Ten Odd Social Security Rules and Practices That You Don't Want to Forget
Retirement Daily Guest Contributor
By Joe Elsasser
Social Security is a major source of income for many retired Americans. But the Social Security program has some unique rules and practices that can make determining when to claim Social Security benefits complex and challenging. Here are ten odd Social Security rules that you will want to remember as you near retirement.
1. Attained age
According to the Social Security Administration, a person “attains” an age on the first moment of the day prior to the anniversary of their birth. People born on the first of the month are treated as though they are born the month prior. January first birthdays can be particularly confusing for people born after 1954, because their full retirement age is based on the year before the date on their birth certificate. For example, if you were born on January 1, 1955, Social Security treats you as though you were born in 1954, causing a full retirement age of 66 rather than 66 and two months—as would be the case for anyone born on any other day in 1955.
2. Throughout-the-month rule for initial eligibility
For initial eligibility, Social Security requires that you be age 62 “throughout the month.” Because of how Social Security treats the day of birth for determining attained age, only people born on the second of the month can actually claim Social Security at age 62. Everyone else will technically claim at 62 and one month. If you were born on the first of the month, Social Security considers you to have been born in the month prior. As a result, you are able to claim during the month you consider yourself to have turned age 62, because you are 62 throughout the entire month. If you were born on the 3rd of the month or after, you are not able to claim until the next month, but you will be considered for purposes of the actuarial reduction to be claiming at age 62 and 1 month (and your check will be received the month after that).
3. Statement assumptions—continued work
If you’re planning to retire early, be careful about trusting the age 70 quote on your Social Security statement. Social Security retirement benefits are based on 35 years of adjusted earnings. The statement assumes continued work throughout the year prior to the age quoted. In general, statements are likely to be off by more than 10% for people with fewer than 35 years of work, or zero earnings in the prior two years. This calculator offers a more accurate estimate by changing future earnings amounts.
4. Annual earnings test
Some people consider the annual earnings test a “cliff.” (If you make more than $18,240 you can’t claim.) In reality, it’s not a “cliff,” it’s a phase-out. For every $2 above the limit, your benefit is reduced by $1. Social Security implements the earnings test by withholding the number of checks necessary to overcome the penalty at the beginning of the year. In reality, some people earning more than the limit should claim; they may forfeit a few checks at the beginning of the year, but they will receive checks for the remainder of the year.
5. Monthly earnings test
For one year an individual can elect to use the monthly earnings test. This allows a person who retires mid-year to claim benefits even if they are over the annual earnings test amount for the year.
For example, a school administrator who retired in May at age 62 and 6 months (from a Social Security covered teaching job) earned $60,000 during the first half of the year. The annual earnings test would eliminate her benefit for the year, but the monthly earnings test would allow her to claim a benefit for each month that her earned income is below 1/12th of the annual threshold amount. The monthly earnings test is specifically handy during the year of retirement.
6. Annual earnings test in your full retirement year
The calendar year that you reach full retirement age has a higher earnings test threshold. In 2020 the amount is $48,600, which only applies to the months prior to your birth month. Someone born in February could actually claim Social Security in January of the year they reach full retirement age, earn $48,600 in January, and have no earnings test-related penalty.
7. Widow limit
The widow(er) benefit is calculated based on when the deceased claimed Social Security and when the survivor claims. The benefit is limited to the higher of 82.5% of the deceased’s full retirement age benefit or the amount the deceased was actually receiving. If the deceased claimed benefits early (at age 62) and the surviving spouse reached full retirement age by the time of the deceased’s death, the surviving spouse will actually receive more than the deceased was receiving (82.5% rather than 75%). In cases where the survivor is younger than the deceased, and the deceased had elected early benefits, you’ll need to pay special attention, as delaying the widow(er) benefit all the way to full retirement age may result in months of forfeited checks without a corresponding increase in benefits.
8. Primary Insurance Amount (PIA) “notch year”
Social Security benefit estimates can actually go down. People born in 1947 (who turned 62 in 2009) experienced this due to price fluctuations in 2008. Individuals born in 1947 were subject to inflation in 2008 but did not receive the 5.8 percent “windfall COLA” paid in January 2009. A similar situation may be evolving in 2020, as the average wage index is likely to be impacted by widespread unemployment due to the pandemic.
9. Medicare hold harmless spillover to those not held harmless
Medicare beneficiaries who are receiving Social Security benefits, and are not subject to excess Medicare premiums based on income, are held harmless if the cost of living adjustment (COLA) does not exceed the increase in their Medicare premiums. A higher wage earner with modified adjusted gross income (over $87,000 for a single person or $174,000 for a couple), or someone who is paying Medicare premiums directly while delaying Social Security is not held harmless from increases in Medicare premiums. If there is a low or zero COLA adjustment for Social Security, any premium increase that would have been paid by all Medicare beneficiaries is only spread over those not held harmless. This can lead to outsized premiums for some. When COLAs for future years are applied, the effect will level out over all beneficiaries.
10. Railroad coordination
A variety of switch strategies continue to exist for those in a household that has one member eligible for railroad retirement and another eligible as a spouse under railroad retirement benefits and Social Security benefits based on their own work record.
If you haven’t noticed, the Social Security program is riddled with quirks that create opportunities for those “in the know” and pitfalls for those “in the dark.” A good financial advisor can help you navigate these rules and regulations and help you determine the best path forward based on your unique situation.
About the author: Joe Elsasser, CFP
Joe is the founder and president of Covisum, a financial tech company focused on creating software that improves lives through better financial decisions. Covisum helps financial advisors serving mass-affluent clients in or near retirement and powers some of the nation’s largest financial planning institutions.