Social Security Matters
by Russell Gloor, National Social Security Advisor at the AMAC Foundation, the non-profit arm of the Association of Mature American Citizens
Ask Rusty – Why Didn’t My Friend’s Wife Get All Her SS Immediately?
Dear Rusty: A friend told me about what he believes is a strange thing in the Social Security system. His wife reached her full retirement age (FRA) of 66 several years ago. She delayed filing for Social Security past her FRA and claimed on her 68th birthday in June of that year, exactly 2 years after her FRA. When she filed, she was told she would receive approximately $300/month, which, of course, was more than she would have received at her FRA. She was told however that she would only receive $300/month as of January 1 of the following year. Between June of the year the turned 68 and filed for SS until the end of that year, she would receive an amount less than $300. This lower amount was the amount she would have received if she had filed in December, the year she turned 67. She said she was told that was how SS works. She would never receive the difference in benefits she lost from June through December of the year she filed. If the above is true, can you explain? Signed: Astounded Friend
Dear Astounded: What your friend described is, indeed, a unique methodology for how Social Security handles benefit payments for those who choose to wait beyond their full retirement age (FRA) to claim SS benefits. To understand it, let me first describe how Social Security retirement benefits are calculated.
At full retirement age, a person is entitled to 100% of the SS benefit they have earned from a lifetime of working. That FRA benefit amount is known as the person’s “Primary Insurance Amount” (PIA) and is based upon the highest earning 35 years over the individual’s lifetime. From those past years, average lifetime monthly earnings are computed, known as the person’s “Average Indexed Monthly Earnings” (AIME). Their AIME is subjected to a formula which yields their Primary Insurance Amount – the benefit the person is entitled to in the month they attain their full retirement age – typically about 40% of the person’s average monthly lifetime earnings. However, if the person chooses to do so, they can wait beyond their FRA to claim Social Security to get a monthly benefit even higher than their PIA, by earning Delayed Retirement Credits (DRCs).
DRCs are applied to the person’s PIA when they claim Social Security. For each month after FRA the person claims, they will have .667% added to their PIA. That means that for each full year of delay, that person will get an extra 8% added to their PIA. For someone (like your friend’s wife) who claimed 24 months after her FRA, she would receive a benefit 16% higher than her FRA amount. However, Social Security normally only applies DRCs in January of each year.
So, even though your friend’s wife claimed her SS benefits in June, 24 months after her FRA, she would initially only get the DRCs she had accumulated through the end of the previous year - in this case, about 18 months’ worth of DRCs, or an SS payment about 12% higher than her PIA (her FRA amount). She would not get her remaining earned DRCs (another 4%) until January of the following year. So, in effect, the wife’s initial benefit didn’t reflect all her earned DRCs until her later January benefit payment. Thus, the wife essentially lost that extra benefit money for the period between June and December of the year she claimed Social Security. In other words, she wouldn’t get the full 16% amount until SS applied the additional 4% DRCs to her benefit payment the following January. And that is why your friend’s wife initially received a payment a bit less than the $300 Social Security said she was entitled to by waiting 2 years after her FRA to claim.
This surprises many who choose to wait beyond their full retirement age to claim Social Security. But, curiously, this process doesn’t apply to those who wait until age 70 to claim their SS benefits. For those who wait until age 70 to claim, Social Security will immediately apply all DRCs that they have accumulated and provide them with their maximum SS benefit immediately.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org.