Dear Rusty: A friend told me about what he believes is a strange thing in the Social Security system. His wife reached her full retirement age (FRA) of 66 several years ago. She delayed filing for Social Security past her FRA and claimed on her 68th birthday in June of that year, exactly 2 years after her FRA. When she filed, she was told she would receive approximately $300/month, which, of course, was more than she would have received at her FRA. She was told however that she would only receive $300/month as of January 1 of the following year. Between June of the year the turned 68 and filed for SS until the end of that year, she would receive an amount less than $300. This lower amount was the amount she would have received if she had filed in December, the year she turned 67. She said she was told that was how SS works. She would never receive the difference in benefits she lost from June through December of the year she filed. If the above is true, can you explain? Signed: Astounded Friend
Dear Astounded: What your friend described is, indeed, a unique methodology for how Social Security handles benefit payments for those who choose to wait beyond their full retirement age (FRA) to claim SS benefits. To understand it, let me first describe how Social Security retirement benefits are calculated.
At full retirement age, a person is entitled to 100% of the SS benefit they have earned from a lifetime of working. That FRA benefit amount is known as the person’s “Primary Insurance Amount” (PIA) and is based upon the highest earning 35 years over the individual’s lifetime. From those past years, average lifetime monthly earnings are computed, known as the person’s “Average Indexed Monthly Earnings” (AIME). Their AIME is subjected to a formula which yields their Primary Insurance Amount – the benefit the person is entitled to in the month they attain their full retirement age – typically about 40% of the person’s average monthly lifetime earnings. However, if the person chooses to do so, they can wait beyond their FRA to claim Social Security to get a monthly benefit even higher than their PIA, by earning Delayed Retirement Credits (DRCs).
DRCs are applied to the person’s PIA when they claim Social Security. For each month after FRA the person claims, they will have .667% added to their PIA. That means that for each full year of delay, that person will get an extra 8% added to their PIA. For someone (like your friend’s wife) who claimed 24 months after her FRA, she would receive a benefit 16% higher than her FRA amount. However, Social Security normally only applies DRCs in January of each year.
So, even though your friend’s wife claimed her SS benefits in June, 24 months after her FRA, she would initially only get the DRCs she had accumulated through the end of the previous year – in this case, about 18 months’ worth of DRCs, or an SS payment about 12% higher than her PIA (her FRA amount). She would not get her remaining earned DRCs (another 4%) until January of the following year. So, in effect, the wife’s initial benefit didn’t reflect all her earned DRCs until her later January benefit payment. Thus, the wife essentially lost that extra benefit money for the period between June and December of the year she claimed Social Security. In other words, she wouldn’t get the full 16% amount until SS applied the additional 4% DRCs to her benefit payment the following January. And that is why your friend’s wife initially received a payment a bit less than the $300 Social Security said she was entitled to by waiting 2 years after her FRA to claim.
This surprises many who choose to wait beyond their full retirement age to claim Social Security. But, curiously, this process doesn’t apply to those who wait until age 70 to claim their SS benefits. For those who wait until age 70 to claim, Social Security will immediately apply all DRCs that they have accumulated and provide them with their maximum SS benefit immediately.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at [email protected].
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Thanks Rusty for this explanation which is interesting to know. Hopefully more people will read this article and understand better what happens when you wait a little longer to claim your SS benefit after your FRA and before age 70.
Considering the size of the benefit mentioned in the discussion, this person had not worked at any high wage jobs or earned enough income to earn credit of earnings for many years. Benefits are based on the average of highest earnings over a 35 year period of employment. One does not have to work full time to earn the required credits for each year. That’s why getting SNAP benefits is back to requiring 80 hours of work hours per month so that person can get a Social Security benefit when they reach retirement age. Social Security benefits are a result of the average credits contribution of each person from the bare minimum of 15 credits per year. The only problem is that for some reason, there’s a cap on income that pays into the funds and is credited despite the fact that earnings income ( income that is liable to be tax) can be much higher than the cap in place.
This is one area where Congress ( the agency that oversees the funding of this program) should have been adjusting the cap on a yearly basis since the beginning of the program, knowing that current workers are the ones contributing to the funds, and also making all employers responsible for having a savings plan for all employees to reduce their tax liability and save money. Instead of encouraging ways to label wages as non-tax liable. Instead of encouraging taxes on 85% of Social Security benefits if retirement income is over $25,000/ year which hurts mostly those income levels barely above the maximum allowed income level which is actually poverty level in today’s economy. Congress has failed to address and adjust these levels to match current economic standards but yet managed to raise their salaries ( a part time position) to a 6 figure income.
I had a car crash 6/2/2024 that broke both my arms why was I denied SSI-D ? I was 58 years old and paid in my entire life since age 15