Understand Your Social Security Retirement Benefits
Are you or a loved one nearing retirement age? Many seniors are uncertain about their federal retirement benefits, including when benefits start, how to apply, who qualifies for survivors benefits and whether benefits will be subject to income tax. Here are the basics, along with the highlights from a recent report on the Social Security system.August 2, 2017
For years, people have questioned the viability of the Social Security system going forward. In July, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds.
What's My FRA?
Your full retirement age (FRA) depends on the year in which you were born.
If you were born on January 1 of any year, refer to the previous year. If you were born on the first of the month, the SSA figures your benefit (and your FRA) as if your birthday were in the previous month.
The report projects that the combined asset reserves of the Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds will become depleted in 2034, unless Congress takes action to reverse the situation.
In general, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are common concerns regarding the Social Security system.
Collecting Retirement Benefits
According to the 2017 report by the Social Security Board of Trustees, roughly 61 million beneficiaries were collecting money from the SSA at the end of 2016, including:
- 44 million retired workers and dependents of retired workers,
- 6 million survivors of deceased workers, and
- 11 million disabled workers and dependents of disabled workers.
In 2016, the SSA's total income ($957 billion, including interest income) exceeded its total expenditures ($922 billion). So, its asset reserves grew by $35 billion last year.
The reserves of the OASDI Trust Funds together with projected income should be sufficient to cover the SSA's costs over the next 10 years. However, starting in 2022, the SSA's total expenditures are expected to start outpacing its total income.
Is it time for you to start collecting retirement benefits? You may apply for benefits as early as age 62. Starting early will reduce your monthly benefits by as much as 30%, but, of course, you'll receive benefits for more years.
If you want to receive full retirement benefits from the SSA, you must wait until you reach the so-called full retirement age (FRA). See "What's My FRA?" at right. Your tax advisor can help you determine if you would likely be better off waiting until your FRA to start taking benefits.
Applying for Benefits
Apply for retirement benefits three months before you want your payments to start. The SSA may request certain documents in order to pay benefits, including:
- Your original birth certificate or other proof of birth,
- Proof of U.S. citizenship or lawful alien status if you weren't born in the United States,
- A copy of your U.S. military service paper(s) if you performed military service before 1968, and
- A copy of your W-2 Form(s) and/or self-employment tax return for the prior year.
For most retirees, the easiest way to apply for benefits is by using the online application.
Receiving Benefits While You're Working
If you're under FRA and earn more than the annual limit (subject to inflation indexing), your benefits will be reduced, as follows:
- If you're under FRA for the entire year, you forfeit $1 in benefits for every $2 earned above the annual limit. For 2017, the limit is $16,920.
- In the year in which you reach FRA, you forfeit $1 in benefits for every $3 earned above a separate limit, but only for earnings before the month you reach FRA. The limit in 2017 is $44,880. But the SSA only counts earnings before the month you reach your FRA.
Beginning with the month in which you reach FRA, you can receive your benefits without regard to your earnings.
Retiring after Your FRA
You can receive increased monthly benefits by applying for Social Security after reaching FRA. The benefits may increase by as much as 32% if you wait until age 70, but of course you'll receive benefits for fewer years. After age 70, there is no further increase. Your tax advisor can help calculate the payout for waiting to collect your retirement benefits and help you determine if you likely will be better off waiting beyond your FRA to start taking benefits.
Managing Benefits for an Incapacitated Person
If a Social Security recipient needs help managing his or her retirement benefits — perhaps an elderly parent — contact your local Social Security office. You must apply to become that person's representative payee in order to assume responsibility for using the funds for the recipient's benefit.
Qualifying for Social Security Survivors Benefits
A spouse and children of a deceased person may be eligible for benefits based on the deceased's earnings record as follows:
A widow or widower can receive benefits:
- At age 60 or older,
- At age 50 or older if disabled, or
- At any age if she or he takes care of a child of the deceased who is younger than age 16 or disabled.
A surviving ex-spouse might also be eligible for benefits under certain circumstances. In addition, unmarried children can receive benefits if they're:
- Younger than age 18 (or up to age 19 if they are attending elementary or secondary school full-time), or
- Any age and were disabled before age 22 and remain disabled.
Under certain circumstances, benefits also can be paid to step-children, grandchildren, step-grandchildren or adopted children. In addition, dependent parents age 62 or older who get at least one-half of their support from the deceased may be eligible to receive benefits.
A one-time payment of $255 may be made only to a spouse or child if he or she meets certain requirements. Survivors must apply for this payment within two years of the date of death.
Paying Income Taxes on Benefits
You'll be taxed on Social Security benefits if your provisional income (PI) exceeds the thresholds within a two-tier system.
PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers). Recipients in this range are taxed on the lesser of 1) one-half of their benefits or 2) 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers).
PI above $44,000 ($34,000 for single filers). Recipients above this threshold are taxed on 85% of the amount by which PI exceeds $44,000 ($34,000 for single filers) plus the lesser of 1) the amount determined under the first tier or 2) $6,000 ($4,500 for single filers).
PI equals the sum of 1) your adjusted gross income, 2) your tax-exempt interest income, and 3) one-half of the Social Security benefits received.
The long-term insolvency of the SSA program underscores the importance of saving for retirement while you're working. Social Security benefits should be viewed only as a supplement to your other assets.
If you have additional questions about receiving Social Security retirement benefits, contact your financial advisor. He or she can help you navigate the application process and understand tax issues related to receiving retirement benefits.