What happens beyond full retirement age

Many people wait until “full retirement age” or later to start getting Social Security benefits. Here are some points to consider – Social Security, health benefits, taxes – to help with their decision-making.

By: Jackie Perlman  /  May 30, 2018

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Retirement age. Could that be when you finally stop working and sail away on a yacht to some tropical place, perhaps to join that smiling brigade of seniors featured in all those planning brochures? Or, maybe it’s a specific age, such as 55 or 65? Or when you leave your job, willingly or not, hopefully with some type of pension or retirement savings?

In Social Security parlance, retirement age is when people start collecting their Social Security retirement benefits

  • That may start as early as age 62, with a reduced benefit.
  • Or, people can wait until their full retirement age to get their full, unreduced benefit. That’s also called the “basic benefit” and, formally, the “primary insurance amount” (PIA). More on that later.
  • Or they may wait even longer and get still higher benefits because of delayed retirement credits.

This article is about people who wait at least to full retirement age to claim benefits.

First, a little history

When the U.S. started the social insurance program in 1935, retirement age for getting Social Security benefits was 65. You might suppose that had something to do with average life expectancy at the time, or possibly some arbitrary number Congress pulled from a hat.

A long-standing myth is that, in 1889, 65-year old Chancellor Otto von Bismarck of Germany designed and helped implement the world’s first old-age insurance system, which conveniently set 65 as the retirement age. Actually, the German system first set the retirement age at 70, and Bismarck was then 74.

The U.S. choice was mainly based on retirement ages used in private and state pensions, and the Railroad Retirement System. Actuarial studies later confirmed that age 65 would produce a “manageable” and “sustainable” system.

Yet, Ida May Fuller, the first-ever recipient of regular monthly retirement checks, died in 1975 at age 100.

See Age 65 Retirement in Social Security History for more serious, and not so serious discussion (did our system really have something to do with Otto von Bismarck?) on the topic.

Fast forward to the present, and some of the basics

To receive Social Security retirement benefits, individuals must have at least 40 quarters of coverage. In 2018, one quarter of coverage requires earnings of $1,320.

Primary insurance amounts (PIA) are computed on the 35 highest-earning years, but it’s a bit more complicated than it sounds. For more, select “Your Retirement Benefit: How It Is Figured” from SSA’s Retirement Publications.

Under current Social Security law, full retirement age is age 65 to 67, depending on the individual’s birthdate. People who start collecting benefits when they reach full retirement age will get their basic benefit (or, PIA). People born in 1952 will reach full retirement age (66) in 2018. If they retire early and start collecting benefits before full retirement age, their benefit is reduced by a fraction for each month before full retirement age. So, they’ll get a smaller benefit for a longer time.

What to know about going beyond full retirement age

According to a Pew Research Center study, more Americans are working well into their 60s, 70s, and even longer. They may decide not to retire in the classic sense of the word, or at least not to retire completely, or they may find it financially difficult to do so.

Here are some pointers for individuals and their advisors who plan to delay the start of their real retirement, or their Social Security retirement benefits, or both. Once people sign up, they can request up to six months of retroactive benefits.

Individuals can get credit for delaying retirement

If people delay the start of their retirement benefits until after their full retirement age, their benefit increases by a fraction for each month they wait, up to 8 percent for each full year they delay. For instance, if a beneficiary’s PIA is $2,000 and he waits 24 months to start his benefits, his monthly benefit amount will be $2,320 ($2,000 + [$2,000 × 8 percent × 2 years]), ignoring any cost-of-living increases. However, delayed retirement credits stop once individuals turn 70.

Other benefit increases

Annual cost-of-living increases may apply to all Social Security recipients, regardless of when they started their benefits.

Also, for people who continue to work after they start collecting benefits, a higher earnings year can replace a lower earnings year – and result in a higher benefit. But keep in mind that inflation adjustment factors in the benefit formula make determining highest-earning years more complicated than simply comparing earnings amounts. For instance, $35,000 earned in 1990 is equivalent to $80,850 in 2018!

The tax picture

Social Security and Medicare taxes are still required

Many people wonder if they still have to pay Social Security and Medicare tax on their wages and/or self-employment earnings after they start receiving benefits.

Answer: Yes! Employers are required by law to withhold these taxes from earnings (see “Social Security and Medicare Taxes” in IRS Pub. 15, Employer’s Tax Guide). Likewise, if people are self-employed, they must continue to pay self-employment tax on their net earnings.

There are some exceptions, but the requirement won’t end when individuals simply reach a certain age or collect Social Security benefits.

Social Security benefits may be taxable

When individuals start collecting Social Security benefits (whether they’re supplementing part-time work or they’ve reached age 70 and maxed out their delayed retirement credits), up to 85 percent of the benefits may be taxable. It all depends on how much other income they have, and what type of income it is.

If half of an individual’s benefits, plus all his or her other taxable income (wages, pensions, dividends, etc.), plus tax-exempt interest and other adjustments total more than $25,000 ($32,000 if married filing jointly), then some of the taxpayer’s Social Security income will be taxable. Individuals’ resident state may tax their benefits, as well.

IRS Notice 703 provides a quick reference and worksheet about how Social Security benefits are taxed. IRS Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, has the full details.

Advisors should help clients anticipate and plan to cover their tax bill

If Social Security benefits are taxable, individuals will need to plan to cover the additional tax bill (and avoid an unpleasant surprise at tax time).

They can do so in several ways:

  • Increase withholding from wages, if still employed.
  • Pay estimated taxes.
  • Request voluntary federal withholding from their benefits (applies only at federal level).

The earnings test

For people who start their benefits before full retirement age but end up working, the Social Security Administration (SSA) will withhold some of their benefits, or require them to pay some of the benefits back. The good news is, once individuals reach full retirement age, the earnings test no longer applies.

Be careful though. The limitation is lifted only starting with the month individuals reach full retirement age. For example, if an individual is still working and starts collecting benefits in January 2018, but doesn’t reach full retirement age until August 2018, the earnings test will apply for January through July, and the individual could lose some benefits. See How Work Affects Your Benefits.

Medicare is a factor, too

Medicare is the federal health insurance program for people age 65 and older and for those with certain types of disabilities. Read more about Medicare basics, or see Medicare and You for full details.

Alphabet soup and premiums

Medicare Parts A and B respectively (aka, original Medicare) cover hospital and medical benefits.

  • Part A is free for people who are fully insured (that is, they have at least 40 quarters of Social Security coverage).
  • Part B has a basic monthly premium of $134 in 2018; it’s more for people with adjusted gross income (AGI) of more than $85,000 ($170,000 for joint filers) as of their most recent tax return—usually 2016 for 2018 premiums. Individuals should contact the SSA if their earnings have dropped since 2016.
  • Part D covers prescription drug benefits. Premiums vary depending on the plan and AGI.
  • Medicare supplemental plans (aka, Medigap plans) are private plans that cover some of the costs that Medicare doesn’t, such as co-pays. Medigap plans have their own “alphabet soup” of features, varying by plan.
  • Medicare Advantage Plans (aka, Medicare “C”) are private plans that cover original Medicare, plus other Medicare services.

Enrollment periods

For most people, Medicare starts at age 65. Enrollment isn’t automatic if individuals aren’t collecting Social Security benefits yet.

The Initial Enrollment Period is seven months, starting three months before the individual turns 65. If individuals have health insurance coverage under their employer or their spouse’s employer, they may be eligible for a Special Enrollment Period (SEP).

Caution here!

  • The employer offering the plan must have 100 or more employees, so people working for a small company may not qualify for the SEP.
  • COBRA, retiree health plans, and individual health plans (including Marketplace plans) are not current employer coverage for SEP purposes.

If individuals qualify for a SEP, they can sign up:

  • At any time they’re covered by the employer plan
  • During the eight months starting the month after the end of their employment or employer coverage (whichever is earlier)

People who missed their Initial Enrollment Period and don’t qualify for a SEP can sign up during the General Enrollment Period, which runs from Jan. 1 to March 31 of each year. In that case, coverage begins July 1 of the same year, and individuals may have to pay a late-enrollment penalty.

Note: People who enroll in Medicare before collecting Social Security benefits must pay Part B and Part D premiums directly. Once the individual receives benefits, he or she may have the premiums withheld from benefits.

Health Savings Accounts

People in a qualifying high-deductible health plan who contribute to a health savings account (HSA), can’t contribute to HSAs after they’re enrolled in Medicare.

Once individuals who are at least age 65 sign up for Social Security retirement benefits, they may be surprised to learn they’re automatically enrolled in Medicare A (the free part), retroactive to age 65 or six months (whichever is later).

People who made HSA contributions and don’t want to withdraw them or pay excise tax on overcontributions should consider delaying their Social Security sign-up until six months after they’ve stopped making HSA contributions. That’s because, as mentioned earlier, individuals can still get retroactive retirement benefits up to six months.

People receive those retroactive benefits in a lump sum, and the benefits won’t interfere with any previously made HSA contributions.

Note: Watch out for an extra federal and state tax bill, and plan for it with estimates, withholding, etc.

Even though people enrolled in Medicare can’t contribute to their HSA, they don’t have to close the account. Any savings in the account will come in handy to cover dental bills and many other uncovered medical expenses individuals will face in the future.

Much has changed since Ida May Fuller started getting Social Security checks

The program has expanded to include early- and late-retirement options and Medicare (which has also changed a lot since it began in 1966) – not to mention spousal options and benefits, disability benefits, and survivor’s benefits.

Whether to begin receiving Social Security retirement benefits as early as possible, wait until full retirement age, or delay benefits well past that age are personal decisions that depend on many factors, including individuals’ work plans, health, finances, and much more.

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Jackie Perlman

Jackie Perlman, CPA, is a principal tax research analyst at The Tax Institute. Jackie specializes in individual taxpayer issues, family tax situations, and tax law complications for families.

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