If an individual delays claiming Social Security benefits until after she reaches full Social Security retirement age, her benefits may be increased for two reasons.First, there is a delayed retirement credit that increases the benefits for each month that retirement is delayed beyond full Social Security retirement age. Second, additional earnings (wages or self-employment income) may also increase the benefits that will be received after retirement.
Delayed retirement credit
For each month past full Social Security retirement age that a worker delays receiving retirement benefits, a credit increases the amount of the benefits. These increases, or delayed retirement credits, apply up to the month that the worker reaches age 70. The amount of the monthly increase depends on the year in which the worker was born.
For workers born:
* After Jan. 1, 1937, and before Jan. 2, 1939, the monthly increase is 13/24 of 1 percent, or 6.5 percent a year;
* After Jan. 1, 1939, and before Jan. 2, 1941, the monthly increase is 7/12 of 1 percent, or 7 percent a year;
* After Jan. 1, 1941, and before Jan. 2, 1943, the monthly increase is 5/8 of 1 percent, or 7.5 percent a year; and,
* After Jan. 1, 1943, the monthly increase is 2/3 of 1 percent, or 8 percent a year.
Example 1: Your client was born on Sep. 15, 1938, and her full Social Security retirement age is 65 years and two months. Although she reached full Social Security retirement age on Nov. 15, 2003, she continued to work and did not apply for Social Security benefits, even though she could have started receiving benefits at that time without having to give any part of the benefits back, because of excess earnings.
She now plans to retire on Jan. 15, 2007, when she will be 68 years and four months old. She will start collecting Social Security benefits at that time. Since she will have worked for 38 months after she reached full Social Security retirement age, her monthly benefits will be increased by 20.5833 percent of her primary insurance amount (38 x 13/24 of 1 percent). If her monthly PIA is $1,800, her monthly benefit will be $2,170 ($1,800 x 1.205833).
Example 2: The same facts apply as in Example 1, except that your client was born on Sept. 15, 1939. Accordingly, her full retirement age is 65 years and four months, and she will be 24 months past that age when she starts collecting benefits. Her monthly benefit will be increased by 14 percent of her PIA (24 x 7/12 of 1 percent). Thus, her monthly benefit will be $2,052 ($1,800 x 1.14).
The delayed retirement credit doesn't increase the worker's PIA, so that other benefits based on the PIA, such as benefits payable to a worker's spouse based on his earnings record, aren't affected by the delayed retirement credit.
However, the widow or widower of a worker who had received or was eligible for delayed retirement credits is entitled to the same increase that had been applied to the benefit of the deceased worker, or for which the deceased worker was eligible as of the time of death.
Recomputation of benefits
Once a retired worker's PIA is determined, that amount (as adjusted for cost-of-living increases), or a percentage of this amount to reflect early retirement or delayed retirement, is generally payable each month for the life of the worker. Similarly, the benefits of dependents or survivors, once ascertained, continue in the same amounts as long as they remain eligible.
However, a person's PIA may be recomputed one or more times after the first computation. The recomputation gives the worker credit for any additional covered earnings in the year that he first became entitled to benefits, or in a later year. A recomputation to include a particular year's earnings is effective in January of the year after the year in which the earnings were paid.
Observation: A worker's PIA is determined by the average monthly amount of Social Security earnings that the worker had over his highest paid 35 years of work under Social Security. However, in determining total Social Security earnings, earnings in earlier years are adjusted to reflect the ratio of the average wages earned by all workers in the year the worker turned 60, to average wages in earlier years in which the worker had Social Security earnings. For example, if average wages in the year the worker turned 60 were five times as high as wages in the year she turned 30, her earnings for the year she turned 30 would be adjusted to five times their actual amount in determining her average adjusted Social Security earnings.
Social Security earnings for the highest-paid 35 years of work under Social Security are divided by 420 (the number of months in 35 years) to get the average adjusted monthly amount. If a worker worked less than 35 years under Social Security, his total Social Security earnings for the years he did work under Social Security are still divided by 420 to get the average adjusted monthly earnings.
Accordingly, a worker will benefit from a recomputation if he had fewer than 35 years in which Social Security taxes were paid when the PIA was originally computed, or if his earnings in a later year are higher than those of an earlier year that were taken into account in computing average earnings over the worker's highest 35 years of earnings.
Example 3: Your client, who was born on Oct. 15, 1940, started collecting Social Security benefits in April of 2006, when he had reached full retirement age of 65 years and six months. He continued to work under Social Security after he started collecting benefits.
Through 2005, the last full year that he had worked under Social Security before starting to get benefits, he had worked a total of 30 years under Social Security. His total adjusted Social Security earnings for those 30 years were $882,000. His average adjusted monthly Social Security earnings through the end of the year before he started collecting benefits were $2,100 ($882,000 divided by 420). His initial PIA for determining his monthly benefit was based on this amount.
If your client had an additional $84,000 of Social Security earnings in 2006, his total adjusted Social Security earnings for 31 years would increase to $966,000, and his average monthly earnings would increase to $2,300 ($966,000 divided by 420). Thus, his PIA for 2007 would be based on average adjusted monthly Social Security earnings of $2,300, instead of $2,100. If he continued to work in 2007 and later years under Social Security, his PIA would be recomputed each year to reflect his higher average yearly Social Security earnings.
Observation: The PIA equals 90 percent of average adjusted monthly earnings up to a specified amount, 32 percent of such earnings above that specified amount and below the next specified amount, and 15 percent of such earnings above the second specified amount. The amounts are adjusted each year for inflation.
According to Social Security Handbook §706.2, for workers who first become eligible for Social Security benefits in 2006, the PIA equals the sum of:
* 90 percent of the first $656 of the average adjusted monthly earnings;
* 32 percent of the amount above $656 up through $3,955; and,
* 15 percent of any amount over of $3,955.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
