Common Questions About Social Security - Rodgers & Associates

Common Questions About Social Security

Question Mark - Crimped Money

Last month I started a series on planning for retirement.

See the other posts in the series here:

Low interest rates, scarce pensions, stability concerns about Social Security, and longer life expectancy make retirement planning difficult. These concerns generate questions we help answer on a regular basis. Here are more of the most frequent questions people ask us.

Will Social Security keep up with the cost of living?
Your benefit amount will not stay the same. Generally, the benefit amount increases each year and protects benefi­ciaries against inflation. Social Security provides an annual cost-of-living increase based on the consumer price index. The most recent Social Security cost-of-living (COLA) increase was 1.7% payable in January 2013. President Obama’s 2014 budget proposal calls for a reduction in future Social Security outlays by changing the annual cost-of-living increase to a method called chained CPI. The proposal may or may not be passed but the subject bears watching.

There is another way that your benefit might increase. When you work you pay Social Security taxes. And because you pay these taxes, Social Security refigures your benefits to take into account your extra earnings. If the worker’s earnings for the year are higher than the earnings that were used in the original benefit compu­tation, Social Security substi­tutes the new year of earnings. The higher your earnings, the more your refigured benefit might be.

We can’t tell you here how much your benefit will increase, as each case is different and your benefit is recom­puted using your lifetime earnings. You need not take any special action. A recom­pu­tation of your benefits will be done automat­i­cally in the year following the close of the year in which you worked. The Social Security Admin­is­tration usually completes all recom­pu­ta­tions by September of the following year. (Remember, employers do not report your income to the SSA until February 28 of the year following the year of earnings.) If you are entitled to a higher benefit, it is retroactive to January of the year after the year when you had the additional earnings.

When can I start drawing full Social Security benefits?
For individuals born in 1937 and before, normal retirement (the age at which a recipient is entitled to 100% of his or her SSI benefits) is 65 years of age. For each month you choose to collect social security income before the “normal” retirement age, your payment is reduced by .555%. The earliest you can collect is age 62 and the benefit would be 80% of your normal SSI.

For individuals born after 1937 and before 1960, the normal retire­ment age increases from 65 years and 2 months to 66 years and 10 months as the table below illus­trates. Still the earliest you can collect is age 62 and the benefit would be on a sliding scale between 70% and 80% of your normal SSI.

Birth Year to Full-Retirement Age Table

For those born 1960 and later, normal retirement is age 67. You can collect at 62, but you will only receive 70% of your “normal” SSI.

The Social Security Admin­is­tration calls this Full Retirement Age. Full retirement age is the age at which you may receive an unreduced retirement benefit. Full retirement age has been 65 for many years. However, beginning with people born in 1938 or later, the age will gradually increase until it reaches 67 for people born after 1959. The 1983 Social Security amend­ments include a provision for raising the retirement age beginning with persons born in 1938 or later. Congress cited improve­ments in the health of older people and increases in average life expectancy as primary reasons for increasing the normal retirement age.

If I work after I start receiving Social Security retirement benefits, will I still need to pay Social Security and Medicare taxes on my earnings?
Yes. Any time you work in a job that is covered by Social Security—even if you are already receiving Social Security benefits—you and your employer must pay the Social Security and Medicare taxes on your earnings. The same is true if you are self-employed. You are still subject to the Social Security and Medicare taxes on your net profit.

Do I have to pay income taxes on my Social Security benefits?
The answer is “maybe.” Some people who receive Social Security will have to pay taxes on their benefits. You may have to pay taxes if you file an individual income tax return as an “individual” and your total income is over $25,000. If you file a joint return, you may have to pay taxes if you and your spouse have a total income of more than $32,000. For more infor­mation on the taxation of benefits, see Strategies to Manage the Taxation of Social Security.

See the other posts in the series here:

Rick’s Tips:

  • Social Security benefits have been annually indexed to the consumer price index since 1975.
  • The age at which you can draw full retirement benefits from Social Security depends on your year of birth.
  • Social Security benefits may be taxable. The taxable amount depends on the total amount of other income you have available.