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What Types of Pensions Trigger Social Security’s Windfall Elimination Provision (WEP)?

A reader writes in, asking:

“I work in a job where I do not pay social security taxes. I heard second hand through a coworker that our HR department says we’ll be affected by social security’s “windfall elimination provision.” I thought that only applied when you get an actual pension. My employer provides a 401-K plan but not a traditional pension. Is this something I need to be thinking about?”

As a bit of background for those unfamiliar with the topic: the Windfall Elimination Provision (WEP) applies when you receive a pension from employment that was not covered by Social Security (i.e., work for which you didn’t have to pay Social Security tax). The effect of the WEP is to reduce the size of your primary insurance amount, thereby reducing your retirement benefit, as well as the your spouse’s or children’s benefit on your work record.*

So for example if you work 20 years in one profession (in which you do pay Social Security taxes) and 20 years in another profession in which you don’t pay Social Security taxes (and from which you receive a pension), the WEP will reduce the Social Security benefit you’ll ultimately receive from the work you did that was covered by Social Security.

You can find the general rules regarding the Windfall Elimination Provsion here and exceptions to those rules here. But what we’re concerned with at the moment is what is considered to be a pension for WEP purposes.

What Counts as a Pension?

With regard to what, exactly, counts as a pension for WEP purposes, the rules and exceptions can be found here.

The general rule is that:

  • If the amount you ultimately receive from the plan is based only on employee payments (plus interest/dividends) then the plan only counts as a pension subject to WEP if it is the employer’s primary retirement plan.
  • If the amount you ultimately receive from the plan is based on employer payments (or a combination of employee and employer payments), then it will generally be considered a pension subject to WEP.

There are special rules for one-time payments from the plan:

  • Withdrawals of the employee’s own contributions and interest made before the employee is eligible to receive a pension are not pensions for WEP purposes if the employee forfeits all rights to the pension.
  • Withdrawals of the employee’s own contributions and interest made after the employee is eligible to receive a pension are considered a lump-sum pension for WEP purposes.
  • Any separation payment or withdrawal consisting of both employer and employee contributions is a pension for WEP purposes, whether made before or after the employee is eligible to receive a pension.

But again, all of the above is only relevant if the possibly-a-pension-retirement-plan is from employment you did for which you did not pay Social Security tax. If you paid Social Security tax for the work in question, the WEP does not apply.

*The WEP only applies while you’re still alive. When you die, your primary insurance amount is recalculated without the effect of the WEP, so if anybody else is receiving benefits on your work record at that time (e.g., your widow/widower and/or children), their benefit will increase.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Social Security Made Simple, 2017 Edition, 50% Off

Social Security Made Simple Front Cover

Just a brief announcement for today. We’ll return to our regular publishing schedule on Friday.

The 2017 edition of Social Security Made Simple is now available. (The prior edition was released in late 2015, immediately after the changes made to the Social Security rules by the Bipartisan Budget Act of 2015.)

The paperback version of the book will be on sale for half-off through tomorrow (Tuesday, March 7). That is, the paperback version will be on sale for $7.50, rather than the usual $15.

For reference, the changes to the book are modest — everything has been updated to use the 2017 figures, and I’ve added a new brief appendix discussing claiming strategies for widows/widowers.

For those who haven’t read the book, the chapter listing is as follows:

  1. Qualifying for Retirement Benefits
  2. How Retirement Benefits Are Calculated
  3. Spousal Benefits
  4. Widow(er) Benefits
  5. Social Security for Divorced Spouses
  6. Child Benefits
  7. Social Security with a Pension
  8. The Earnings Test
  9. The Claiming Decision for Single People
  10. When to Claim for Married Couples
  11. The Restricted Application Strategy
  12. Age Differences Between Spouses
  13. Taking Social Security Early to Invest It
  14. Checking Your Earnings Record
  15. How Is Social Security Taxed?
  16. Social Security and Asset Allocation
  17. Do-Over Options

Conclusion: Six Social Security Rules of Thumb
Appendix A: The File and Suspend Strategy
Appendix B: Widow(er) Benefit Math Details
Appendix C: Restricted Applications with Widow(er) Benefits

You can find the new edition here: https://www.amazon.com/dp/0997946512/

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

The (un)Importance of Social Security Full Retirement Age

A reader writes in, asking:

“I read over and over that it’s ideal to wait until 70 to file for social security but that it’s important to wait until at least full retirement age. But what is special about full retirement age exactly? Am I wrong in thinking that it is not much better or worse than a year earlier or later?”

No, you are not wrong.

In terms of general Social Security rules, full retirement age is important because:

  • It’s the reference point around which your benefit is calculated (with a reduction for filing early and a bonus for filing later),
  • It’s the earliest date at which you can suspend benefits (though that’s much less frequently relevant these days after the changes made in 2015), and
  • It’s the point at which the earnings test is no longer applicable.

And full retirement age is often the best age at which to file for spousal or survivor benefits because:

  • It’s the point at which survivor benefits and spousal benefits stop growing (i.e., there’s no increase for waiting until 70), and
  • It’s the earliest date at which you can file a restricted application for spousal benefits (i.e., an application for just spousal benefits) for those who are still eligible to do so (i.e., anybody who was at least 62 years old as of 1/1/2016).

But, from the perspective of when to start receiving your own retirement benefits, full retirement age is nothing special. It’s just one of 96 possible months at which you can start taking benefits.

And in fact, of those 96 months, the first one and the last one (62 and 70) come up much more frequently than other months as the optimal time to start benefits.

If you could claim at any age (i.e., with delayed retirement credits earned for delaying beyond age 70 and with early claiming available prior to 62 — with an accompanying penalty), people in particularly good health would often want to wait well past age 70. And people in very poor health would often want to claim very early — perhaps in their 50s even.

But those aren’t options. So everybody who would be best served by claiming prior to 62 (if such were an option) will find “claim at 62” to be the best strategy. And everybody who would be best served by claiming later than 70 (if such were an option) will find “claim at 70” to be the best strategy.

In other words, yes, it is very uncommon that full retirement age happens to be the best answer for when to start receiving retirement benefits. (And for both spouses to start receiving retirement benefits at full retirement age is almost surely a mistake. In most cases, that would be a dominated strategy.)

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

When Should I Take Social Security Benefits? (Single Investor)

The following is an excerpt from my book Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.

Even if you are married, the place to start when trying to figure out when to claim Social Security is with a solid understanding of the (less complicated) analysis for unmarried retirees.

And before we go any further, let’s make sure we’re on the same page about an important point: The decision of when to retire is separate from the decision of when to claim Social Security benefits. For example, depending on circumstances, you might find that it makes sense to retire at a given age, yet hold off on claiming Social Security until a later date — maybe even several years later.

The earlier you claim Social Security, the less you’ll receive per month. For example, the following table shows how retirement benefits are affected by the age at which you first claim them:

Age when you claim retirement benefits Amount of retirement benefit
5 years before FRA 70% of PIA
4 years before FRA 75% of PIA
3 years before FRA 80% of PIA
2 years before FRA 86.67% of PIA
1 year before FRA 93.33% of PIA
at FRA 100% of PIA
1 year after FRA 108% of PIA
2 years after FRA 116% of PIA
3 years after FRA 124% of PIA
4 years after FRA 132% of PIA

Background: Your “primary insurance amount” (PIA) is the amount you would receive per month if you claimed retirement benefits at your “full retirement age” (FRA).

In other words, by waiting until age 70 rather than claiming as early as possible at age 62, you can increase your monthly benefit amount by roughly three-quarters. Of course, by waiting, you decrease the number of months in which you’ll be receiving a Social Security check.

So how can you tell if the trade-off is worth it? One way to compare two possible ages for claiming benefits is to compute the age to which you would have to live for one strategy to become superior to the other strategy. Another way to analyze the decision is to compare the payout you get from delaying Social Security to the level of income you can safely get from other retirement income sources.

Computing the Breakeven Point

EXAMPLE: Alex and Bob are both retired and unmarried. Both are age 62, both have a full retirement age of 66, and both have exactly the same earnings history. In fact, the only difference between the two is that Alex decides to claim his retirement benefit at age 62, while Bob decides to wait all the way until 70. Even though Alex claims benefits at age 62, he doesn’t need to spend the money right now, so he keeps it in his savings account, where it earns a return that precisely matches inflation.

By age 70, because he has been receiving benefits for eight years, Alex is far better off than Bob. However, starting at age 70, Bob starts to catch up (because he’s receiving a monthly benefit equal to 132% of his primary insurance amount, as compared to Alex who is receiving a monthly benefit equal to 75% of his primary insurance amount).

In the end, Bob’s cumulative benefit surpasses Alex’s cumulative benefit approximately half way through age 80. From age 80.5 onward, Bob’s lead over Alex continues to grow.

The takeaway: For an unmarried retiree, from a breakeven perspective, if you live past age 80.5, you will have been better off claiming benefits at age 70 instead of claiming as early as possible at age 62.

According to the Social Security Administration, the average total life expectancy for a 62-year-old female is 84.8. For a male, it’s 82. In other words, from a breakeven perspective, most unmarried retirees will be best served by waiting to take their retirement benefit.

Comparing Social Security to Other Income Options

When you delay Social Security, you give up a certain amount of money right now (i.e., this month’s or this year’s benefits) in exchange for a stream of payments that will increase with inflation for the rest of your life.

Take, for example, somebody with a full retirement age of 66. If her benefit at full retirement age would be $1,000 per month, her benefit at age 62 would be $750 per month, and at age 63 it would be $800 per month.

Therefore, waiting from age 62 to age 63 is the equivalent of paying $9,000 (that is, $750 forgone per month, for 12 months) in exchange for a source of income that pays $600 per year (that is, a $50 increase in monthly retirement benefit, times 12 months per year), adjusted for inflation, for the rest of her life.

Dividing $600 by $9,000 shows us that delaying Social Security retirement benefits from age 62 to 63 provides a 6.67% payout. Let’s see how that compares to other sources of retirement income.

Inflation-adjusted single premium immediate lifetime annuities are essentially pensions that you can purchase from an insurance company. With such an annuity, you pay the insurance company an initial lump-sum (the premium for the policy), and they promise to pay you a certain amount of income, adjusted for inflation, for the rest of your life. In other words, such annuities are a source of income very similar to Social Security.

As of this writing, according to the quote system on mutual fund company Vanguard’s website (which allows you to compare quotes from multiple insurance companies), the highest payout available to a 63-year-old female on such an annuity is 4.13%. For a male, the highest available payout would be 4.43%. As you can see, both of these figures fall well short of the 6.67% payout that comes from delaying Social Security from 62 to 63.

Alternatively, we can compare the payout from delaying Social Security to the income that you can safely draw from a typical portfolio of stocks and bonds. Several studies have shown that, historically in the U.S., retirees trying to fund a 30-year retirement run a significant risk of running out of money when they use inflation-adjusted withdrawal rates greater than 4%. And it’s worth noting that even a 4% withdrawal rate isn’t a sure bet going forward, given that the studies show 4% to be mostly safe in the past, which is a far cry from completely safe in the future.

In other words, for each dollar of Social Security you give up now (by delaying benefits), you can expect to receive a greater level of income in the future than you could safely take from a dollar invested in a typical stock/bond portfolio.

A similar analysis can be performed for each year up to age 70, and the conclusion is the same: Delaying Social Security benefits can be an excellent way to increase the amount of income you can safely take from your portfolio.

EXAMPLE: Daniel is retired at 62 years old. His full retirement age is 66. He has $40,000 of annual expenses and a $600,000 portfolio. He is trying to decide between claiming benefits as early as possible at age 62 or spending down his portfolio while he holds off on claiming benefits until age 70.

Daniel’s primary insurance amount (the amount he’d receive per month if he claimed his retirement benefit at full retirement age) is $1,500, which means he would receive:

  • $1,125 per month ($13,500 per year) if he claimed benefits at age 62, or
  • $1,980 per month ($23,760 per year) if he claimed benefits at age 70.

If Daniel claims his retirement benefit at age 62, he’ll have to satisfy $26,500 of expenses every year from his portfolio (because Social Security will only be satisfying $13,500 out of $40,000). That is, he’ll be using a 4.4% withdrawal rate ($26,500 divided by his $600,000 portfolio) starting at age 62. That’s a higher withdrawal rate than most experts would recommend.

Alternatively, if Daniel delays Social Security until 70, he’ll have to satisfy annual expenses of $16,240 (that is, $40,000, minus $23,760 in Social Security benefits), plus an additional $23,760 for the eight years until he claims Social Security.

If Daniel allocates $190,080 (that is, $23,760 x 8) of his $600,000 portfolio to cash or something else very low-risk (in order to satisfy the additional expenses for those eight years), that leaves him with a typical stock/bond portfolio of $409,920. With a portfolio of $409,920, Daniel can satisfy his remaining $16,240 of annual expenses using a withdrawal rate of just under 4%.

In effect, Daniel is spending down his portfolio by $190,080 in order to purchase additional Social Security benefits in the amount of $10,260 per year, starting at age 70. By doing so, he’s reduced the withdrawal rate that he’ll need to use from his portfolio for the remainder of his life, thereby reducing the probability that he’ll run out of money. In addition, if Daniel’s portfolio performs very poorly and he does run out of money, he’ll be much better off in the wait-until-70 scenario than in the claim-at-62 scenario, because he’ll be left with $23,760 of Social Security per year rather than $13,500.

Reasons Not to Delay Social Security

Of course, there are circumstances in which it would not make sense for an unmarried person to delay taking Social Security.

First and most obviously, if your finances are such that you absolutely need the income right now, then you have little choice in the matter.

Second, if you have reason to think that your life expectancy is well below average, it may be advantageous to claim benefits early. For example, if you have a medical condition such that you don’t expect to make it past age 64, it would obviously not make a great deal of sense to choose to wait until age 70 to claim benefits.

Third, the higher market interest rates are, the less attractive it is to delay Social Security. For example, if inflation-adjusted interest rates (such as those on inflation-protected Treasury bonds known as TIPS) were 2-3% higher than they are as of this writing, the payout from inflation-adjusted lifetime annuities might be higher than the payout from delaying Social Security.

Simple Summary

  • For unmarried retirees, from a breakeven perspective, you’ll be best served by waiting until age 70 to claim benefits if you expect to live past age 80.5. (And, for reference, the average total life expectancy for a 62-year-old female is 84.8. For a male, it’s 82.)
  • For unmarried retirees, on a dollar-for-dollar basis, the lifetime income you gain from delaying Social Security is generally greater than the level of income you can safely get from other sources. As a result, delaying Social Security can be a great way to increase the amount you can safely spend per year. (Or, said differently, it can be a great way to reduce the likelihood that you will outlive your money.)
  • The shorter your life expectancy and the greater the available yield on inflation-protected bonds, the less desirable it is to delay claiming Social Security benefits.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Social Security Strategies for Married Couples

The following is an adapted excerpt from my book Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.

In general, the primary factors that determine when married people should take Social Security are the same as those for determining when unmarried people should take Social Security. That is, the longer you expect to live — or the more concerned you are about running out of money in retirement — the more sense it makes to delay Social Security.

If one spouse’s Social Security benefit is significantly higher than the other spouse’s, delaying benefits for the higher-earning spouse is often an especially good deal because it results in an increased payout for the longer of the two spouse’s lifetimes (due to survivor benefits).

In addition to the above considerations, however, there is a strategy available to some married couples that (depending on circumstances) might allow them to maximize their Social Security benefits even further.

[In addition to the restricted application strategy that we will be discussing here, there is also a “file and suspend” strategy that has been popular for several years. However, as a result of the Bipartisan Budget Act of 2015, the file and suspend strategy is no longer available to anybody who had not already implemented it as of 4/29/16.]

The “Restricted Application” Strategy

After reaching full retirement age, if you’re eligible for both spousal benefits and your own retirement benefit, you can file a “restricted application” for just spousal benefits. This is in contrast to filing for one benefit or the other prior to full retirement age, in which case you would automatically be “deemed” to have filed for the other benefit as well. (As we’ll discuss below, however, not everybody is eligible to use this restricted application strategy.)

EXAMPLE: Steve and Beth are both age 65, and they each have a full retirement age of 66. Beth’s earnings history is slightly higher than Steve’s. As a result, they chose to have Beth delay her retirement benefit until age 70. However, to help with their near-term cash flow, they chose to have Steve take his benefits at age 62.

When Beth reaches full retirement age, she can file a “restricted application” for just her spousal benefit. Later, when Beth reaches age 70, she files for her own retirement benefit.

Result: Beth receives spousal benefits for four years (from age 66 to 70) at essentially no cost to her, since her own retirement benefit is growing the entire time because she had not yet filed for it. Depending on the size of Steve’s primary insurance amount, these four years of spousal benefits could be a large five-figure sum — which Beth and Steve would miss out on entirely if they were less familiar with the Social Security rules.

Are You Eligible for a Restricted Application?

Due to the Bipartisan Budget Act of 2015, the deemed filing rules have changed for anybody who was younger than 62 as of January 1, 2016. For anybody affected by the new rules, deemed filing continues to apply even beyond full retirement age.

As a result, nobody who was younger than 62 as of January 1, 2016 will be able to file a restricted application for spousal benefits. That is, if they file for a spousal benefit at any point, they’ll automatically be deemed to have filed for their own retirement benefit as well (assuming they’re eligible for one), thereby preventing it from continuing to grow as if they had not yet claimed it.

Simple Summary

  • It’s often a good idea to have the spouse with the higher primary insurance amount delay taking benefits, because doing so increases the amount the couple receives as long as either spouse is alive.
  • It’s less advantageous to have the spouse with the lower primary insurance amount delay benefits, because doing so only increases the amount the couple will receive while they’re both alive. That said, depending on circumstances, it can still be a good idea for the lower earner to delay benefits.
  • Via a restricted application, it’s often possible to have one spouse receive spousal benefits for the years between full retirement age and age 70, while allowing the his/her own retirement benefit to continue growing until age 70.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

How Social Security Benefits Are Calculated

The following is an excerpt from my book Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.

The size of your monthly retirement benefit depends on:

  1. Your earnings history, and
  2. How old you are when you first begin taking benefits.

But first we need to back up a step. In order to understand how Social Security benefits are calculated, you need to be familiar with two terms:

  • “full retirement age” (FRA), and
  • “primary insurance amount” (PIA).

Your full retirement age depends on the year in which you were born (see table below). Your primary insurance amount is the amount of retirement benefits you would receive per month if you started taking them at your full retirement age. As we’ll discuss shortly, your PIA is determined by your earnings history.

Year of Birth Full Retirement Age
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

How Earnings History Affects Retirement Benefits

Your primary insurance amount is based on your historical earnings. Specifically, it’s based on your “average indexed monthly earnings” (AIME). Calculating your AIME is a five-step process.

  1. Make a year-by-year list of your earnings, excluding any earnings for each year that were in excess of the maximum amount subject to Social Security tax.
  2. Adjust your earnings from prior years to today’s dollars.
  3. Select your 35 highest-earning years.
  4. Add up the total amount of earnings in those 35 years.
  5. Divide by 420 (the number of months in 35 years).

You do not actually have to do this calculation yourself. The Social Security Administration does it for you. It is, however, important to understand the concept, so that you can understand how your benefit is calculated.

Calculating Your Primary Insurance Amount

For someone becoming eligible for retirement benefits (that is, reaching age 62) in 2017, his or her primary insurance amount would be:

  • 90% of any AIME up to $885, plus
  • 32% of any AIME between $885 and $5,336, plus
  • 15% of any AIME above $5,336.

Note that these figures change to account for wage inflation each year. So, for example, for somebody turning age 62 in 2018, each of these dollar amounts will probably be slightly higher.

Or, to put it in terms of annual income, if claimed at full retirement age, Social Security would replace:

  • 90% of the first $10,620 of average annual wage-inflation-adjusted earnings, plus
  • 32% of average annual wage-inflation-adjusted earnings from $10,620 to $64,032, plus
  • 15% of average annual wage-inflation-adjusted earnings from $64,032 to $117,408.

Two noteworthy takeaways here are that:

  1. Social Security replaces a higher portion of wages for lower-earning workers than for higher-earning workers, and
  2. There’s a maximum possible Social Security retirement benefit. (Few people reach that maximum though, because doing so would require that you earn the maximum earnings subject to Social Security tax for 35 different years.)

If You Worked Fewer than 35 Years

If you have fewer than 35 years in which you earned income subject to Social Security taxes, the calculation of your average indexed monthly earnings will include zeros. For example, if you worked for 31 years, your AIME calculation would include those 31 years of earnings, as well as 4 years of zeros.

As a result, working additional years would result in those zero-earnings years being knocked out of the calculation and replaced with your current earnings. The result isn’t going to make you rich, but it’s worth including in your list of considerations when deciding when to retire.

How Age Affects Retirement Benefits

If you wait until after full retirement age to claim your retirement benefit, the amount you receive will be greater than your primary insurance amount. The increase is 2/3 of 1% for each month you wait beyond full retirement age (up to age 70, beyond which there is no increase for waiting). This works out to an increase of 8% per year.

EXAMPLE: Alan was born in 1954, so his full retirement age is 66. His primary insurance amount is $2,000. If he waits until age 70 (that is, 48 months after FRA) to claim his retirement benefit, he will receive $2,640 per month, calculated as:

  • His PIA of $2,000 per month, plus
  • 2/3 of 1% x 48 months x $2,000.

If you claim your retirement benefit prior to full retirement age, it will be reduced from your primary insurance amount by 5/9 of 1% for each month (up to 36 months) prior to full retirement age. This works out to a reduction of 6.67% per year. For each month in excess of 36 months, the reduction is 5/12 of 1% (or 5% per year).

EXAMPLE: Allison was born in 1954, so her full retirement age is 66. Her primary insurance amount is $2,000. If she claims retirement benefits at age 64 (24 months prior to FRA), her monthly benefit would be $1,733.33, calculated as:

  • Her PIA of $2,000 per month, minus
  • 5/9 of 1% x 24 months x $2,000.

If Allison instead decided to claim as early as possible, at age 62 (48 months prior to FRA), her benefit would be $1,500 per month, calculated as:

  • Her PIA of $2,000 per month, minus
  • 5/9 of 1% x 36 months x $2,000, minus
  • 5/12 of 1% x 12 months x $2,000.

In short, the interaction between the size of your retirement benefits and the age at which you first claim that benefit looks like this:

Age when you claim retirement benefits Amount of retirement benefit
5 years before FRA 70% of PIA
4 years before FRA 75% of PIA
3 years before FRA 80% of PIA
2 years before FRA 86.67% of PIA
1 year before FRA 93.33% of PIA
at FRA 100% of PIA
1 year after FRA 108% of PIA
2 years after FRA 116% of PIA
3 years after FRA 124% of PIA
4 years after FRA 132% of PIA

Adjusting Benefits for Inflation

Every year after you reach age 62, your primary insurance amount is adjusted to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When your PIA is adjusted upward for inflation, it increases not only your retirement benefit, but also any other benefits that are based on your PIA (e.g., your spouse’s spousal benefits).

Simple Summary

  • Your “primary insurance amount” (PIA) is the monthly retirement benefit you would receive if you claimed benefits at “full retirement age” (FRA).
  • Your primary insurance amount is calculated based on your 35 highest-earning years (after adjusting prior years’ earnings for wage inflation).
  • If you claim retirement benefits prior to your full retirement age, you will receive an amount smaller than your PIA. If you wait until after your full retirement age to claim benefits, your retirement benefit will be greater than your PIA.
  • Social Security benefits are adjusted on an annual basis to keep up with inflation (as measured by the CPI-W).

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
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