Your Social Security Benefits
Qualifying for Social Security Retirement Benefits
Most Americans qualify for Social Security retirement benefits. The basic requirements to qualify are:
- You’ve earned enough work credits; and
- You’ve reached age 62.
When you pay Social Security taxes on your income, you are earning “credits” toward qualifying for benefits. In 2013, Social Security will award one work credit for every $1,160 you have in earnings. (This amount is typically more each year.) For example, if you earn $4,640 in 2013, you will receive a total of four credits ($1,160 x 4 = $4,640). If you earn $100,000 in 2018, you still get only four credits since four is the maximum you can earn in any one year.
In order to collect retirement benefits, you are required to have earned at least 40 credits—or 10 years of earnings. These credits don’t have to be consecutive, meaning that they remain on your record even though you may stop and start work at various times in your career. If you have fewer than 40 credits, you will not qualify for retirement benefits.
In addition to earning a minimum of 40 work credits, you must be at least age 62 to qualify for retirement benefits. Retirees become eligible to collect benefits in the first month after reaching age 62 for the entire month. So if you were born on May 15, you don’t become eligible to begin benefits until June 1. Strangely, the Social Security rules consider you to have attained an age on the day immediately before your actual birthday. So if you were born on May 1, you are considered to have attained an age on April 30 and can be eligible for benefits in May of that year.
The rules above only apply to filing for benefits at age 62. For filing at any other age, you are considered to become eligible for benefits in the month you attain that age. So if you want to begin benefits at age 66 and were born on May 15, you can start benefits in May of the year you turn age 66.
Types of Benefits
Even though you are planning to collect a retirement benefit, there are other benefits that may be payable based on your work record. These benefits are payable to current and former family members who meet the requirements for collecting.
|Retirement||A retirement benefit is paid to a worker who has earned enough credits to qualify and has reached at least age 62. This benefit is paid only to the worker. It is reduced for claiming before full retirement age and earns delayed retirement credits for claiming after full retirement age.|
|Spousal||A spousal benefit is paid to the spouse of an eligible worker who is receiving a retirement benefit (or who has filed and suspended a retirement benefit). A spousal benefit can be up to ½ of the Primary Insurance Amount (PIA) of the eligible worker, and it is reduced when the spouse claims that spousal benefit before reaching his or her own full retirement age. Only one spouse can collect a spousal benefit at any one time, and spousal benefits do not earn delayed retirement credits. Therefore, there is no reason to wait beyond full retirement age to begin collecting a spousal benefit.|
|Survivor||A survivor benefit (also sometimes called a widow/widower benefit) is paid to the surviving spouse or minor children of a deceased eligible worker. In some circumstances, a survivor benefit can be paid to the dependent parents of a deceased eligible worker. Survivor benefits are complicated, and a number of factors are used in determining the amount of the benefit.|
|Family/Children||Minor children under age 18 may qualify for benefits based on an eligible worker’s record. In addition, a parent caring for minor children under that age of 16 may qualify for a benefit based on the worker’s retirement benefit. These family benefits are subject to the family maximum payout of benefits that is between 150% and 180% of an eligible worker’s Primary Insurance Amount.|
|Divorced Spouse||A divorced spouse benefit is similar to a spousal benefit and is paid to a qualified former spouse of an eligible worker. The benefit is up to ½ of the worker’s PIA, reduced if the divorced spouse claims the benefit before full retirement age. There are a number of requirements to collect a divorced spouse benefit, the most significant being that the marriage must have lasted at least 10 years. In addition, the claimant cannot be married. A divorced spouse benefit paid from a worker’s record will not affect the worker’s retirement benefit, nor any other benefits paid from that worker’s record.|
|Surviving Divorced Spouse||A surviving divorced spouse benefit is equal to the survivor benefit paid to a current spouse. It does not affect the survivor benefit or any other benefit paid from the deceased worker’s record. As with the Divorced Spouse benefit, the marriage must have lasted at least 10 years, and the claimant cannot remarry before age 60 without forfeiting the benefit.|
As you can see, a number of benefits can be paid based on the work record of a single eligible worker. Each class of benefits has a separate set of eligibility rule, payment calculations and claiming requirements.
One important issue to note is there is a maximum amount of benefits that can be paid on the record of a worker. Known as the Family Maximum, the formula for calculating the amount is complex. The maximum benefit, however, generally ranges between 150% and 180% of the worker’s PIA.
In calculating the Family Maximum, the worker’s benefit is subtracted first, and the remaining dollars are divided between the other eligible beneficiaries. The divorced spouse and surviving divorced spouse benefits do not contribute to the family maximum benefit.
Primary Insurance Amount
The Primary Insurance Amount (PIA) is the foundation of all Social Security benefits. It is also known as the full retirement benefit because it is equivalent to the monthly benefit you’ll receive if you file for benefits precisely at your full retirement age.
Your PIA is determined by your highest 35 years of earnings. (We’ll cover more about the complicated formula in a later lesson.) If you do not have 35 years of earnings, zeros are averaged into the calculation.
Because it is based on actual earnings, your “official” PIA is not calculated until you apply for benefits. Until then, you are able to get only an estimate of your PIA. In providing you with an estimate, the Social Security Administration assumes that you will continue working until you file for benefits and that you’ll earn in each year at least what you earned in the prior year. So, if your income increases over time, so will you PIA.
Your PIA is that amount that determines not only what amount you will be paid each month, but it determines how much any spousal, survivor or family benefit will be paid based on your earnings record. It is also the amount from which deductions are made for claiming early, and it’s the amount to which delayed retirement credits are added for filing after your full retirement age. Here’s an example:
Jack’s PIA: $1,000
Benefit at full retirement age of 66: $1,000
Benefit at age 62: $750
Benefit at age 70: $1,320
If Jack waits until full retirement age to claim his benefits, he will receive $1,000 monthly. If he chooses to claim early, his benefit will be reduced by 5/9% per month for each month before full retirement age for 36 months and 5/12% per month for up to 12 months. This means that if he files at age 62, his monthly benefit will be $750, or 75% of his PIA.
Similarly, if Jack waits to claim benefits until after his full retirement age of 66, he will grow delayed retirement credits in the amount of 2/3% per month – or 8% per year. That’s what Jack’s benefit will be $1,320 at age 70 – 32% more than at full retirement age.
Now, if you have worked in a job where you did not contribute to Social Security (such as a teaching or local/state government job , your PIA will be reduced based on the Windfall Elimination Provision. You can read more about this topic in our advanced lessons.
Full Retirement Age
Full retirement age is sometimes called normal retirement age. For a number of years, full retirement age was 65. But it’s based on your year of birth, and it gradually increases to age 67 for those born in and after 1960.
Full retirement age is the age at which you can claim your full retirement benefits without any reductions. If you begin benefits precisely at your full retirement age, your benefit will be equal to your Primary Insurance Amount (PIA). You can begin benefits as early as age 62, but your benefits will be reduced; conversely, if you begin after full retirement age, your benefit will be increased.
If you are continuing to work and are tempted to collect Social Security benefits, the earnings test will reduce your benefits if you begin collecting before your full retirement age. Once you reach your full retirement age, you will be able to have unlimited earnings without the earnings test reducing your benefits.
One important note: For many people, full retirement age for claiming survivor benefits is different from full retirement age for retirement benefits. Before claiming any benefit, make sure you know your full retirement age for that class of benefit.
How Benefits are Calculated
In an earlier lesson, we discussed that the Primary Insurance Amount (PIA) is the basis of your benefit payments. PIA is defined simply as the amount of monthly Social Security benefits you will receive if you begin benefits at your full retirement age—but that’s about the only simple part of it.
Your PIA is based on a complex calculation and is a portion of your Average Indexed Monthly Earnings (AIME) for your 35 years of highest earnings. In addition, your earnings prior to age 60 are indexed to reflect increases in U.S. workers’ average wage level. For example, if the average wage level in the U.S. is twice as high when you are 60 than when you were 40, the formula doubles your age 40 earnings. If you have fewer than 35 years of income, the “missing” years are entered as zeroes. Also important: the maximum income counted for each year is the maximum Social Security taxable earnings for that year ($128,400 for 2018). These 35 highest earnings years are then averaged to a monthly amount that becomes your AIME.
The PIA is the sum of three separate percentages of portions of your AIME. The portions depend on the year you reach age 62. For 2017, these portions were the first $895 of AIME, the amount between $895 and $5,397, and the amount over $5,397. These dollar amounts are called “bend points.” Here’s how the calculation works for someone who turned age 62 in 2017.
First, the three portions of the AIME are multiplied by specific percentages:
(a) 90% of the first $895 of his/her average indexed monthly earnings, plus
(b) 32% of his/her average indexed monthly earnings over $895 and through $5,397, plus
(c) 15% of his/her average indexed monthly earnings over $5,397.
Then, these three dollar amounts are added together and become the PIA. Let’s look at an example:
Betty is turning 62 in 2017 and wants to retire and start her Social Security benefits. Her AIME is calculated to be $6,000. Her PIA is calculated as follows:
- 90% X $895 = $805.50
- 32% X ($5,397 – $895) = $1,440.64
- 15% X ($6,000 – $5,397) = $90.45
Her total PIA is $805.50 + $1,440.64 +90.45 = $2,336.59 (In reality, the calculations will always be rounded down to the nearest $0.10, so her PIA will actually be $2,019.50).
Social Security is designed to replace a higher percentage of earnings for lower income workers. For instance, it might replace 60% of the earnings for someone earning minimum wage but only 25% of income for someone earning the maximum Social Security income. If you earn twice the maximum Social Security income, then about 12.5% of your income will be replaced.
An understanding of these formulas may prove useful in determining how long you want to continue working. Suppose Betty in the example above had 35 years of earnings when she reached age 62. If she works four more years before beginning her benefits, earnings from the next four years will replace lower earning years, having a slight impact on her PIA. But since her AIME is already into the smallest portion of the formula that converts her AIME to her PIA, her PIA would not be appreciably higher if she works longer. However, if Betty had been a stay-at-home mom who returned to the workforce after raising children, working a few more years might make a significant difference in her PIA.
Cost-of-living adjustments (COLAs) are added to your benefits in most years. The purpose of a COLA is to protect the buying power of benefits against inflation. Each year, the Bureau of Labor Statistics determines the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a measure of consumer price inflation. If there was no increase, no COLA is given.
If you are already receiving benefits, you are likely familiar with how COLAs are applied. If you’ve not yet begun benefits, it might surprise you to know that past COLAs are applied to your Primary Insurance Amount (PIA) from your 62nd birthday. Even if you don’t begin receiving benefits until age 70, the previous COLAs will be added to your PIA.
While it’s certainly great to receive a COLA on your benefit at any age, think about the value of a COLA applied to a higher benefit received for claiming later. Waiting later to claim benefits means your PIA will be higher because of delayed retirement credits. But it also means that your COLAs will be added to that higher benefit. A 3% COLA added to a benefit of $1,000 is less than the same 3% added to $1,760. The compounding that will occur for the remainder of your life will make a substantial difference in your total benefits.
Your Social Security Statement
Many of us remember the old “green line” documents we received each year from the Social Security Administration. These are now referred to as “green line” because of the prominent green line displayed on each. These documents were your Social Security Statements, and they provided important benefit information for you – your estimated PIA, estimated amounts of benefits you could expect to receive at various ages, and your earnings history were included on your statement.
These statements are no longer mailed to you, but you can now get your statement online from the Social Security Administration’s website, www.SSA.gov/mystatement. Because your future benefits are calculated based on the earnings reported for you, it is very important that you check your statement annually and make sure the earnings are accurate. The longer you wait, the more difficult it will become to correct past earnings.
Your statement can be a valuable financial planning tool since it provides estimates of your Social Security income at various ages. You can use this information to determine how much you will need to save in addition to your benefits in order to have the retirement you hope for.
To receive your online statement, you must be age 18 or older and must be able to provide information about yourself that matches that which is already on file with the Social Security Administration. In addition, you must answer security questions to complete the verification process. Once your identity is verified, you can create an account with a user name and password. You can return to the secure site and access your online statement at any time.
Remember that your earnings are reported annually, and your benefit estimates will likely change each year. So set a calendar reminder each year to verify the information Social Security has on file for you.
Correcting Your Earnings History
If you notice an error in your earnings history, it’s important to take steps to correct the error as soon as possible. Missing earnings for the current year or last year should not be a cause for concern because they may not have been recorded yet. However, earnings errors in prior years may have occurred for one of the following reasons:
- The employer reported your earnings using the wrong name or Social Security number.
- The employer reported your earnings incorrectly.
- You got married or divorced and changed your name, but never reported the change to Social Security.
If earnings are missing, the first thing you should do is find some proof of those earnings. This proof could be:
|a. Forms W-2 (Wage and Tax Statement) and W-2c (Statement of Corrected Income and Tax Amounts).|
|b. Employer-Prepared Wage Statement|
|c. SSA Earnings Records, extracts of SSA Earnings Records, certifications of SSA Earnings Records, and notifications of wage determinations|
|d. Form SSA-7011-F4 (Statement of Employer)|
|e. Form SSA-1002-F3 (Statement of Agricultural Employer) Form SSA-1003-F3 (Statement of Agricultural Employer for Years 1988 and Later)|
|f. Any other statement signed by an employer|
|g. A statement signed by a custodian of the employer’s records|
|h. End-of-year pay statement/pay stub|
|i. Certification by an authorized SSA employee of the contents of an employer’s records|
|j. Internal Revenue Service (IRS) copy of employee’s tax return|
If you cannot find any written documents that show the missing earnings, you should write down as many as possible of the following facts:
- Where you were working when you earned the missing amounts;
- The name of the employer;
- The dates worked;
- How much was earned; and
- The name and Social Security number used for that period.
After you have gathered the evidence or made a list of all of the information you can remember, you should contact Social Security who will work with you to correct the record. This process could take some time, depending on the information you are able to provide. SSA may have to contact your employers or help you contact them.