Normal or full retirement age

Full retirement age is the age at which a person may first become entitled to full or unreduced retirement benefits. No matter what your full retirement age (also called normal retirement age) is, you may start receiving benefits as early as age 62 or as late as age 70. For many years, NRA was age 65. Now, however, your date of birth governs your NRA. Beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959.

The following table, provided by the Social Security Administration (SSA), indicates how NRA varies by year of birth for retirees.

For example, John Roberts was born on March 13, 1953. His NRA (using the preceding chart) will be March 2019.

The SSA has developed a simple retirement age calculator tool to help people determine their NRA. The tool is reproduced below (and can be accessed at https://www.ssa.gov/planners/retire/agereduction.html).

Full retirement and age 62 benefit by year of birth

Step 1: List FICA-taxed earnings each year

A worker’s earnings history is reported on his or Social Security statement, which is now obtainable from the SSA online at www.socialsecurity.gov/myaccount/.

Step 2: Adjust each year of earnings for inflation

The SSA uses a process called wage indexing to determine how to adjust a fully insured worker’s current and previous earnings for inflation. There are two steps in the wage indexing process.

• First, each year the SSA publishes the national average wages for the year. The list is available at the National Average Wage Index page https://www.ssa.gov/oact/COLA/AWI.html.
• Second, the worker’s wages are indexed to the average wages for the year he or she turns 60. For each year, one would take the average wages of the indexing year (which is the year in which the covered worker turns age 60) divided by average wages for the year being indexed, and multiply the included earnings by this number.

Before age 60, it is only an estimate

Considering the application of the wage indexing formula, the calculation to determine the PIA is an estimate for a fully covered worker who is not yet 62 years old. The average wages for the year in which the worker attains age 60 is unknown, so an exact calculation is not possible. Nevertheless, one could impute an assumed inflation rate to average wages to estimate the average wages going forward.

A statement from the SSA showing estimated benefits at age 62, full retirement age, and age 70, includes earnings your current salary through age 60. Large changes in earnings from the date you are looking at the report to age 60 can make a significant difference in your future estimated benefit.

Step 3: Use the highest 35 years of indexed earnings to calculate a monthly average

To determine a worker’s average monthly earnings, the Social Security benefits calculation factors the highest 35 years of a FICA-covered worker’s earnings. Presuming that a worker does not have 35 years of FICA-covered earnings, a zero will be used in the calculation, which will lower the average. One would then total the highest 35 years of indexed earnings and divide this total by 420 (representing the number of months in a 35-year work history). This produces a worker’s AIME.

Formula

The PIA for a fully-insured worker who first becomes eligible for Social Security retirement benefits or disability insurance benefits in 2019, or who dies in 2019 before becoming eligible for benefits, will be the sum of

• 90% of the first $926 of the worker’s AIME, plus
• 32% of the worker’s AIME greater than $926 and through $5,583, plus
• 15% of the worker’s AIME greater than $5,583.

The amount is then rounded down to the next lower multiple of $0.10 if it is not already a multiple of $0.10.

Cost of living increases

Cost of living increases, or COLAs, are intended to keep benefits in pace with inflation so that a benefit recipient’s buying power holds roughly steady. Congress enacted the COLA provisions in 1972 as part of the Social Security Amendments with automatic COLA adjustments becoming effective in 1975. According to the SSA, COLAs received in 1975–2019 are as follows.

The benefit increase of 2.8% for 2019 will affect more than 67 million Social Security recipients and 8 million Supplemental Social Income (SSI) beneficiaries in 2019, many of whom live on fixed incomes. The amount of the increase each year is not announced until after October of the prior year when the key inflation statistic that sets the COLA, the CPI, for the July–September quarter is released. To calculate the amount of the COLA, the government will compare that inflation figure with the figure for that same calendar quarter in the year immediately prior.

Historically, Social Security payments have been adjusted each year to reflect inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Previous inflation adjustments have ranged from 0% in 2010, 2011, and 2016 to 14.3% in 1980.

Deciding when to begin benefits

Generally, early or late retirement will produce approximately the same total Social Security benefits over the recipient’s lifetime. If one claims Social Security retirement benefits early, the monthly benefit amounts will be smaller to take into account the longer period over which they will be distributed. If a fully insured worker claims benefits later, he or she will receive benefits for a shorter period of time, but the monthly amounts will be larger to make up for the months when no benefits were paid.

Each potential benefit recipient’s situation is different. Therefore, the following should be kept in mind:

• It is critical to consider cash flow before deciding when to claim Social Security retirement benefits.
• Claiming retirement benefits prior to full retirement age would result in lower monthly benefit payments.
• Delaying benefits until after full retirement age generally results in delayed retirement credits that would increase the monthly retirement benefit.
• For individuals in poor health, or those whose family histories point to an abbreviated lifespan, there is a stronger case for claiming Social Security retirement benefits at an early age.
• Is it likely that the benefit recipient will have earned income in amounts that cause a reduction in Social Security retirement benefits?
• Is there concern that Congress will reduce benefit amounts in the future?
• It is important to contact Social Security to communicate about when benefits would be claimed.

Social Security income planner

If, in your practice as a CPA or CPA financial planner, you wish to perform more sophisticated analysis as to when and how you or your clients should claim Social Security retirement benefits, you may wish to consider investing in software that will help you calculate how and when to claim Social Security retirement benefits, and will help you craft a strategy that will help your clients get the most value out of the Social Security program.

Break-even analysis

There are many reasons why most older Americans choose to take Social Security retirement benefits prior to their normal retirement age. The early benefits carry present value, and the break-even analysis often makes the argument unless the benefit recipient will lead a very long life.

Changing when to start Social Security retirement benefits

Unforeseen changes can occur in the lives of older Americans. If Helen started taking her Social Security retirement benefit at 62, her earliest opportunity, then inherited hundreds of thousands of dollars from her favorite Uncle Henry six months later, she can change her mind about taking her benefits so early. Generally, she can withdraw her Social Security claim and reapply within one year of the receipt of her first check and reapply at a later age.

However, the benefit recipient must repay all benefits received up to the point of the withdrawal including any benefits that had been paid to a spouse or children. This applies regardless of whether the individuals receiving the auxiliary benefits are living with the covered worker at the time of the benefit withdrawal.

Further, if Medicare premiums for Part B (most likely), Part C, or Part D had been withheld from prior Social Security retirement benefit checks, they must also be returned.

If an individual is entitled to Medicare benefits at age 65 but is not receiving Social Security retirement benefits at that time, it is important that he or she begin the process of applying for Medicare benefits. Failure to enroll in Medicare at age 65 generally results in an increased premium.

The benefit recipient who later chooses to withdraw her claim must also return, to the SSA, any income tax that had been withheld on the prior retirement benefits.

Keep in mind that a benefit recipient cannot withdraw the benefit claim unless the withdrawal is filed within the first 12 months of receiving the first benefit. The one-year limitation applies to any withdrawal of benefit claim after December 8, 2010.

Helen could suspend her Social Security benefits rather than withdrawing her benefits. She will earn delayed retirement credits from the time of her withdrawal to the time she begins benefits again. The delayed retirement credits will be based on the benefit Helen was receiving just prior to her suspension of benefits. Any benefits received by a spouse or qualifying children will also be suspended.

When both spouses work

When both spouses work, married couples can claim spousal and worker payments at different times. In a situation where both spouses had FICA earnings and have reached their full retirement age, they can claim a spousal payment and then switch to payments based on their own work record later. The claim for “spousal benefits only” is allowed only for people born in 1953 and earlier. Anyone born after 1953 will not be allowed to file for spousal benefits only at full retirement age but must take the higher of spousal or his or her own benefit. Only one member of the couple may claim spousal benefits while waiting for his or her own benefit to accrue delayed retirement credits to age 70. Again, this applies only to people born in 1953 and earlier.

After reaching full retirement age, a worker who is already entitled to benefits may voluntarily suspend, current or future retirement benefit payments up to age 70 beginning the month after the month when the request is made. The worker may also elect to suspend any retroactive benefits that are due.

Keep in mind, however, that if a FICA-covered worker has begun receiving benefits, then decides to suspend in favor of spousal benefits, he or she may make that change only within the first 12 months of receiving the first retirement benefit check based on his or her own FICA earnings.

Waiting and delaying benefits past normal retirement age will provide a higher benefit payment to which they can switch. This strategy is generally known as file and suspend and can be done only at full retirement age or later. (See chapter 1: File and suspend is allowed only for those age 66 or older by April 30, 2016.)

Child in care benefits at any age

The spouse of a fully insured worked can also receive (only) the spouse’s benefit at any age if he or she is caring for a child of the worker who is also receiving benefits. The spouse’s benefit would continue until the worker’s child reaches age 16. At that time, the child’s benefits continue, but the spouse’s benefits stop unless he or she is old enough to receive benefits based on his or her own age.

Benefits for an ex-spouse

Note: This election for ex-spouse benefits is available only to those people born in 1953 and earlier.

With divorce, the ex-spouse of a fully insured worker can receive benefits based on the former spouse’s earnings even if the insured worker remarries. For benefits to be available to an ex-spouse, certain requirements must be satisfied:

• The marriage lasted 10 years or longer.
• The ex-spouse remains unmarried through age 60.
• The ex-spouse is age 62 or older.
• The benefit that the ex-spouse is entitled to receive based on his or her own work is less than the benefit he or she would receive based on the former spouse’s FICA earnings.
• The former spouse is eligible for Social Security retirement or disability benefits.

If the spouse on whose earnings the benefits are based has not applied for retirement benefits, but is qualified for them, then the ex-spouse can receive benefits on former spouse’s record if the divorce was finalized two or more years prior to the ex-spouse applying for benefits. If the divorced spouse remarries, he or she generally cannot collect benefits on the former spouse’s earnings record unless his or her subsequent marriage ends (whether by death, divorce, or annulment). Of course, if the ex-spouse is eligible for retirement benefits on his or her own record, the Social Security retirement benefit may be that amount. However, if the benefit on the former spouse’s earnings record is a higher amount, the ex will receive benefits reflecting that higher amount (reduced for age).

Once a divorced spouse has reached full retirement age and is eligible for a spouse’s benefit and his or her own retirement benefit, he or she has a choice. A divorced spouse can elect to receive only the divorced spouse’s benefits when he or she applies online and, therefore, delay receiving retirement benefits until a later date. If his or her retirement benefits are delayed, a higher benefit may be received later based on the effect of delayed retirement credits.

An ex-spouse collecting benefits based on the former spouse’s work record does not affect the benefits of the former spouse or the benefits of the former spouse’s new spouse.

Mini case

Arguably, the reason why Andy Fletcher, now 66, has been married four times is his quick temper. He is currently married to Sue. Sue is very attractive and considerably younger than Andy. Andy’s first wife, Mary, died in an auto accident 27 years ago. Andy’s second wife, Cynthia, remarried 11 years ago after being married to Andy for 10 1/2 years characterized by arguments. Andy’s third wife, Patience (she ran out of hers) divorced him after a rocky 12-year marriage.

As his current wife, Sue would be entitled to spousal Social Security retirement benefits, as would Patience because she was married to Andy for longer than 10 years. Cynthia having remarried would not be entitled to a spousal Social Security retirement benefit based on Andy’s earnings.

Benefits for children of retirees

When a fully insured worker qualifies for Social Security retirement benefits, his or her children may also qualify to receive benefits based on the parent’s FICA earnings. An eligible child can be the worker’s biological child, adopted child, or stepchild. A dependent grandchild may also qualify.

To receive benefits, the child must be

• unmarried; and
• under age 18; or
• 18–19 years old and a full-time student (no higher than grade 12); or
• 18 or older and disabled from a disability that started before age 22.

Normally, benefits stop when children reach age 18 unless they are disabled. However, if the child is still a full-time student at a secondary (or elementary) school at age 18, benefits will continue until the child graduates or until two months after the child becomes age 19, whichever is first.

Benefits paid to a worker’s child do not decrease either the worker’s or the spouse’s retirement benefit. Keep in mind, however, that a maximum family benefit amount applies. Also, the qualifying parent must be receiving a benefit for the child to receive a benefit.

When are benefits actually paid?

Social Security benefits are paid the month after they are due. A worker who applies for benefits in May will receive the first check in June. Further, although the check will not arrive until June, the worker must be eligible for the benefit as of the time of the application, in this case, May.

Electronic payments

Rules that took effect in 2013 require that all Social Security and SSI benefits be received electronically. Individuals who apply for benefits now do so electronically. Individuals who have been receiving benefits by check will be contacted by the Treasury Department to arrange for electronic filing. Those already receiving benefits may create a “my Social Security” account and initiate (or change) direct deposit online.

Maximum family benefit

The maximum family benefit is the maximum monthly amount that can be paid on a worker’s earnings record. There is a special formula for computing the maximum benefits payable to the family of a disabled worker. The following, however, is devoted to the more common family maximum for retirement and survivor benefits.

Family benefits—spousal benefits, survivor, mother or father, and children benefits—are called auxiliary benefits. The total family maximum benefit amount each year is the wage earner’s personal maximum plus the maximum of auxiliary benefits for family members. Benefits based on a worker’s FICA earnings paid to a former spouse are not considered in calculating the maximum family benefit. The maximum benefit that the family, including the worker, can receive also depends on when the worker first claims Social Security retirement benefits.

Generally, the maximum family benefit has no impact on two spouses collecting Social Security retirement benefits on their respective earnings. It is when there are children and other dependents that the family maximum benefit is most likely to become an issue.

Generally, the maximum family benefit represents between 150% and 180% of the worker’s full retirement benefit.

Beware early benefits

If the worker takes retirement benefits early, the retirement benefit will (in the absence of any withdrawal) be permanently reduced. Let’s say that Howard Garner needs cash flow now and claims his Social Security retirement benefit at age 62 resulting in a 25% cut from the amount that would have been his PIA-based benefit at his full or normal retirement age of 66.

In that light, the maximum family benefit available to the Garner family based on Howard’s FICA earnings is 75% of Howard’s PIA and 50 percent in auxiliary benefits. Sadly, this translates to only 125% of what might have been Howard’s full PIA.

Delaying retirement benefits pays off

Contrast Howard Garner’s situation (and that of his family) with that of his brother, Gerald Garner. Unlike Howard, the more financially successful Gerald did not have a pressing need for cash from Social Security retirement benefits and is able to delay claiming his benefit until the cap age of 70.

Because of the delayed retirement credit, Gerald’s monthly retirement benefit now represents 132% of his full retirement age PIA. Therefore, the auxiliary benefits will represent 187 of the amount of Gerald’s PIA at his FRA or NRA.

Computation of the retirement and survivor family maximum

The formula used to compute the family maximum is similar to the formula used to compute the PIA. The formula sums four separate percentages of portions of the worker’s PIA. For 2019, these portions are the first $1,184, the amount between $1,184 and $1,708, the amount between $1,708 and $2,228, and the amount greater than $2,228. These dollar amounts are the “bend points” of the family-maximum formula. Therefore, the family-maximum bend points for 2018 are $1,144, $1,651, and $2,154. See the table showing bend points for years beginning with 1979. (The table also shows PIA formula bend points.)

For the family of a worker who becomes age 62 or dies in 2019 before attaining age 62, the total amount of benefits payable will be computed so that it does not exceed

1. 150% of the first $1,184 of the worker’s PIA, plus
2. 272% of the worker’s PIA greater than $1,184 through $1,708, plus
3. 134% of the worker’s PIA greater than $1,708 through $2,228, plus
4. 175% of the worker’s PIA greater than $2,228.

We then round this total amount to the next lower multiple of $0.10 if it is not already a multiple of $0.10.

The maximum family benefit is the maximum monthly amount that can be paid on a worker’s earnings record. There is a special formula for computing the maximum benefits payable to the family of a disabled worker. The family maximum for a family of a disabled worker is 85% of the worker’s AIME. However, it cannot be less than the worker’s PIA nor more than 150% of the PIA.

Now, let us look at Allen Woods who waits until his full retirement age to claim benefits. He would have a family benefit maximum equal to 187% of his full PIA.

Finally, consider, Fred who can afford to wait until he turns age 70 to collect his retirement benefit. In this situation, his own retirement benefit is 1.32 times his PIA due to the “delayed retirement credit” and the maximum auxiliary benefits are 87% of his PIA.

Once the family has reached the maximum benefit amount, benefits will be reduced for the auxiliary beneficiaries proportionately but not for the FICA wage earner’s benefit. Further, if a dependent in a family who has reached the maximum stops receiving benefits (for example, a dependent child finishes high school or marries), reductions to other auxiliary beneficiaries would be increased accordingly.

Consider earned income limits

A worker does not have to be retired to claim Social Security retirement benefits. However, if the benefit recipient continues to work and earns amounts of earned income exceeding inflation-indexed thresholds, all or part of the retirement benefits may be temporarily withheld. Certainly, investment income and retirement plan distributions are not considered to be earned income for this purpose, nor are workers’ compensation or unemployment insurance benefits. Wages, salaries, tips, and net self-employment earnings are treated as earned income for this purpose.

Before full retirement age

Workers under their full retirement age can earn up to $17,640 without penalty in 2018 and $17,040 without penalty in 2018. When earned income exceeds this inflation-indexed threshold, the Social Security retirement benefit recipient loses $1 in benefits for every $2 by which earned income exceeds the threshold.

The full or normal retirement age year

In the year in which a fully insured worker reaches his or her normal retirement age, the earnings limit increases to $46,920 in 2019 (it was $45,360 in 2018), and the penalty is reduced to 33 cents withheld from each dollar of earned income above the limit. Continuing with the example of Ruth Sanders, now presume year 2019. In 2019, Ruth earns $60,000 in the workplace. From January 2019 through July 2019, Ruth had earned income of $47,970. Ruth would experience a benefit reduction of $350, losing 33 cents of benefit for each dollar by which her earned income exceeds the threshold, but considering only her earned income up to her full retirement age. Once Ruth attains her FRA, the benefit reduction for earned income disappears.

Clients with high-paying jobs can easily wipe out benefits—which makes a strong argument for delaying benefits until after the NRA.

After the full or normal retirement year

Under the Freedom to Work Act, after a worker’s Social Security retirement benefit reaches his or her full retirement age, there is no penalty for working and claiming benefits at the same time. This begins in the month in which the worker attains the FRA.

Benefit reduction is not permanent

Benefits are not permanently withheld. The money deducted from Social Security retirement benefits when a worker has earned income over the limit is not withheld forever. Once that worker reaches his or her full retirement age, benefits are recalculated to provide a credit corresponding to the reduced benefits.

Potentially higher FICA wages in one’s 60s

Social Security retirement benefits are calculated based on a worker’s 35 highest years of earnings. If one of a fully insured worker’s highest earnings years happens after benefit payments begin, that worker’s payments will automatically increase the following year. Earnings of a fully insured worker that are lower than the earlier computed top 35 years will not reduce the worker’s benefit.

Knowledge checks

1. Howard was born in 1970. His FRA or NRA is
   1. Age 60.
   2. Age 65.
   3. Age 66.
   4. Age 67.
2. Clark’s FRA or NRA is age 66. He decides to claim his Social Security retirement benefits at age 62. Which statement best describes the effect of Clark’s decision on his benefits?
   1. Clark’s benefit will not be affected because age 62 is a permissible age for claiming Social Security retirement benefits.
   2. Clark’s retirement benefit will be reduced by ⁵/₉ of 1% for each month of benefits paid before his FRA or NRA for 36 months and 5/12 of 1% for 12 months.
   3. Clark’s retirement benefit will be reduced by ⁵/₁₂ of 1% for each month of benefits paid before his FRA or NRA.
   4. Clark’s benefit will be reduced to 50% of his PIA.
3. Clara Bowen worked as a part-time assistant librarian for more than 20 years. Her PIA is $800 per month. Her husband, Robert, worked as a radiologist in a major hospital. His PIA is $2,200 per month. Presuming that Clara claims benefits at her FRA or NRA, which of the following statements is true?
   1. Clara can claim the combination of her benefits and her spousal benefits for a total of $3,000 per month.
   2. Because Clara is fully insured she may claim benefits based only on her own earnings.
   3. Clara may claim 50% of Robert’s PIA because it is higher than her own benefit.
   4. Clara would receive 37.5% of Robert’s benefits.
4. All but which are correct with respect to Social Security benefits?
   1. Actuarially, the SSA has determined that the average person would benefit by delaying his or her Social Security distribution to age 69.
   2. Social Security benefits are increased if a fully insured worker delays retirement beyond full retirement age.
   3. Most older Americans choose to take Social Security retirement benefits at their normal retirement age.
   4. The earliest age a fully covered worker can begin getting Social Security retirement benefits is 62.