Five questions — and our tips — for navigating Social Security benefits
When the Social Security Program was signed into law in 1935, it was meant to add a small supplement to retirement income. Today, however, Social Security represents a large percentage of a retiree’s portfolio. Understanding how Social Security benefits work, what benefits you’re entitled to, and the best strategies for filing are essential to retirement planning. Here are the five most common questions we’re asked about Social Security and our tips for navigating benefits:1. Can I file for Social Security and still work?
Most full-time employment prevents you from collecting some, if not all, of your monthly Social Security benefit, although this depends on your age. If you’re collecting benefits and you’re between age 62 and your full retirement age (FRA), you’re subject to the “earned income test.” Earned income, in this case, includes wages subject to FICA tax, non-FICA wages, or net self-employment income. Income from investments, rental properties, deferred compensation, unemployment compensation, etc., has no impact on the earned income test. Between 62 and the year prior to your FRA, $1 of benefits is withheld for every $2 of earnings over $19,560. In the year of your FRA, $1 of benefits is withheld for every $3 of earnings over $51,960 (for 2022). Once you’re past your FRA, earned income doesn’t impact your Social Security benefits. Note that benefits that aren’t paid because of the earned income test aren’t forever lost — at your FRA, your monthly benefit is permanently increased for the months that benefits weren’t paid.
2. What if I file for Social Security benefits early and later regret my decision?
If you file for Social Security benefits but soon realize you should have waited, you have two options to remedy the situation. The first is a “do-over.” This involves filing Form 521 with the Social Security Administration within 12 months of applying. With this option, you’re required to pay back any benefits that you, your spouse, or your children have collected.
Alternately, if paying back the collected benefits would create a financial hardship, you have the option to simply suspend benefits from that point forward, essentially pressing “pause” on your Social Security benefit (as long as you’ve reached your FRA).
Either of these options allows you to delay your filing until you reach your FRA or even later, when you can earn extra benefits. Also be aware that both of these options impact spousal and/or dependent benefits and Medicare premiums. If you choose a “do-over” or elect to suspend your benefits, individuals who are collecting on your record (spouse, children) can no longer do so, and you can no longer have your Medicare Part B and D premiums deducted from your benefit.
3. What are the Social Security benefits for surviving spouses and children?
In the wake of the loss of a loved one, Social Security is likely not top of mind. But benefits for the surviving spouse and their children provide unique opportunities that require different filing strategies. Widow or spousal benefits have other filing rules than those for typical retirement benefits. For one, surviving spouses are entitled to pick which benefit to take and when. Because filing for widow benefits isn’t included in Social Security “deemed filing” rules, surviving spouses can choose to take either their own retirement benefit or the widow benefit and delay the other to let it grow.
Additionally, minor children can collect benefits at up to 75% of the deceased parent’s benefit. Understanding the details of how to file for widow and children’s benefits is a valuable way to ensure you maximize your lifetime benefits.
4. Can I collect a pension and also Social Security?
Although pensions are becoming rarer, many people who are approaching filing age may have earned one. Certain rules for collecting a pension benefit in addition to Social Security benefits apply if the pension you’re collecting comes from a “noncovered” employer. This typically would be through a public employer, like Public Employees Retirement System or benefits earned through the railroad system. You’ll want to carefully understand, and plan around, the windfall elimination provision (for retirement benefits) and the government pension offset (for spousal/widow benefits) to take full advantage of your Social Security benefit. The windfall elimination provision will not reduce your benefit to zero. Based on the number of years of substantial earnings you have in covered employment, the benefit calculation is altered with a maximum reduction of $512 per month (2022). The government pension offset is a much easier calculation — it simply reduces the spousal or widow benefit by two-thirds of the pension amount, which means that the benefit could be reduced to zero if the pension is high enough.
5. Will there be any Social Security left when I retire?
In 2021, total costs of the Social Security program exceeded income into the OASI (Old-Age and Survivors Insurance) trust fund that supplies it. The same shortfall is expected to occur for 2022 and all future years until the trust fund is depleted.
What does this mean for those who are still paying FICA taxes but won’t file for benefits for several years? Per the 2022 Trustees Report, full benefits will be able to be paid until 2034, at which point FICA tax income paid into the fund will be sufficient to pay 77% of scheduled benefits. Unless Congress passes legislation, it’s likely that future benefits will be paid at a reduced rate.
Social Security benefits have changed a lot since they were first put in place almost a century ago, and they’ll continue to evolve. It’s more important than ever to create a plan for your and your family’s benefits. Working with your financial advisor and running projections can help maximize your lifetime benefits and your financial independence.
