Federal employees enjoy talking about retiring before age 65, but the fact is that many of them are working past age 65. They are not alone.
According to newly released data from the Census Bureau and Bureau of Labor Statistics (BLS) analyzed by investment and financial-planning firm United Income, as of February 2019 about 20% of Americans over age 65 — a total of 10.6 million people — are either working or looking for work, representing a 57-year high. Included in the 10.6 million are many federal employees,
Many of these federal employees may be seeking advice or guidance from their Human Resources or Personnel Offices as to how working past age 65 affects their retirement benefits. In particular, on claiming Social Security and Medicare benefits.
This column provides an overview of Social Security benefits including claiming considerations and strategies for those federal employees who continue working in federal service past age 65. Another updated column that will subsequently appear presents an overview of Medicare issues facing federal employees working past age 65.
Social Security represents an important part of every federal employee’s future retirement income, especially those employees who are covered by the Federal Employees Retirement System (FERS). But even for those employees covered by the Civil Service Retirement System (CSRS) (who do not pay into Social Security while working under CSRS) Social Security benefits can be an important part of their retirement. This is because even a minimum monthly Social Security retirement monthly benefit can be sufficient to pay most, if not all, of a CSRS annuitant’s monthly Medicare Part B premium.
Both CSRS and FERS employees have the advantage of receiving throughout their retirement a defined benefit pension plan in the form of a CSRS or a FERS annuity that provides a guaranteed monthly income stream, the equivalent of which is most likely not available to employees working in private industry.
CSRS and FERS annuities are backed by the US government and are not affected by the stock market. There is no risk of outliving one’s CSRS or FERS annuity. This risk – longevity risk- is a risk associated with the Thrift Savings Plan (TSP) which is classified as a defined contribution plan and not as a defined benefit plan. Social Security also provides a guaranteed income stream that an individual also cannot outlive. Cost-of-living adjustments (COLAs) help CSRS and FERS annuity and Social Security benefits keep pace with inflation.
Having a Social Security Claiming Strategy
Having a Social Security claiming strategy is extremely important for every Social Security recipient. A Social Security claiming strategy is more challenging if one is still working, is married or divorced, or is a widow/widower.
The right claiming strategy can add thousands of dollars to an individual’s guaranteed Social Security monthly income. Married employees in particular should pay attention to the timing of each spouse’s claim to benefits and take advantage of spousal as well as their own benefits as a way to maximize lifetime Social Security benefits. CSRS and CSRS Offset employees who continue to work in federal service should give particular attention to claiming their own Social Security benefit or spousal, ex-spousal, or widow/widower benefits because of the two Social Security offsets (the Windfall Elimination Provision and the Government Pension Offset) that affect CSRS annuitants but not CSRS and CSRS Offset employees.
In general, the longer a person works and the more he or she earns while paying into Social Security, the more he or she will receive in Social Security retirement benefits. As will be explained and illustrated below, it therefore makes sense for many individuals to wait until at least their full retirement age (FRA) before starting to receive their Social Security retirement benefits. An individual’s FRA depends on the person’s birth year, as summarized in the following table:
Choosing when to start claiming Social Security benefits is an individual decision and under certain circumstances it makes sense for some individuals to start receiving benefits as early as possible. For example, individuals with serious health issues that shorten their life expectancy should consider enrolling as early as possible in Social Security. Parents of disabled children may claim early in order to get benefits for a child.
Claimants may be eligible to begin taking Social Security benefits at the age of 62. But should they? That is an important question for their future financial security. As shown in the following table, there is a big difference between the benefits paid to someone who receives Social Security benefits starting at age 62 and benefits paid to someone who waits until full retirement age, and an even greater difference if that same person waits until age 70 to start collecting Social Security retirement benefits.
* These estimates are based on the assumption that the claimant retires in 2019 and was born in 1957
As shown in the table above, there is a major difference between the benefits paid to someone who takes Social Security early (age 62) and benefits paid to those who wait until FRA or until age 70. In this example, an individual who starts receiving Social Security benefits at age 62 would forfeit $660 per month compared with the benefits he or she would have received had he or she started at the FRA of 66 years and 6 months, and receive an additional $1,332 per month had he or she started receiving benefits at the age of 70. For each year an individual waits past his or her FRA until age 70 to start receiving his or her Social Security retirement benefit, the individual receives a guaranteed 8 percent more year in benefits (“delayed retirement credits”).
Important Consideration: The “Earnings” Test for Employees Between Age 62 and the Year They Become FRA
There is another important consideration, namely the “earnings” test, for those individuals younger than FRA in 2019 (those individuals born in 1954 through 1957) receiving Social Security benefits and who continue to work.
The Social Security Administration (SSA) has a limit for individuals younger than their FRA, receiving their Social Security benefits, and working as to how much the individual can earn without losing any of their benefits. During 2019, someone between age 62 and 66 and 6 months, receiving Social Security retirement benefits and working (receiving earned income) can earn a maximum $17,640 without losing any of his or her Social Security retirement benefits. For every $2 the individual earns above $17,640, the SSA will reduce the individual’s Social Security benefits by $1. That would mean if the individual earned more than $52,920 during 2019, he or she would lose all of his or her benefits for 2019.
There is a separate “earnings” test for individual in the year they become FRA. During 2019, those individuals born during 1953 reach age 66 which is their FRA. These individuals have an “earnings” test as follows: Until the month the individual reaches his or her FRA, the individual can earn no more than $46,920. For every $3 the individual earns above $46,920, the SSA will withhold $1 in benefits.
Once an individual reaches the month of his or her FRA, the “earnings” test ends. That means an individual can receive Social Security benefits, work and earn as much as he or she wants without losing any of his or her Social Security benefits.
Some Suggestions and Strategies for Federal Employees Who Have Reached Their FRA
1. For those employees who will be 65 year old during 2019 (those born during 1954) and who continue to work should not elect to receive Social Security benefits during 2019 because of the “earnings” test.
2. For those employees who are 66 or older during 2019 (born before Jan. 2, 1954) and have reached their FRA, are encouraged to elect receiving their Social Security benefits only if they need the additional income. Otherwise, they are encouraged to delay their Social Security benefits until age 70 in order to receive the delayed retirement credits.
3. There is one exception for a federal employee who is reaching FRA during 2019 to delay the start of Social Security benefits. A CSRS or CSRS Offset employee who has reached FRA and continues working in federal service is encouraged to receive his or her Social Security monthly benefits. This is because while the employee continues in federal service, his or her Social Security benefits are not subject to the Windfall Elimination Provision (WEP). The WEP reduces benefits on average of 40 to 50 percent but applies only to CSRS annuitants and not to CSRS employees. Since the employee has reached FRA, there is no Social Security “earnings” test.
Other Considerations for Federal Employees Claiming Their Social Security Benefits in 2019
1. Spousal benefits. A lower earning spouse may be eligible for a benefit of as much as half of their higher earning spouse’s benefit if the higher earning spouse’s benefits are more than twice the lower earning spouse’s benefits. A 2015 change in the law eliminated some spousal benefit claiming strategies for those born on or after Jan. 2, 1954. A CSRS employee married to a spouse who has paid into Social Security would be an example of a ‘lower earning” spouse. However, a CSRS annuitant would most likely not be able to receive a spousal Social Security benefit because of the Government Pension Offset (GPO) which reduces – most likely eliminates – any type of spousal Social Security benefit. Once again, a CSRS-covered employee married to someone with larger Social Security benefits is encouraged to receive those benefits while continuing to work in federal service.
2. Employees who are divorced or widowed and were married for at least 10 years may have the opportunity to claim benefits on an ex-spouse’s record, even if the ex-spouse has remarried. A man or woman claiming spousal benefits on his or her ex-spouse’s record must be unmarried and age 62 or older. The benefit she is entitled to receive through her own record is less than the benefit she receives based on her ex-spouse’s Social Security.
If he or she claims at FRA, then the benefit will be one-half of his or her former spouse’s retirement benefit amount. His or her benefits would not include any delayed retirement credits that an ex-spouse may have received. Surviving spouses also are entitled to receive benefits on a former spouse’s record. Surviving spouses can claim as early as the age of 60 for reduced benefits or receive full benefits at FRA. Once again, a divorced CSRS employee would be eligible for these benefits but only if he or she is continuing to work in federal service. Once a CSRS employee retires and becomes a CSRS annuitant, the GPO will most likely eliminate any type of Social Security benefit from the ex-spouse, widow or widower.
3. Social Security benefits are taxable at least on the federal level, and may push am employee into a higher federal tax bracket. For most employees receiving a Social Security retirement monthly benefit, 85 percent of their Social Security monthly retirement benefit will be added to their other income and subject to federal income tax. The result is that the employee could be pushed into a higher federal marginal tax bracket.
Considerations for Federal Employees Receiving Their Social Security Benefits in 2020
1. As a result of a persistent low core inflation, the annual Social Security cost-of-living adjustment (COLA) is expected to be about 1.4 to 1.8 percent. With this COLA and subsequently higher monthly benefits, more benefits will be subject to federal income tax.
2. Those individuals born between Jan. 1 and Apr. 29, 1950 are the last batch of individuals to take advantage to “file and suspend” Social Security benefits. “File and suspend” means that an individual filed for his or her Social Security benefit, received one check and then stopped the benefit. But by “filing and suspending” their own Social Security benefit, this allowed family members (spouse and children under the age of 18) to receive 50 percent of the individual’s Social Security benefit while the individual’s benefit grew by 8 percent per year until age 70. Individuals born between Jan. 1 and Apr. 29, 1950 will become age 70 during 2020. At age 70, Social Security benefits will automatically begin.
3. As a result of a Congressional-passed law change in 2015, anyone born after Jan. 1, 1954 (reaching full retirement age after Jan. 1, 2020) will not be able to file a “restricted claim” for spousal benefits. A “restricted claim” for spousal Social Security benefits allows an individual who reaches FRA to claim half of their spouse’s or ex-spouse’s FRA Social Security retirement benefit while their own Social Security continue to grow by 8 percent per year (delayed retirement credits) until age 70.