Old-Age and Survivors Insurance for retired workers
The Social Security Administration manages three programs under the Social Security Act:
- Retirement (Old-Age and Survivors Insurance) for retired workers and their families.
- Disability Insurance for disabled workers and their families.
- Supplemental Security Income to aged, blind, and disabled adults and children with limited income and resources.
This article covers only Retirement.
The Old-Age, Survivors and Disability Insurance (OASDI) trust fund is predicted in the 2019 Trustees Report to run out in 2034, but this hasn’t changed since 2016. In 2017 there were two proposals to prevent deficit spending that show the extremes of possibilities. Representative Sam Johnson (R-TX) proposed to “sharply” cut benefits and lower cost to match income. Representative John Larson (D-CT) proposed to “slightly” increase benefits and “substantially” increase income.1
This conclusion by Alicia Munnell of Boston College is worth quoting in its entirety:
The 2017 Trustees Report confirms what has been evident for almost three decades – namely, Social Security is facing a long-term financing shortfall which equals 0.9 percent of GDP. The changes required to fix the system are well within the bounds of fluctuations in spending on other programs. For example, defense outlays went down by 2.2 percent of GDP between 1990 and 2000 and up by 1.7 percent of GDP between 2000 and 2010.
While Social Security’s shortfall is manageable, it is also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet. Representatives Johnson and Larson propose plans that eliminate the 75-year deficit solely through benefit cuts and solely through tax increases, respectively. These are useful “bookends,” highlighting that policymakers need guidance about how Americans want the burden of fixing Social Security allocated between benefit cuts and tax increases. Finding a mechanism to communicate those preferences to Congress is the big challenge. Once the preferred allocation is determined, filling in the specifics is relatively easy. Stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement.1
Estimating Retirement Benefits
Social Security benefits are calculated from the Average Indexed Monthly Earnings (AIME) figure, which is an average of the highest 35 annual incomes after indexing for wage inflation to a base age of two years before earliest eligibility, usually 60. (Any earnings during or after the base year are used at face value, without indexing.)
The monthly Primary Insurance Amount (PIA) is calculated from the AIME, based on three percentages set by law. The PIA is adjusted by reductions or credits for claims earlier or later than the Normal or Full Retirement Age.
The Social Security (originally Old-Age, Survivors, and Disability Insurance) and Medicare trustees report annually on the financial status of the two programs. The report projects future average wage and benefit adjustments for three scenarios:
- Alternative I (optimistic) assumptions.
- Alternative II (intermediate) assumptions.
- Alternative III (pessimistic) assumptions.
Future earnings and benefits are estimated using the “intermediate” assumptions from the OASDI Trustees Report. The Report also contains a helpful Social Security glossary.
The my Social Security account has replaced the past mailings of benefit details. This account allows you to see your estimated benefits, review your earnings record, and check your application status.
The estimated benefits here assume a future annual income at the last recorded amount, and can take as long as 3 years to update. If you plan on stopping work before claiming Social Security retirement benefits, you may need a program that allows you to change future income. If you don’t expect your income to change dramatically, or you’re satisfied with your current top 35 indexed earnings years, then you don’t.
This online calculator is recommended by Social Security for its accuracy; it accesses your actual Social Security record. Multiple filing ages and average annual incomes can be run. It cannot calculate Survivor or disability estimates or the Windfall Elimination Provision (WEP) for government, nonprofit, or foreign pensions.
The calculator allows you to change a single average yearly income, and the age to stop work and start benefits. Benefit filing and stop-work ages cannot be entered separately, but future earnings can be entered as zero. If you enter a stop-work age of less than 62, benefits will be estimated starting at 62, the first year of eligibility. Multiple cases can be run with the “Add a New Estimate” button.
There are some limitations on using this calculator:
- If you are still working, you have to enter a single average yearly income to approximate your expected working and non-working incomes. This might not accurately reflect your 35 peak indexed incomes that your benefit is based on, and AnyPIA would be a better choice.
- You must have enough credits to qualify for benefits.
- You cannot be currently receiving benefits on your own Social Security record.
- You cannot have a pending application for Social Security or Medicare.
- You cannot be 62 or older and receiving benefits on another Social Security record.
Social Security describes this program as the most powerful of all its publicly available calculators, capable of computing almost any type of Social Security benefit.
AnyPIA shows both past and future indexed earnings, allowing you to identify your top 35 income years. It allows you to save cases. It handles survivor and disability estimates and the Windfall Elimination Provision (WEP).
AnyPIA offers the following increased benefit options:
- Alternative I (optimistic) assumptions from the most recent OASDI Trustees Report.
- Alternative II (intermediate) assumptions from the Trustees Report.
- Alternative III (pessimistic) assumptions from the Trustees Report.
- No benefit increases after the last known increase. This setting is recommended by Social Security to “compare a benefit estimate with no future inflation to your current income and expenses” (AnyPIA User’s Guide).
- User-specified benefit increase for each projected year.
The disadvantages of AnyPIA are
- You need to download it and install it on your computer. The current version was released on October 19, 2018. The Windows program runs on Windows 7/8/10. The Mac program runs on versions up to OS 10.6 (Snow Leopard) but not later.
- It has a steep learning curve compared to the online calculators.
- Social Security warns that it is not the official calculator and may produce different results.
To be confident of your AnyPIA results, you should first try to match the estimates in my Social Security.
Open Social Security
Mike Piper of Oblivious Investor offers Open Social Security, a free, open-source Social Security strategy calculator. It calculates a total lifetime benefit for each possible claiming age (or, if you’re married, each possible combination of claiming ages) to find which provides the highest total over your lifetime. Factors it does not consider include
- The fact that delaying benefits reduces longevity risk and therefore may be preferable even in some cases in which it is not the strategy that gives you the highest expected total, or
- Tax planning or other reasons to file earlier or later.
Timing of Retirement Claims
Before Full Retirement Age
The monthly Primary Insurance Amount (PIA) is reduced for claims before the Normal or Full Retirement Age (FRA). At age 62 the reduction can be as much as 30 percent below the FRA and 62 percent below age 70.
At Full Retirement Age
The monthly Primary Insurance Amount (PIA) is the benefit at the Normal or Full Retirement Age (FRA). The FRA ranges from 65 to 67.
After Full Retirement Age
The monthly Primary Insurance Amount (PIA) is increased byDelayed Retirement Credits for claims after the Normal or Full Retirement Age (FRA). At age 70 the increase can be as much as 32 percent above the FRA and 62 percent above age 62.
Our personal choice was to ignore predicted lifetimes and delay our higher earner benefit until 70, maximizing it for whatever actual lifetimes we see. Social Security is our only annuity if we outlive our savings.
There is a Spouse Benefit that might be available, even if you don’t qualify for Social Security on your own earnings or are divorced. You must be at least 62 and the spouse or ex-spouse must be receiving or applying for retirement or disability benefits.
At your FRA the Spouse Benefit is 50% of the other’s FRA benefit. If you qualify for your own retirement benefits, Social Security pays those first. If your Spouse Benefit is more than your retirement benefit, you receive a combination of benefits equal to the Spouse Benefit.
The Spouse Benefit is reduced by claiming earlier than your FRA, but does not increase with Delayed Retirement Credits. This means there is no reason to delay after FRA if your Spouse Benefit is greater than your own retirement benefit. The reduction for early claiming can be as much as 30%, lowering the Spouse Benefit from 50 to 35% of the other’s FRA benefit.
A past strategy of filing a restricted application for a Spouse Benefit only, to allow your retirement benefit to increase with Delayed Retirement Credits, is now available only to those born before January 2, 1954. All others who apply for either benefit are deemed to have applied for the other as soon as they are eligible.