In Brief
Social Security remains a critical component of most Americans’ financial and retirement plans. Despite its longevity and familiarity, many individuals are unaware of all its relevant provisions and the related benefits and drawbacks. In the following article, the author answers 20 common questions about Social Security so that advisors are ready to advise taxpayers.
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1. How many different categories of Social Security payments may be received by an individual?
There are 13 categories of benefits, as follows:
- Retirement benefits
- Spousal benefits
- Divorced spousal benefits
- Widow/widower benefits
- Divorced widow/widower benefits
- Child-in-care spousal benefits
- Child benefits
- Disabled child benefits
- Mother/father benefits
- Disability benefits
- Parent benefits
- Grandchild benefits
- Death benefits.
This article will address the first five categories.
2. At which age can individuals collect Social Security benefits?
The Social Security Administration released the following data on the ages that eligible retirees have applied for Social Security as of 2022. (Note that the totals exceed 100% since percentages include workers receiving Social Security disability benefits who convert to the retired worker benefit.)
| Male | Female | |
|---|---|---|
| Age 62 | 22.9% | 24.5% |
| Age 63 | 6.4% | 6.6% |
| Age 64 | 6.7% | 7.3% |
| Age 65 | 13.3% | 13.4% |
| Age 66 | 28.4% | 26.5% |
| Age 67 | 15% | 13.4% |
| Age 68 | 13.4% | 13.1% |
| Age 69 | 13.8% | 12.2% |
| Age 70 | 8.4% | 9.3% |
3. When is a worker eligible for Social Security?
Once individuals have worked 40 quarters, they are considered fully insured. A qualifying quarter in 2024 for an employee will require at least $1,730 being earned ($6,920 per calendar year for self-employed). The highest 35 years of earnings are calculated, with each year being indexed for inflation. This total is then divided by the lower of:
- 420 (assuming 35 years of earnings) or
- a smaller monthly figure if the individual does not have 35 years of earnings.
The resulting figure is the Average Monthly Earnings (AME). AME is used to determine the Primary Insurance Amount (PIA). PIA is the amount that would be received if an individual begins to collect retirement benefits at the full retirement age (FRA) as discussed in Question 5 below. The PIA is the sum of the following:
- 90% of the first $1,174 of AME
- 32% of AME over $1,174
- 15% of AME over $7,078.
The maximum PIA in 2024 is $3,822.
If an individual does not have 35 years of earning income, a zero will be used in the calculation for any missing years. If one works into retirement, benefits may increase as the earlier zero (or those years with lesser income) can be replaced with those new earnings, which are not indexed for inflation and can be higher with greater earning capacity.
Social Security should be applied four months in advance of the date being selected for the receipt of benefits. This application can be completed online at https://www.ssa.gov/apply.
4. How is the Cost-of-Living Adjustment determined?
The Social Security Cost-of-Living Adjustment (COLA) is calculated annually by averaging together the Consumer Price Index for Urban Wage Earners and Clerical Workers in the third quarter of each year and then by comparing that with the same average figures for the previous year. The COLA is the percentage difference between the two. The average has been an approximate 2.6% adjustment over the past two decades and is 3.2% currently; it was 8.7% in 2023, the largest increase in 40 years.
COLA is also relevant with respect to the premium for Medicare Part B (which covers outpatient services, such as doctors’ visits) for individuals 65 or older. This premium is deducted from Social Security benefits. As a result of a “hold harmless” provision in federal law, a person’s Social Security benefits cannot be reduced from one year to the next because of an increase in the Part B premium. Consequently, in years of nominal COLAs or high Part B premium increases, a retiree with a small monthly Social Security check will not see any reduction in benefits.
5. What is Full Retirement Age?
Full Retirement Age (FRA) is the age at which 100% of the monthly Social Security benefit is first available to a retiree without any reduction.
For individuals born in 1960 or later, FRA is age 67. For individuals born in 1959 or prior FRA is at least age 66.
There is a retirement credit, which means instead of taking Social Security benefits at the earliest possible age of 62, there will be an 8% annual increase until attaining what is known as the Full Benefit Age (FBA) of 70, when no further credit is given for delaying the receipt of Social Security. The following illustrates the differences between the maximum possible Social Security benefits in 2024 at age 62, the FRA of 67, and the FBA of 70:
| Age 62 | $2,710 | |
| Age 67 | (FRA) | $3,822 |
| Age 70 | (FBA) | $4,873 |
For those born in 1960 or later, the incentive to wait past the first year of eligibility at age 62 until the FRA of 67 is reflected below by the benefit percentage reduction in the years prior to FRA:
| Age 62 | 70% |
| Age 63 | 75% |
| Age 64 | 80% |
| Age 65 | 86.7% |
| Age 66 | 93.3% |
| Age 67 | 100% |
Individuals who plan on delaying applying for Social Security still need to register for Medicare during the six-month period of three months before and after turning age 65 to avoid a penalty. For those in that situation but who have health coverage elsewhere, enrollment in Medicare Part A is recommended. The penalty for not enrolling in Part A could be an increase in the monthly premium of 10% for twice the number of years of not having been enrolled.
In addition to the reduction of Social Security benefits when claiming these before the FRA, individuals must consider the excess earnings benefit reduction, as reviewed in Question 6 below.
6. What is the excess earnings benefit reduction?
An individual applying for Social Security benefits before the FRA may also face a substantial reduction in benefits by having excess earnings. The reasoning for this provision is to encourage workers to wait until the FRA or later to start collecting benefits. Social Security will withhold (until FRA is attained) $1 of every $2 earned over the 2024 earnings limit of $22,320 ($1,860 per month). In the year in which an individual will reach FRA, Social Security withholds $1 for every $3 earned over $59,520 ($4,960 per month) until the month FRA is attained.
Earned income is that which is received from the fruits of one’s labor, such as wages and self-employment income (pensions, unemployment compensation, and workers’ compensation are not included in this earnings calculation being not subject to FICA). In other words, income from the fruits of capital such as interest and dividends do not result in reduced Social Security benefits. Any benefit reduction because of the excess earnings will be restored at FRA.
An ancillary, but minor, benefit of income reporting under this provision is the increase in an individual’s 35-year average earnings as discussed above in Question 3. The excess earnings test is an individual one—a spouse’s income does not factor into the calculation. In the first year of retirement, earnings prior to collecting Social Security benefits do not count.
7. When are Social Security retirement benefits income taxable?
Irrespective of attaining the FRA, Social Security may be taxable for any retiree at any age depending on the calculation of provisional income. The first step is calculating provisional income as the sum of:
- Adjusted gross income (AGI—without Social Security benefits, but adding tax exempt interest) and
- 50% of Social Security benefits received.
The second step is to apply this figure to the following percentages. (Note that Married Filing Separately is no benefit under these parameters.)
Percentage of Social Security Benefits Required to be Included in Taxable Income
| Provisional Income | Single | Joint |
|---|---|---|
| Less than $25,000 | 0% | – |
| Less than $32,000 | – | 0% |
| $25,000 to $34,000 | 50% | – |
| $32,000 to $44,000 | – | 50% |
| More than $34,000 | 85% | – |
| More than $44,000 | – | 85% |
The figures above have never been adjusted for inflation since 1984, the initial year of this tax. Had these inflationary adjustments been made over the years, the individual base amount under the first level would be an estimated $75,250 (vs. $25,000) and $96,300 (vs. $32,000) for joint filers.
8. Which states tax Social Security?
The following 11 states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont.
9. Can an individual who has begun receiving benefits change their mind?
If a retiree decides it was a mistake to receive Social Security benefits before attaining the FRA, whether due to the benefit reduction (Question 5) or the excess earnings penalty (Question 6), an individual is allowed a one-time opportunity to have an application revocation due to a change in circumstances. This election must be filed within the first 12 months of receiving benefits. A taxpayer must submit Social Security Form SSA-521, Request for Withdrawal of Application, which revocation will require the repayment of benefits received, including spousal benefits (Question 10, below).
10. What are the benefits available to spouses?
A spouse of a worker who is 62 or older must have been married at least one year before being entitled to receive any Social Security benefits related to the retiree. Spousal benefits cannot be taken until the other spouse applies. In other words, when an application is made for a spousal benefit, it will be considered a “deemed filing”—that is, this individual has also applied for his or her own benefit. The amount of Social Security benefit will be the greater of the spousal benefit or the worker’s benefit.
The spousal benefit can be as high as 50% of the worker’s benefit, as reflected in the below chart. The spousal benefit will not include any portion of the retiree’s benefit related to delaying benefits past the FRA. Similar to a worker who has not reached FRA, a spouse will also lose benefits under the excess earnings penalty.
The following reflects the approximate reduced percentage in spousal benefits when taken by the spouse before attaining FRA of 67:
| Age | % of FRA Benefits that can be Claimed |
|---|---|
| 62 | 32.50% |
| 63 | 35.00% |
| 64 | 37.50% |
| 65 | 41.66% |
| 66 | 45.83% |
| 67 | 50.00% |
11. Which concepts apply to a widow/widower of a retired worker?
If the deceased spouse passed away before attaining the FRA and had not applied for Social Security prior to death, the widow/widower is able to receive 100% of the benefit as if the decedent had attained the FRA. Otherwise, if the deceased spouse had begun receiving benefits prior to FRA, that entire reduced amount will continue to be received by the surviving spouse. In other words, in both situations, the survivor’s benefit is 100%, as compared with the maximum spousal benefit of 50% of the Social Security benefit being received by a living retiree.
To be eligible, the widow/widower must be at least age 60, which is two years prior to eligibility for retirement benefits. In addition, the surviving spouse had to be married at least nine months before the passing of the decedent, as compared with one year for the spousal retirement benefit. Eligibility is available to a surviving spouse earlier than age 60 if taking care of a deceased worker’s child under age 16 (or age 50 if disabled). The nine-month rule is waived if the death is deemed accidental or occurred while serving with the Armed Forces.
A widow/widower receiving a decedent worker’s benefit can switch to their own retirement benefit if higher at any time. This option is not available to spousal benefits, as discussed in Question 10, because of the “deemed filing” rule. As is the case with spousal benefits, there will be a reduction when taken before a surviving spouse attains the FRA. As a result, the optimal situation may occur when a surviving spouse takes their benefit at age 62 and then elects the survivor’s benefit (if higher) at the FRA. The benefit of any widow or widower who remarries will be continued, provided the remarriage occurs after age 60. Otherwise, remarriage before that age terminates the widow/widower’s benefit.
12. Is an ex-spouse entitled to Social Security benefits?
An ex-spouse age 62 or older is able to receive the same benefits as if they were still married (or a widow/widower) to the former spouse. The ex-spouse can receive these benefits provided the marriage lasted at least 10 years and this individual has attained age 62. The divorce must have occurred at least two years prior to the application for benefits. These benefits are available even if the former spouse is not yet receiving Social Security, or has filed an application to suspend benefits (as discussed in Question 9).
The divorced spouse’s Social Security benefit will be reduced under the excess earnings penalty, or if the benefit is taken before that individual’s FRA.
A remarriage by the ex-spouse will never affect the former spouse’s benefit.
13. When can a retiree apply for retroactive Social Security benefits?
The retroactive benefit option provides a lump sum payment representing the missed monthly benefits for the period six months prior to filing an application with Social Security. This would be appropriate for an individual changing their mind on waiting until age 70. To elect this option, the retiree must have reached FRA. In addition, these benefits are only available retroactive to the month in which one attained the FRA, with a maximum of six months of missed payments.
If the retroactive benefit option is pursued, the future monthly benefit amount will be reduced for the remainder of the individual’s life. This is because it is deemed that the retiree applied for Social Security six months earlier due to the receipt of the lump sum payment.
14. What is the best strategy for a married couple with widely different earnings?
With a couple whose earnings widely vary, the spouse with the lower earnings may want to apply for Social Security on upon attaining age 62 while the higher earning spouse waits until age 70. Under such a plan, the flow of Social Security benefits to the family will begin early; the higher earning spouse will preserve the highest possible benefits not only for retirement income, but also for the survivor benefit. The lower earning spouse can then apply for the spousal benefit when the other spouse applies. At that time, the lower earning spouse may be entitled to a spousal boost in addition to his or her own benefit. To the extent that the reduced percentage is applied to the higher earning spouse’s benefit (as outlined in Question 10) and this figure exceeds the lower earning spouse’s retirement benefit, the excess is the amount of the spousal boost added to this retiree’s check. The spousal boost will be calculated using less than 50% of the higher earning spouse’s benefit because of the lower earning spouse’s initial application for Social Security at age 62 under this particular scenario.
15. When can Social Security checks be levied for the benefit of a creditor?
There are limited circumstances wherein an individual’s Social Security check can be levied; this includes an IRS levy for unpaid taxes and a court order for unpaid alimony/child support. Based on a law passed in the mid-1990s, the Treasury Department can recover funds from an individual who has defaulted on a federal student loan by withholding up to 15% of their Social Security benefits. Recently, more than 170,000 Social Security recipients had their monthly check reduced as a result of this legislation.
Social Security benefits are never assignable.
16. What are generally the break-even ages for collecting Social Security?
By waiting until the FRA instead of claiming at age 62, an individual will receive more overall Social Security benefits once roughly age 77 is attained. Waiting until age 67 (instead of beginning benefits at age 62), the break-even age is age 80 and 7 months. For those who wait until age 70 to collect Social Security benefits, once the retiree has reached approximately age 82, the total amount received will be greater than if benefits had begun at age 62.
17. What happens if an individual is unable to handle financial matters such as applying for Social Security?
The Social Security Administration does not accept Powers of Attorney. Instead Form SSA-11, a “Request to be Selected as Payee,” allows an individual to be designated as the Representative Payee for one who is unable to handle their own financial affairs. This representative must understand that there cannot be a fee charged for this service and may be requested to provide an accounting of the funds received and disbursed. To act on behalf of the individual in all other matters pertaining to Social Security, the form Claimant’s Appointment of a Representative (SSA-1696) should be utilized.
18. What is the current and future state of Social Security?
In testimony before the Senate Budget Committee on July 12, 2023, Kathleen Romig, director of Social Security and Disability Policy at the Center on Budget and Policy Priorities, stated that Social Security is the biggest single source of income for American retirees. She further indicated that without Social Security, older Americans would have a poverty rate of 38% instead of rate of 10% (or 2.2 million taxpayers of the 20 million who receive monthly Social Security benefits).
In a recent analysis, the Center for Retirement Research at Boston College (BC) noted the following:
- The Social Security retirement fund will be depleted by 2033 but if combined with the smaller Disability Insurance Fund (which would require an Act of Congress), this depletion would be delayed until 2035.
- Their analysis indicates that absent any government action, this depletion would result in the need to reduce benefits by 21% in the next decade.
- The BC report states that if payroll taxes were immediately raised by 1.75% for the employers and 1.75% for the employees, enough funds would be generated for benefits to be paid through 2098.
19. What about news reports of Social Security overpayments and collection efforts against family members?
The Social Security Administration (SSA) has sent overpayment notices totaling between $6 billion and $10 billion for its 13 various benefit programs. The SSA has an uncollected overpayment balance of roughly $23 billion, which is minimal compared to the more than $1.4 trillion that the agency disburses to about 71 million people each year.
The major overpayment problem does not generally stem from monthly Social Security retirement benefits. The problem is principally generated from those who receive Social Security disability benefits or SSI. This is because individuals are not allowed to earn more than $1,470 per month in additional income after a nine-month trial work period. Another problem area stems from individuals who are receiving Social Security disability benefits but are also collecting worker’s compensation benefits.
Dependents or spouses who are listed on the recipient’s records can be held personally liable for overpayments, though overpayments have been written off if the dependents were younger than 18 when the parents received the benefits.
20. Where can additional information be found?
The following websites are sources for more information on Social Security:
- AARP Social Security Resource Center—https://www.aarp.org/retirement/social-security/questions-answers/benefits/?cmp=KNC-DSO-COR-Core-Retirement-Soc
- Motley’s Fool Social Security Tax Calculation—https://www.fool.com/retirement/2024/05/19/is-it-better-take-social-security-at-62-67-or-70/
- Social Security Handbook—https://www.ssa.gov/OP_Home/handbook/handbook.html
- The Advisor’s Guide to Social Security Planning by Theodore Sarenski, CPA—https://www.aicpa-cima.com/resources/download/guide-to-social-security-planning
- Maximize My Social Security—https://maximizemysocialsecurity.com
