The Roads to Smaller Social Security Checks, Part 1

By Al Chingren - October 24, 2017

If you need a GPS to figure out the best path for claiming Social Security, you're not alone. The Government Accountability Office's (GAO) September 2016 review  suggests that many individuals do not grasp key details of Social Security rules that can affect their retirement benefits—including ones that can reduce them.

In this two-part series, I'll review seven circumstances that could lead to lower benefits, and some potential ways to avoid them when possible.

Misunderstanding in Many Directions

Some people understand that delayed claiming leads to higher monthly benefits. However, many are unclear about the actual amount it increases when you claim at each age. The GAO also discovered widespread misunderstanding about the availability of spousal benefits, how monthly benefits are determined and how the retirement earnings test works. Below are the first factors I'll cover that could permanently reduce your Social Security benefits.

Paths That May Lead to "Reduction Junction"

You may know that filing prior to your full retirement age (FRA) will permanently reduce your retirement benefit. However, there are several other factors that could potentially shrink your Social Security payment. Here are the first four:

1. Filing Early

If you were born between 1943 and 1954, the FRA for Social Security is age 66. Collecting at 62 leads to a lifetime 25 percent reduction of the primary insurance amount. Reductions are based on the number of months until you attain FRA:

  • 5/9 of 1 percent for each of the first 36 months
  • 5/12 of 1 percent for any additional months

If you were born after 1954, your full retirement age may be later. See the Social Security Administration's website  for the most recent breakdowns by birth year.

2. Claiming Lump Sums

Some retirees can claim up to a six-month lump sum benefit if filing after they reach FRA. Getting that first, large check may sound great, but the initial start date will be set at six months prior. That establishes a smaller monthly benefit moving forward. Before you choose this option, consider the impacts.

3. Earning and Claiming Social Security

Continuing to work and collecting Social Security may reduce your benefit if you earn over a certain amount. Here's how this looks in 2017:

  • Before you reach FRA: If your earnings exceed $16,920, $1 is withheld from Social Security for every $2 over the above earnings limit.
  • Year you reach FRA: The limit increases to $44,880, and $1 is withheld from your benefit for every $3 above that limit. This continues until the month you reach full retirement age.

4. Working for an Employer That Doesn't Pay

If you work for an organization that is not required to withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the pension you get based on that work may reduce your Social Security benefits if one of the following affects you.

  • The Windfall Elimination Provision affects how the amount of your retirement or disability benefit is calculated if you receive a pension from work where Social Security taxes were not taken out of your pay. A modified formula is used to calculate your benefit amount, which may result in a lower benefit than you otherwise would receive.
  • The Government Pension Offset occurs if you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes. Some or all of your Social Security spouse's or widow's or widower's benefits may be reduced.

Smaller Social Security Checks, Part 2

In Part 2 of this series, l review three other situations that could result in you receiving lower monthly Social Security benefits. Medicare choices, taxes on your benefits and owing debt in retirement can all have an impact. Understanding your options may help you make smarter decisions when it comes to filing your claim.

Al Chingren
Al Chingren

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      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.