Introduction to Social Security: Part II (Policy)
Understanding FRA is important, but it is also necessary to understand how additional policies could potentially impact benefits.
Working in Retirement
For those who claim before FRA, Social Security’s Earnings Test will automatically reduce benefits to the extent your wages exceed the below (in 2017).
|Year||Earnings Limit||Withholding from Benefit|
|Before year FRA is reached||$16.920||$1 for every $2 earned past limit|
|Year FRA is reached||$44,880||$1 for every $3 earned past limit|
|After year FRA is reached||None||None|
Longevity, and Lifetime Benefits
Life expectancy may be the greatest single variable in determining how much a person will receive in total lifetime Social Security benefits. If a client’s longevity is in question, or he/she doesn’t have an immediate need for Social Security, the decision of when to claim may be based on what will generate the largest lifetime income. This can be represented by a simple choice:
- A) Draw benefits early for a longer period of time, OR
- B) Delay benefits and receive a higher yearly amount.
COLAs and Health Care Inflation
Social Security cost of living adjustments (COLAs) were implemented in 1973 to ensure that benefits would keep pace with inflation. Social Security COLAs are expected to rise by an average of 2.6% annually (after a 2.9% increase from 2017 to 2018). Unfortunately, this falls far short of the pace of rising health care inflation, which is expected to increase by over 6% for the foreseeable future.
Medicare Part B and Health Care Costs
Since The Medicare Modernization Act of 2003, Medicare Part B premiums have been deducted from Social Security disbursements. Considering that Part B premiums rose 52% in 2016, this automatic deduction can have a tremendous impact on monthly Social Security income. According to HealthView’s latest data, in 2017, the average 64-year-old couple retiring in one year will require 64% of their lifetime pre-tax Social Security benefits to pay for health care costs.
Medicare Means Testing
Means testing (for Medicare Parts B and D) was officially introduced in 2007. This basically translates into “The more you make, the more you pay.” Retirees who cross Modified Adjusted Gross Income (MAGI) thresholds could see their Medicare Part B Premiums rise from 37% to over 200%. This means that depending on your client’s retirement income, even more money could be deducted from Social Security to pay for Part B. (It is worth noting that some financial products do not count toward MAGI, which can help reduce exposure to Medicare surcharges. This topic will be covered in a future article.)
Divorcees who were married for longer than 10 years can receive benefits from an ex-spouse’s record (even if the ex-spouse has remarried) if
- the claimer is unmarried;
- the claimer is aged 62 or older;
- the ex-spouse is entitled to Social Security retirement benefits, and
- benefits based on claimer’s employment history are less than ex-spouse’s benefits.
The Windfall Elimination Provision
Those who work for an employer that does not withhold Social Security taxes from salaries, such as a government agency or an employer in another country, may see a reduction in Social Security benefits.
The Government Offset Provision
Individuals who receive a pension from federal, state, or local government employer – and did in not pay Social Security taxes – may see a reduction in benefits. (This applies to spousal and ex-spousal benefits as well.)
Social Security is a lot more complex that you probably imagined. Making the right decisions about when to file, knowing how much will be deducted for Medicare premiums, and choosing the right investments to reduce potential Medicare surcharges can have a substantial long-term impact on your client’s retirement budget.
We encourage you to contact us to further explore these topics and review planning strategies that can help your clients achieve their retirement goals.