Understanding Social Security Benefits [for Florida Retirement Planning]

Understanding Social Security Benefits for Florida retirement planning and questions about when to begin taking payments are among the most common posed to those of us in the elder law, estate planning and financial planning community.

SSR of course refers to retirement insurance provided through Social Security is generally viewed one of the federal government’s most important programs despite a fair amount of scrutiny in recent years.

According to the Social Security Administration (“SSA”), which administers the program, over fifty million beneficiaries received SSR benefits and related survivor benefits in 2018.  And, of those recipients, over sixty percent rely on SSR for at least half of their monthly retirement budget.

Timing SSR for Florida Retirement Planning

As important as SSR is, the program is often misunderstood and confused with similar programs.  Along with SSR, the SSA also manages Social Security Disability Insurance (“SSDI”) and Supplemental Security Income (“SSI”).  SSDI is a disability program, which like SSR, is funded through FICA taxes and requires prior employment to qualify.  SSI is a means-tested income-replacement program that aids the elderly, blind, or disabled and is funded through general tax revenue.  In this article, though, we’re focusing on SSR and how the retirement benefits provided under the program can affect retirement planning.

Qualifying for Social Security Retirement Benefits

To receive SSR benefits, you must have contributed to the program through FICA or self-employment taxes during your time in the workforce.  The SSA determines eligibility through a system of “work credits” earned over time.  Forty lifetime credits are required to qualify for SSR, and up to four credits are available per year.  Currently, workers receive one credit for every $1,360 in annual income subject to FICA or self-employment taxes.  If you earn qualifying income of $5,440 or more in a year, you get the full four credits for that year.  So, ten years of consistent employment is usually sufficient to qualify for SSR.

As of 2019, the minimum age at which you can start receiving SSR benefits is 62.  However, the payment amount is based, in part, on how old you are when you first claim the benefits.  The baseline “full retirement age” is presently 66, but it will be increasing to 67 for individuals born in 1960 or later.

If you claim SSR benefits before full retirement age, your monthly payments are reduced.  Conversely, if you wait until after age 66, your monthly payments will be increased.  The idea is similar to lifetime income annuities.  If you start receiving benefits later in life, the SSA thinks you will receive fewer total payments.  In theory, it’s all supposed to even out in the long-run, but, of course, not everyone lives to their precise life expectancy.

Calculation of Social Security Retirement Benefits

Monthly SSR payments are calculated using your Average Indexed Monthly Earnings (“AIME”) over the 35 highest-earning years of your life.  To determine AIME, the SSA starts by figuring the monthly average earned for each year, and then adjusts each yearly average for inflation so that the earlier figures are increased to correspond to today’s dollar.  The adjusted yearly averages are then used to calculate indexed monthly earnings, and the result is AIME.  If you worked fewer than 35 years, the calculation uses zero as the average for each non-earning year up to 35.  If you worked more than 35 years, the SSA only takes into account the 35 years with the highest earnings.

Significantly, AIME only considers income which was subject to Social Security taxes.  So, if your earnings for a year exceed the cap (currently $132,900), AIME does not consider the excess.  Or, if you earned money from capital gains or from government work not subject to FICA or self-employment taxes, those earnings won’t be considered either.

The next step in the calculation is to use AIME to determine your Primary Insurance Amount (“PIA”), which is the baseline monthly benefit if you claim SSR at your precise full retirement age.  PIA relies on a tiered structure similar to federal income taxes.  Under the current formula, you receive 90% of the first $926 of AIME, plus 32% of amounts between $957 and $5,583, plus 15% of any remaining amounts. The highest possible PIA is $2,861, but this figure assumes maximum contributions for 35 years.  That national average PIA is closer to $1,450.

If you decide to take SSR at full retirement age, no further math is required – PIA is the amount of your benefit.  However, if you claim benefits earlier or later, PIA needs to be adjusted again.  And this is where some strategy comes into play because, within a certain range, you can exercise some control over your SSR amount by timing your claim.

Upsides and Downsides of Early vs. Late SSR Claims

As noted above, an important part of understanding Social Security benefits for retirement planning is considering that although you can claim SSR benefits as early as age 62, the drawback to an early claim is that the monthly payment amount is reduced.  The current formula decreases benefits by 0.55% per month (6.67% annually) for each month prior to full retirement age up to three years, and then 0.416% per month (5% annually) for each month beyond three years.  So, if you take SSR at the earliest possible age, the per-payment benefit is reduced by 30% from PIA.

More than half of eligible SSR beneficiaries elect to take benefits early, and there are certainly advantages to doing so.   First and foremost, you get access to the money earlier. So, if you don’t need the full amount for your retirement budget and are ready to call it a career, it might make sense to take the money sooner.  If you’re in poor health or otherwise don’t anticipate reaching your life expectancy, an early claim can make a huge difference in the aggregate benefits you receive.  Or, if you plan to invest the money and think you can earn returns that beat the reduction percentage, an early claim could be a smart move financially.  Remember, there’s nothing that says you can’t claim SSR benefits and continue working until you’re ready to retire.  But, keep in mind, up to 85% of SSR benefits can qualify as taxable income.

The opposite side of the coin is that you can increase your monthly benefit payment by waiting until after full retirement age to claim SSR.  The SSA calls this “delayed retirement credits,” and it works out to a 0.67% increase per month (8% annually) for each month you delay benefits, up to age 70.   That means that if you reach full retirement age at 66 but wait until 70 to claim benefits, your payments will be increased by the maximum 32% (no delayed retirement credits are awarded after age 70).

Holding off on SSR can make sense if you’re in good health, have a family history of outliving life expectancy, or need a little bit larger benefit to make your retirement budget work.  Or, if you plan to continue working anyway and don’t need the money yet, you can save money on income taxes by waiting until retirement, when your income is lower and the benefits will therefore be taxed at a lower rate.  The favorable tax laws in the State of Florida means that FL doesn’t tax its residents on SSR benefits, but federal income taxes still apply.

For individuals who continue working after full retirement age, a delayed claim can also increase the benefit amount by raising AIME.  The SSA uses your best 35 years to determine average earnings, and most people earn more income late in their careers than at the beginning.  So, if you’re age 66 and still working – making substantially more than you did in the 1980s even adjusted for inflation – a delayed retirement would allow you to replace lower-earning years with current higher-income years, thereby raising the average and, as a result, the monthly benefit.  Combined with delayed retirement credits, this can result in a substantial increase over what PIA would have otherwise been at full retirement age.

How Does SSR fit into Retirement Planning

Understanding Social Security benefits for retirement planning in Florida is about utilizing SSR as a reliable, secure source of income allowing for much-needed predictability in retirement.  Because you have some control over the payment amount, you can time your claim for optimal benefit in your situation.  Even if you’re not relying heavily on SSR for retirement, having a stable income stream lets you keep funds invested in other assets until the time is right to sell.  So, you won’t be forced to sell off stocks in your IRA when markets are down to pay the electric bill if you have regular liquidity from SSR.

Spousal and survivor benefits in Florida provided through SSR are also very useful in retirement planning because they ensure that people who depend on your income have a means of support.  Spousal benefits are available for spouses of SSR qualified workers.  The program originated when a higher percentage of households relied on one income and is designed to provide assistance for spouses who do not otherwise qualify for SSR.  A spouse who can receive SSR in his or her own right can choose between accepting spousal benefits or SSR, whichever is greater, but not both.

Survivor benefits are available for family members who relied upon a now-deceased SSR-eligible individual.  Typically, survivor benefits are paid to widows or widowers, but they are also available for minor or disabled children, former spouses, and parents in certain circumstances.  As with spousal benefits, one recipient cannot receive two checks.  A surviving spouse can receive the greater of his or her own SSR or survivor benefits, but not both.

Important Note About Government Employees: 

Spousal and survivor benefits are also subject to what the SSA calls the Government Pension Offset (GPO).  The GPO reduces spousal or survivor benefits by 2/3 of the amount of any pension the spouse or survivor receives from federal, state, or local government employment.  Importantly, the GPO only applies if the spouse or survivor’s government position did not pay Social Security taxes.  Pensions from government jobs that do pay Social Security taxes do not trigger the GPO.  Along the same lines, the Windfall Elimination Provision reduces SSR payments to certain individuals who qualify for both SSR and a government pension from a position that did not pay Social Security taxes.

SSR Benefits and Florida SSI/Medicaid Eligibility

When planning for retirement, it’s important to remember that SSR benefits count as “income” in determining eligibility for many means-tested programs, including Florida Medicaid.  So, for example, if you need Medicaid to assist with the costs of Florida long-term care, such as a nursing home, you may need to hold off on claiming SSR until after the Medicaid application process, or you might need to set up a trust to receive the SSR payments.  In Florida, the income threshold for the Medicaid program covering long-term care is $2,313.  If SSR would put you over the limit, you may need to develop a Medicaid planning strategy to preserve income eligibility such as using a Qualified Income Trust (QIT) in Florida.

The impact of SSR benefits on Florida Medicaid qualification or need based SSI benefits in Florida – and the retirement-planning strategies available to harmonize the two programs – is a fairly complex topic worthy of a (soon-to-come) article all its own.  If you have questions about SSR eligibility, calculation, or its effect on Medicaid, consult with an experienced Florida retirement and Medicaid planning attorney, who can help you develop a strategy for maximizing benefits with the minimum possible effect on Medicaid eligibility.

Steve Gibbs, Esq.