inflation each year and effectively places a cap on the amount of Social Security benefits a worker can receive, regardless of earnings. The wage base for 2023 is $160,200 

Using a worker’s earnings record, the SSA calculates a number known as the Primary Insurance Amount, or PIA. The PIA is the basic value used to determine the dollar amount of benefits available to a worker and his or her family. 

What Is the Benefit Amount?

Workers aged 60 or older and who are not receiving Social Security benefits automatically receive a paper Social Security Statement each year, listing the worker's earnings as well as providing estimated retirement, disability, and survivors benefits. Workers attaining ages 25, 30, 35, 40, 45, 50, 55, and 60 who are not receiving Social Security benefits and who are not registered for an online Social Security account. (My Social Security) will receive a paper statement in the mail approximately three months before their birthday.

Which Is Better? — Early or late? 

One way to answer this question is to perform a "break-even" analysis which estimates the age at which the total value of higher benefits (from delaying retirement) is greater than the total value of lower benefits (from starting retirement early). 

If you expect to live longer than this break-even age you would likely benefit from delaying the start of Social Security retirement benefits. If you are in poor health, or if members of your family tend to die at relatively young ages, you will likely receive a greater benefit by beginning your benefits early. 

Federal government indicates that Social Security retirement benefits typically make up almost one-third of the income of Americans aged 65 or older. Thus, the decision as to when to begin to take Social Security retirement benefits is an important one. Once you decide to begin receiving Social Security retirement benefits, the initial benefit will generally serve as the "base" amount for the rest of your life, subject only to adjustment for increases in the cost of living. 

The question is made a little easier to answer if you separate when you want to retire from when you want to begin receiving Social Security retirement benefits; these two events don't necessarily have to occur at the same time. An understanding of how your benefits are calculated, how they are taxed, and what happens if you continue to work after beginning to receive benefits, is also important. 

"Full" Retirement Age — "Full" Benefits 

For many years, full retirement age (FRA), the age at which "full" benefits - 100% of an individual's Primary Insurance Amount (PIA) - are available was set at age 65. This is still true for those born in 1937 or earlier. However, for those born in 1938 or later, FRA gradually increases until it reaches age 67 for those born in 1960 or later. 

Early Retirement — Reduced Benefits 

Age 62 is the earliest age that someone can begin to receive Social Security retirement benefits. However, if retirement benefits begin before the "full" retirement age, the benefit paid is reduced to reflect the income that will be paid over a longer period of time. The amount of the reduction varies with the year of birth. For example, an individual born in 1937 (FRA = age 65) who began receiving benefits at age 62 had his or her retirement benefit reduced to 80% of what it would have been had they chosen to wait until FRA. However, for a worker born in 1962, for whom FRA is age 67, choosing to receive retirement benefits at age 62 results in an initial benefit reduced to 70% of what it would have been had the individual waited to age 67.

Delay Retirement — A Bigger Benefit 

What happens if you decide to wait and take your retirement benefits later than your FRA? You get paid for waiting, in the form of a larger retirement benefit. For each year beyond your FRA that you delay receiving retirement benefits, up to age 70, your benefit is increased by a specified percentage of the PIA. The amount of the credit for each year of delay beyond FRA will vary depending on the year of birth. For example, an individual born in 1935 who delayed receiving benefits until age 70 had his or her benefit increased by 6% for each year (five years in this case) beyond the FRA of age 65. For those born in 1943 and later, delaying retirement increases their benefit by 8% per year for each year they wait beyond their FRA. 

Federal Income Taxation of Social Security Benefits

Under federal law, Social Security benefits may be subject to income tax. If one-half of your Social Security benefits plus your "modified adjusted gross income" (often the same as adjusted gross income) exceed certain limits, then a portion (up to 85%) of your benefits is taxable. For married couples filing jointly this threshold is $44,000; for all others it is $34,000. State or local tax treatment of Social Security benefits can vary. The threshold is $0 for those who are married filing separately and who lived with their spouse at any time during the year. 

If You Continue Working

If you begin taking Social Security retirement benefits early and also continue working, your retirement payments will be temporarily reduced if your earnings exceed certain limits. For this purpose, "earnings" generally include wages received as an employee or the net income received from self-employment. The amount of the reduction will vary:

• Under FRA: One dollar of benefits is lost for every two dollars you earn over $21, 240 ($1,410 monthly).
• The year you reach FRA: One dollar of benefits is lost for every three dollars you earn over $44,880 ($1,770 monthly).

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The decision as to when to take Social Security retirement benefits is an important one. A wrong decision can cost a retiree thousands of dollars. The guidance of financial professionals, to insure that all relevant issues are considered, is highly recommended.

Social Security Claiming Strategies for Married Couples

For many Americans, Social Security benefits are an important source of retirement income. How much a retiree receives each month from Social Security is affected by a number of factors, including the retiree's lifetime earnings history, the age at which he or she applies for benefits, and whether more than one type of benefit may be available. 

Carefully choosing when and how to claim Social Security retirement benefits can significantly increase the total dollar amount of benefits received. For an unmarried individual, deciding when to claim Social Security retirement benefits is relatively straightforward. For married couples, however, it is a more involved decision. 

Basic Ground Rules for Claiming Retirement Benefits

• Primary Insurance Amount: All Social Security benefits are based on a workers lifetime earnings record. Higher lifetime earnings generally result in higher benefits. Based on the earnings record, the Social Security Administration calculates an amount, called the “Primary Insurance Amount,” (PIA). The PIA is the basic value upon which all of the worker's (and dependent's) benefits are based. 
• Full retirement age: For many years, the “full” retirement age (FRA), the age at which “full” benefits -100% of an individual's PIA - are available, was age 65. However, for those born in 1938 or later, FRA has gradually been increasing. It is scheduled to reach age 67 for those born in 1960 or later.
• Early retirement = reduced benefits: Age 62 is generally the earliest age that someone can begin to receive Social Security retirement benefits. However, if retirement benefits begin before an individual's FRA is reached, the benefit paid is reduced to reflect the fact that income will be paid over a longer period of time. An individual's PIA is reduced by 5/9 of 1% for each month, up to 36 months, that the individual applies before FRA. If the individual applies for benefits more than 36 months before FRA, an additional reduction of 5/12 of 1% is applied for each month in excess of 36. 
• Delayed retirement = a bigger benefit: If an individual delays applying for retirement to FRA or beyond, the benefit is increased. For those born in 1943 or later, delaying retirement increases the benefit by 8% of the full PIA for each full year they wait beyond FRA. The maximum delayed credit is reached at age 70. 
• Working and receiving benefits simultaneously: Individuals under FRA, who are both working and receiving Social Security benefits, are subject to certain earnings limitations. Once these limitations are exceeded, a recipient's Social Security benefits are reduced. For 2017, for those under FRA, benefits are reduced by one dollar for every two dollars in excess of $16,920. If the worker reaches FRA in 2017, benefits are reduced by one dollar for every three dollars of earnings in excess of $44,880. At FRA, these “lost" benefits are later partially restored through a benefit re-computation that takes into account the number of months of reduced or no benefits. 
• Type of benefit available - unmarried individuals: For single individuals, deciding when to apply for retirement benefits is relatively easy; they have only the retirement benefit itself to consider. Apply early, get a reduced benefit; apply later, get a larger benefit. 

Claiming Strategies Available to Married Couples

For married couples, the situation is more complex, for two key reasons: (1) there are several types of benefits that may possibly be claimed by spouses, and (2) the impact of major changes to Social Security law contained in the Bipartisan Budget Act of 2015, signed into law by President Obama on November 2, 2015. These legislative changes effectively ended what Congress saw as an abuse of prior Social Security law, resulting in married beneficiaries receiving more Social Security retirement income than Congress originally intended. Because of this legislation, the Social Security retirement claiming strategies available to married couples have changed. Whether the new law or old law applies will depend on the ages of the spouses and the cutoff dates during a transition period provided for in the new law.

Types of benefits available to married couples:

Through April 29, 2016, there were three types of retirement benefits potentially available to certain married couples:

1. Retirement benefit: The benefit an individual receives based on his or her own earnings record. If both spouses have worked, each may independently qualify for a retirement benefit.

2. Spousal benefit: A benefit payable to the spouse of a retired worker. If the spouse has reached FRA, the benefit is generally 50% of the worker's PIA.

3. Survivor's benefit: A benefit payable to a deceased worker's surviving spouse. If the survivor has reached FRA, the benefit is usually 100% of the worker's PIA.

Under prior law, the optimal Social Security retirement claiming strategy available to a married couple was usually a mix of two basic approaches: (1) File and Suspend, and; (2) Claim Now, Claim More Later. The following examples show how each of these approaches worked.

File-and-Suspend: In the "File-and-Suspend" approach, a worker, upon reaching FRA, filed for retirement benefits and then immediately suspended their receipt.This had a couple of effects Under both the old and the new law, the option to Ilk and suspend is not available until an individual reaches FRA:

1. The spouse then qualified for “spousal" benefits. Social Security would compute both the spousal benefit (generally 50% of the worker's PIA) and any retirement benefit the spouse may have earned in his or her own right, and, in effect, awarded the larger of the two. Except for cost-of-living adjustments, this benefit would continue unchanged until either the spouse or the worker died. 

2. The worker, by suspending receipt of benefits, would also have received an increased retirement benefit for each month of delay up to age 70. This would also have provided a larger widow(er)'s benefit (generally 100% of the deceased worker's PIA) to the spouse, assuming that: (a) the worker pre-deceased the spouse, and (b) the worker's retirement benefit was larger than the benefit the spouse was receiving at the time the worker died.

Claim Now, Claim More Later: If the worker or spouse was at or beyond FRA, they had a choice of collecting either the spousal benefit or their own retirement benefit. Generally, this approach was used by the high-earning spouse: 

1. A low-earning spouse must have claimed his or her own retirement benefit. The high-earning spouse would do what is known as a "restricted application" where he or she would choose to receive the spousal benefit only while allowing his or her own retirement benefit to grow (via delayed retirement credits) until age 70. 

2. At 70, the high-earning spouse would then switch from spousal benefits to his or her own retirement benefit. 

The Impact of the Bipartisan Budget Act of 2015

The Bipartisan Budget Act of 2015 effectively ended both the File-and-Suspend and the Claim Now, Claim More Later strategies. The major impacts of this law on Social Security include: 

File-and-Suspend: The new legislation, effective for claims filed on or after April 30, 2016, still allows an individual to file-and-suspend, but doing so also suspends all other benefits based on the worker's record. The worker must actually receive his or her Social Security benefit in order for a spouse or other qualifying dependents to receive a benefit. The worker's own retirement

Benefit will still increase due to delayed retirement credits. Families who were already receiving benefits under this strategy, and those who file-and-suspend by April 29, 2016 (i.e. those who reached age 66 by April 29, 2016), were not affected by the new law.

1. Claim Now, Claim More Later: Under prior law, the key to this strategy turned on the ability of a spouse, once he or she reached FRA, to file a "Restricted," application for spousal benefits only. Under the new legislation, individuals who were age 62 or older in 2015 will still be able to file a Restricted application in the future, claim spousal benefits, and then later switch to their own (larger because of delayed retirement credits) retirement benefit. However, for those under age 62 in 2015, this choice is no longer available. When a spouse who is entitled to both a spousal benefit and a retirement benefit applies for benefits, Social Security will calculate both amounts and award the larger of the two. In essence, the spouse either applies for all possible benefits, or delays all possible benefits. There will no longer be a choice to claim one benefit now and a different benefit later. 

2. Key points to remember: 

Those who are already using either the File-and-Suspend or the Claim Now, Claim More Later strategies may continue to do so. The new law does not affect them. 

April 29, 2016 was the last day for those who had reached FRA to request suspension of benefits in order to qualify a spouse or other dependents for Social Security benefits while simultaneously allowing their own retirement benefit grow due to delayed retirement credits. 

Those who were at least age 62 in 2015 will still be able to file a "Restricted" application for spousal benefits only when they reach FRA. The last of these individuals will reach FRA in 2019. 

Those who reach age 62 after 2015 will not be able to file a "Restricted" application, nor will they be entitled to use the File-and-Suspend strategy.

Seek Professional Guidance

The decision as to when to take Social Security retirement benefits is an important one. A wrong decision can cost a retiree thousands of dollars. The guidance of financial professionals, to insure that all relevant issues are considered, is highly recommended.

Financial Freedom Group can help you determine the best time to start your social security benefits given you and your spouses unique situation.

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