Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Many people are working past traditional retirement age, but that has implications for Social Security benefits. Joining me to discuss that topic is Andrew Salata. He is a public affairs specialist with the Social Security Administration.
Andrew, thank you so much for being here.
Andrew Salata: Thank you for having the chance to talk with you about some of the information about working after retirement and how it affects people. It's something we're seeing more and more. So it is timely.
Benz: A lot of people really have no choice but to continue working past that traditional retirement age. Let's get the good news right out of the way, which is that if you are full retirement age, you can continue to earn Social Security benefits, and those benefits won't be affected no matter what you earn from your job, correct?
Salata: Correct. If you're at your full retirement age--which for those who we are seeing now born between 1943 in 1954 is 66--if you're already 66 and you continue working, those work wages or self-employment wages do not affect the Social Security benefits.
It's a little bit different if you're turning 66 this year. For the months prior to age 66, some individuals take retirement at the beginning of the year, so if you're turning 66 later in the year, you can earn up to $40,080 for the months prior to your birthday month. So, an example would be if you turn 66 in June, as long as your earnings are under $40,080 by May 31…
Benz: So, in those first five months of the year?
Benz: OK. So that's pretty generous, but your benefits do start to get cut back if you are prior to that full retirement age and you're still earning a paycheck. Let's talk about the thresholds that kick in and in turn what happens to your Social Security benefits.
Salata: Sure, because the earliest you can still file even though our retirement ages have changed is 62 for early retirement. But if you do file early, so prior to when you're turning 66, the limit is lower, it's $15,120 for the calendar year. And again, we look at the calendar-year amounts.
So, even if you do take your retirement benefits later in the year, we still have to first take a look at the calendar-year amount, except for a special rule. The first year you retire in case you are waiting for a birthday before you retire, we will look at a monthly amount. The $15,120 comes out to be $1,260 a month over 12 months. So, as long as your earnings stay at that level or below, so if you reduce your hours or just get a part-time job, we'll disregard the whole calendar-year amount as long as each month that you're receiving benefits is under $1,260.
Benz: But if I go over that amount, what happens?
Salata: Yeah, if you do go over it, what we do look at is, for every $2 you're over the calendar-year amount, we hold back $1. So, the benefit average Social Security amount is about $1,100, and for every $2,200, we would hold back a check. So what we do look at is what your whole calendar-year amount would be, and what we do is for over that amount, we'll divide it by 2, and that's what we hold back from your Social Security checks.
We hold full checks, just because as an estimate in case you do earn a little bit more instead of having the back-and-forth adjustments, we can just take from probably whatever overage we held throughout the year and then in that way we can just pay you back that money quicker.
Benz: So, that is the impact on the actual Social Security earnings, but there's also sort of a related effect, which is that if my income from all sources hits a certain threshold, then my benefits start being taxable, correct?
Salata: Correct. And what we do look at in this case with the work restrictions--I was only talking about wages or self-employment--when we look at the taxable part, the Internal Revenue Service looks at your combined income plus half of your Social Security benefit, plus any nontaxable income. If that threshold goes over $25,000 as a single individual filing or $32,000 as a married couple filing jointly, then Social Security benefits are taxable at the tax bracket you're in.
Benz: So, if I'm looking to get my arms around this question or maybe thinking that working longer will be part of my in-retirement strategy, what tools do you have to help people crunch the numbers and make sure that they are thinking through all these variables?
Salata: Well, we have two. First, on our Retirement Planner page at socialsecurity.gov, you can actually click on to working after receiving Social Security benefits, and it just asks you three questions: your date of birth, so we'll know at what level you are, whether you're over full retirement age or not; your estimated work earnings for the calendar year; and then your Social Security monthly amount. And you just plug-in those totals, and it will tell you whether we'll be able to pay you for that year.
And if you haven't filed yet and you're trying to decide on filing to get that benefit amount, you can use our retirement estimator online, and it will give you the amount for your Social Security benefits, whether it's early retirement or your full amount. So, you'll have those figures to put in.
And as we always say, if you visit 'My Social Security' and create an account, you can get your Social Security statement online. The one we used to mail, you can now have on your computer and that also gives you those same figures as well as earnings.
Benz: So, last question for you, Andrew, is the relationship between pension income and Social Security income. Let's talk about the extent to which earnings from pensions do in fact affect Social Security benefits.
Salata: Yes, because with Social Security benefits, when we figure out Social Security, your benefit amount, we look at your lifetime of earnings. We adjust for inflation for the previous years, and then we come up with a monthly average of your earnings over your lifetime. And it's a weighted formula where we give a certain percent back based on average earners.
So, say a low earner has an average return of about 56% of their work earnings into Social Security, but an average earner would have averaged about $24,000 per year. So that $2,000 a month would give about $1,100 Social Security, whereas a high earner, who averages maybe $78,000 a year over their lifetime, would get a little over $2,200. Even though that's 34%, it's still a larger dollar amount.
What happens for workers who pay into a different retirement system, like municipal workers, local governments, state, or even city workers, they haven't paid into Social Security. So their earnings record will be lower. So, to adjust for our weighted formula, we changed the formula to still give an intended return between 34%-37%.
So, right now individuals who may fall under the Windfall Elimination Provision, which is what it is called, would have an adjustment to their benefits of about $396.
Benz: Andrew, thank you so much for being here. There's obviously a lot of complex material to get through. We appreciate you being here.
Salata: Well, thank you. And I appreciate being able to come out and sharing with you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.