Social Security is a social insurance program, designed to provide retirement, disability, and survivor benefits to those who are eligible. The benefits are paid for by the withheld tax on current workers’ earnings.
In order to become eligible to receive Social Security retirement benefits, first of all, an individual must work in a Social Security-covered job (where Social Security taxes are withheld from pay).
Self-employed individuals are also subject to Social Security taxation.
Eligibility for retirement benefits occurs when the individual has worked in such a covered job, earning at least the minimum amount, for 40 quarters (10 years).
The 40 quarters of earnings do not have to be a continuous 40 quarters, these quarters may be earned at any time during the worker’s career.
Disability benefits have a more complicated method of determining eligibility due to the fact that it is common for a disability to arise at any stage in an individual’s working career.
The minimum amount for 2020 is $1,410 – meaning, that if you earn at least $1,410 during any 3 month period in 2020, you will earn one quarter-credit. If you earn $5,640 or more over the course of 2020, you will earn four quarter-credits. Four quarter-credits are the maximum you can earn in any one year.
If you have earned a total of 40 or more quarter-credits, once you reach age 62, you can be eligible to apply for Social Security retirement benefits.
If you have not earned the 40 quarter-credits in your own career but you are married to someone who has earned enough credits, you will be eligible for a spousal benefit upon reaching age 62 as well.
Likewise, if you are divorced from someone who earned the credits, and you were married for at least 10 years and have not remarried, you can be eligible for the spousal benefit based on your ex-spouse’s record as well.
It should be noted that, although 62 is the earliest age that you can apply for and receive Social Security, at this age your benefit is reduced to the minimum. Delaying your application until your Full Retirement Age (which ranges from 66 to 67, depending upon your year of birth) can increase the amount of Social Security benefit you will receive. Furthermore, delaying application beyond your Full Retirement Age will increase your benefit more – up to as late as age 70.
Once you’ve started receiving Social Security retirement benefits based on your own earnings record, these benefits will continue for your entire lifetime.
Most of the time, the amount will only change when there is a Cost of Living Adjustment (COLA), which increases your benefit on what is supposed to be an annual basis.
However, there can be years when the COLA is zero (as we saw in 2010, 2011, and 2016), but this is fairly uncommon. There is no situation (under current rules) where a COLA would adjust your benefit downward.
Additionally, your Social Security benefit could actually last longer than your lifetime. After your death, your benefit may continue in the form of a survivor benefit for your spouse, ex-spouse, and/or minor or disabled children.
There are many ways that your Social Security retirement benefit could be reduced. The circumstances that cause these downward adjustments are detailed below.
There are circumstances that may cause your net Social Security retirement benefit to be reduced. Among these are Medicare premiums, IRMAA adjustments, tax withholding, earnings limits, and WEP impact.
For example, if you started collecting Social Security benefits before age 65, when you turn 65 (assuming you’re enrolled in Medicare Part B), your Medicare Part B premium will be deducted from your monthly Social Security check. This results in a reduction in your net Social Security benefit received.
In addition to the Medicare Part B premium, you may also have a Medicare Part D premium deducted from your Social Security benefit as well, if you have Part D coverage for prescription drugs.
You may elect to have Medicare Part C premiums (Medicare Advantage) deducted from your Social Security check as well.
If you had high income in a prior year, you may be subjected to a Medicare premium increase called the Income-Related Monthly Adjustment Amount (IRMAA). When this adjustment is applied to your premium, the amount of the premium for Medicare Part B (and Part D if you have it) will increase, resulting in a further reduction to your net monthly Social Security benefit.
Once the IRMAA adjustment is no longer in effect, your premium will revert to the standard Medicare Part B (and Part D) amount, bumping up your net Social Security benefit again.
You have the option of having income tax withheld from your Social Security benefit check. If you do this, the withheld tax payments will result in a reduction of your net monthly Social Security benefit that you receive. This not required, but it is an option for folks who need the additional tax withheld.
If you are collecting Social Security benefits before your Full Retirement Age (FRA – ranges between age 66 and 67, depending upon your year of birth) AND you are still working, either as an employee or a self-employed individual, depending on how much you earn there may be reductions to your Social Security benefit.
If you earn more than $18,240 in 2020, for every $2 over that amount your Social Security benefits will be reduced by $1. This is often accomplished by withholding the first checks of the year after your “extra” earnings until the withheld amount is reached. After that, you’d once again receive your normal monthly Social Security check.
Once you reach FRA, there is no earnings limit. Plus, in the year you’ll reach FRA, the earnings limit is much more liberal. If you’re reaching FRA in 2020, for every $3 that you earn over $48,600, $1 is withheld from your Social Security benefits.
If you are collecting Social Security benefits based on your own earnings record and also receiving a pension from a job that was not covered by Social Security (such as a teaching position or a governmental entity), your Social Security benefit may be reduced due to the Windfall Elimination Provision, or WEP.
This provision reduces your Social Security benefit by the lesser of 50% of the amount of the pension, or 50% of the first bend point (an arcane figure used in calculating your overall benefit).
The maximum reduction for WEP impact for someone reaching age 62 in 2020 is $480, and this figure is adjusted annually.
Each person’s WEP figure is based on the year that they reach age 62. WEP cannot completely eliminate your Social Security retirement benefit, and there are ways to mitigate or even eliminate this impact, depending upon the length and amounts on your Social Security-covered earnings record.
If you are receiving Social Security benefits based on someone else’s record, there can be circumstances when the benefit will decrease or even stop altogether.
Most of the same items from above can reduce the amount of your Social Security spousal or survivor benefit (Medicare, IRMAA, tax withholding, and earnings limits).
WEP can have an indirect impact on a Social Security spousal benefit, in that the WEP reduction is applied to Spouse 1’s own benefit first, and then the Social Security spousal benefit based on that record, received by Spouse 2, would be correspondingly reduced.
However, there are several other situations that can impact Social Security spousal or survivor benefits directly, including GPO, remarriage, and death of a spouse or ex-spouse.
If you are collecting a Social Security spousal or survivor benefit while also collecting a pension from a governmental entity, your Social Security spousal or survivor benefit may be reduced or even eliminated due to the Government Pension Offset, or GPO.
GPO subtracts 2/3 of the amount of your governmental pension from the Social Security spousal or survivor benefit and can reduce this benefit to zero. Unlike WEP, there is no way to reduce or eliminate the impact of GPO.
If you are collecting a Social Security spousal benefit based on an ex-spouse’s earnings record and you remarry, you will lose the Social Security spousal benefit. This applies while your current marriage is in effect.
You can start up a new Social Security spousal benefit based on your new spouse’s record (if your new spouse has a Social Security benefit). If the current marriage ends, such as from death or subsequent divorce, you can re-apply for the earlier Social Security spousal benefit again.
If you are collecting a Social Security survivor benefit based on a late spouse’s (or ex-spouse’s) record and you remarry before age 60, the Social Security survivor benefit will cease.
Remarriage after age 60 does not cause this elimination of benefits.
This one is a bit hard to understand – since generally you only become eligible for survivor benefits at age 60. However, if you are totally disabled you can become eligible for survivor benefits as early as age 50 – and so these individuals can be impacted by the “before age 60” remarriage rule.
In addition, remarriage before age 60 can result in your becoming ineligible to apply for Social Security survivor benefits based on earlier marriage.
If you married at age 59 (after your earlier spouse or ex-spouse has passed away), you would eliminate your eligibility for Social Security survivor benefits while the current marriage is in effect. Subsequent death or divorce will restore the eligibility for Social Security survivor benefits as if you had not remarried before age 60.
* There is an exception to these two remarriage rules: If you remarry (at any age) and your new spouse is also collecting either a Social Security spousal or survivor benefit currently, then you will be allowed to continue receiving the Social Security spousal benefit after the remarriage. This only applies to individuals currently receiving those benefits. If the remarriage rule otherwise applies to you and you have not started receiving a Social Security spousal or survivor benefit, you will not be allowed to start either after the remarriage occurs.
If you are collecting a Social Security spousal benefit based on the earnings record of your spouse or ex-spouse and that spouse or ex-spouse dies, the Social Security spousal benefit will cease.
Of course, if you otherwise are eligible, you would be able at that time to apply for and receive a Social Security survivor benefit based on the late spouse or ex-spouse. You may also delay applying for the Social Security survivor benefit to a later date if it would be more advantageous for you to wait.
Usually, the Social Security survivor benefit is a larger amount (versus a spousal benefit) as well.
Social Security benefits are calculated using a complicated formula.
To start off, over your lifetime, your earnings that have been subject to Social Security taxation are recorded each year. Once you reach 60, these earnings are indexed based on the average wage during the year you reached age 60. By indexing, we mean that the earlier wages that you earned are multiplied by an inflation factor so that the dollars you earned in your earlier years are, from an inflation standpoint, equivalent to the dollars you earned in the current year. From your age 60 onward, if you earn additional income subject to Social Security taxation, the amounts are not indexed.
The average is taken from the highest 35 years of indexed earnings.
So if early in your life you had much lower (even after indexing) earnings, some of these years may not be included in the average.
On the other side of the coin, if you’re continuing to earn after your initial benefit is calculated and your new earnings are greater than one of the previously-included “top 35 years”, the new earnings will replace the lowest year from the previous calculation.
If you don’t have a full 35 years of Social Security taxed earnings, zeros will be included for the remaining missing years.
These 35 years are added together, and then divided by 420 – this is the number of months in 35 years. The result is an average indexed monthly earnings amount (known by SSA as AIME).
The AIME is then applied to two bend points. These bend points are also based on your age 60 year (just like the earnings indexes).
For someone reaching 60 in 2020, the two bend points are $960 and $5,785.
The first $960 of your AIME is then multiplied by 90% (0.9). The amount between $960 and $5,785 is then multiplied by 32% (0.32).
If the AIME is greater than $5,785, any amount above that is multiplied by 15% (0.15). These three results are added together to produce your Primary Insurance Amount, or PIA.
The PIA is the amount of benefit that you are (currently) scheduled to receive if you file for benefits at exactly your Full Retirement Age (FRA).
Full Retirement Age is based on your year of birth as well, and for folks born between 1946 and 1954, FRA is 66. For each year after 1954, two months are added to the FRA, until it reaches 67 for someone born in 1960 or later.
If you file at any time before your FRA, there will be a reduction to your Social Security benefits.
At the minimum age of 62, if your FRA is 67, your benefit will be 70% of your PIA.
For an FRA of 66, the minimum benefit at age 62 will be 75% of your PIA.
For every month after age 62 that you delay filing for Social Security, the amount will increase until you reach FRA, when your Social Security benefit will be equal to your PIA.
For each month that you delay past your FRA, the amount of your benefit will increase above your PIA.
The latest that these increases are applied is your age 70.
For someone who was born in 1960 (and therefore your FRA is 67), the maximum benefit amount will be 124% of your PIA.
If you were born between 1946 and 1954 (with a FRA of 66), the maximum benefit amount will be 132% of your PIA.
If you were born in between 1954 and 1960, your maximum will be somewhere in between 124% and 132%.
You first become eligible to apply for Social Security benefits at age 62.
Depending on your year of birth, you may have a Full Retirement Age (FRA) of 66, 67, or some point in between.
The oldest age that you should consider for applying is 70.
If you were born between 1946 and 1954 your FRA is 66. For each year after 1954, two months are added to the FRA, until birth year of 1960 or later, when the FRA is 67. This date is important because this is the age when you are eligible to receive a full benefit, which is also known as your Primary Insurance Amount, or PIA.
At any age prior to FRA, your benefit will be reduced.
For each month prior to FRA, there is a reduction, ranging from approximately 0.42% up to 0.55% per month. If your FRA is 66, the minimum benefit at age 62 is 75% of your PIA. If your FRA is 67, the minimum benefit is 70% of your PIA.
Starting benefits later than your FRA will result in an increase to benefits. For every month of delay (up to age 70), 0.67% is added to your benefit. If your FRA is 66, the maximum benefit is 132% of your PIA. For an FRA of 67, the maximum benefit is 124% of your PIA.
These amounts have been actuarially determined to be approximately the same for the average lifespan of the individual filing for benefits. In other words, if you live to the average lifetime (around 82), starting benefits at any point between ages 62 and 70 will result in approximately the same benefit amount to be paid over your lifetime.
If you expect that you’ll live a long time past the average, such as if you have a family history of centenarians, you might want to delay your benefit as long as possible. This will maximize the income stream from Social Security over a long period of time. Of course, you’ll need to have other resources (IRAs, 401(k)s, or other earnings or savings) to cover your income needs while you delay.
On the other hand, if you are facing an illness or condition that is likely to shorten your lifespan, you’ll be better off starting benefits earlier in most cases. This way you’re receiving the benefit (even though it’s reduced) for as long as possible given your situation.
Delaying benefits may also set up your spouse for increased survivor benefits after your death. If you maximize your own benefit and your spouse has earned a smaller Social Security benefit on his or her own record, after your death the benefit that you’ve been receiving will be converted to a survivor benefit to replace your surviving spouse’s smaller benefit.
For others, starting benefits early may result in additional benefits for other family members.
If you have minor children (under age 18) and/or a spouse who would otherwise not be eligible for benefits, when you start your Social Security benefit, these dependent benefits may become available.
If you are delaying benefits, these dependent Social Security benefits are not available until you file for your Social Security benefit.
Your own financial situation may force you to start benefits early. In spite of the reduction, if you have little to no other resources available to you, this could be your only choice.
There’s no concrete answer, to be honest.
There is no “best age” for filing for Social Security benefits. It’s a personal decision for each individual, based on the circumstances that he or she and his or her family faces.
Jim Blankenship, CFP®, EA
Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 30 years, Jim is a CFP® professional and has earned the Enrolled Agent (EA) designation. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.