Retirement Insurance Benefits

People attain fully insured status based upon their payments into the Social Security system through payroll taxes and the amount of time they have been working in jobs covered through the Social Security system. This is measured through quarters of coverage.[4]

A person earns one quarter of coverage for each $1,410 of earned income in 2020. A person can earn up to four quarters of coverage per year. The amount to earn one quarter of coverage may change from year to year based on the national average wage index.[lower-alpha 1]

In order to be considered fully insured, a person must generally have at least 40 quarters of coverage.[lower-alpha 2] Fully insured status is used for other benefits besides RIB.[4]

The United States uses English common law; because of this a person obtains their age on the day before their birthday.[6] A person born on the first of month is considered to obtain their age in the month prior and a person born on January 1 is considered to obtain their age in the prior year. In order for a person to be eligible for RIB in the month of their birth, they must have either been born on the first (where they obtained their age in the prior month) or the second of the month (where they obtained their age on the first of the month).

Benefit payments vary, in part, based on when a person claims RIB, so not every person will desire to begin collecting their benefits at the same time. As a result, an application must be filed with the Social Security Administration before one can collect RIB. There are several ways to apply for the benefits:

• Calling SSA's national toll-free number (1-800-772-1213) or
• Contacting a local Social Security office[7] or
• Submitting an online application[8]

The primary factor in deciding the amount of a RIB payment is the PIA which may be computed in different ways; the highest PIA is used on a person's record. Where a new start method and an old start method come up with the same PIA, it is considered that the new start method is used.[9]

RIB benefits can be claimed in any month after the age of 62, subject to certain restrictions.[3] However, benefits may be reduced if they are claimed before that person's Full Retirement Age. For each month that the benefit is claimed before the month in which the person attains Full Retirement Age, the benefit is reduced by a certain amount of the PIA. For the first 36 months, the benefit is reduced by 5/9 of 1% of the PIA; for additional months it is reduced by 5/12 of 1%. The aggregate reduction for the first three years is 20%.[10]

For the formulae, RF means Reduction Factor, the number of months RIB is claimed early

Formula for First 36 Months: Benefit = PIA × (180 – RF) /180

Formula for Additional Months: Benefit = PIA × (228 – RF) /240

For example, for an individual whose Full Retirement Age is 66 and 10 months and who has a PIA of $1,000, the benefit, if claimed at 62, would be $708.[11]

DRCs are accrued in any month between the month in which a person attains Full Retirement Age and the month they attain the age of 70 and they postpone claiming RIB. A person who is already claiming RIB may also voluntarily decide to stop receiving their payments temporarily to accrue DRCs beginning at their Full Retirement Age.[12]

The value of DRCs is 2/3% a month or 8 percent per year for postponement of claiming RIB. For example, if the person's full retirement age is 66 and 10 months and the PIA is $1,000, the benefit if claimed at 66 and 10 months would be $1,000 but would be $1,253 (plus any cost of living adjustment) if claimed at age 70.[11]

An earnings test has been part of the calculation of retirement benefits since the Social Security Act was signed in 1935.[13] There are two earnings tests applied to beneficiaries who are under Full Retirement Age, the Annual Earnings Test (AET) and Monthly Earnings Test (MET). The Senior Citizen's Freedom to Work Act of 2000, signed into law April 7, 2000, eliminated the use of these tests for beneficiaries who have attained their Full Retirement Age.[14]

The AET is used as the primary earnings test for RIB. The test applies only to earned income and has a two tier system in calculating deductions. The first tier, for those who are not reaching Full Retirement Age in the current year, reduces the benefits for the year by $1 for every full $2 the beneficiary earns over the annual exempt amount. The second tier, for those who are reaching their full retirement age, reduces the benefits for the year by $1 for every full $3 the beneficiary earns over the second tier annual exempt amount.[15] The first tier annual exempt amount is $18,960 and the second tier annual exempt amount is $50,520 for the year 2021.[16] When possible, all benefits deducted are deducted at the beginning of the year before any benefits are paid.[17]

The earnings test does not reduce lifetime Social Security benefits, on average.[11] This is because any benefits lost to the earnings test lead to increased monthly benefit amounts when an individual reaches the full retirement age. For example, if an individual claims benefits at 62 in 2021 and receives $920 a month, but then returns to work for a year and has 12 months of benefits withheld, SSA would recompute the benefit at the person's full retirement age and pay $985 a month (in today's dollars) going forward.[17] Thus, the earnings test shifts Social Security benefits from a time when a person is working to a time when they are more likely to be retired.

The MET can be used only in certain years, under certain conditions. In order for the MET to be applied to any given year, that year must first be considered a grace year,[15] which requires that it either be the first year in which the beneficiary is entitled to benefits under Title II of the Social Security Act, during a year in which there was at least one month in which the beneficiary was not entitled to Title II benefits, or a year in which the beneficiaries entitlement to Title II benefits was terminated for reasons other than death. The grace year must also include at least one non-service month, which is any month in which the beneficiary neither earns wages over the monthly exempt amount nor performs substantial services in self-employment.[18] Services are considered substantial in self-employment if they consist of over 45 hours in a single month or 15 hours if it is a "highly skilled occupation."[19]

The monthly exempt amount is 1/12 of the yearly exempt amount for that year. For first tier beneficiaries, the monthly exempt amount is $1,130 and $3,010 for second tier beneficiaries for 2008.[20]

The MET is helpful for beneficiaries who retire in the middle of the year and who would be penalized for earlier earnings under the AET.

The Social Security Amendments of 1983 (Public Law 98-21) created the WEP. Beneficiaries who have been employed in work that does not pay into the Social Security Trust Fund and who receive a pension from that employment based upon earnings which were not covered by Social Security may see their benefits partially offset by the WEP. The WEP applies once the beneficiary is both entitled to RIB and is entitled to the pension or meets all the requirements except for stopping work or filing an application.[21]

There is a possibility that with enough years of coverage (YOC) that the WEP may be either reduced or waived. Anyone with 30 or more YOCs is exempt from the WEP. Beneficiaries with between 21 and 29 YOCs will have the effect of the WEP reduced.[22]

The WEP may reduce the benefit in various ways, taking various rules and computation methods into account (see main article). The WEP was developed as the result of the progressive method in which the PIA is computed. Since those with less earnings on the record receive a comparatively larger percentage of their average income, under normal computations a beneficiary who paid in little to the Social Security system and who is drawing a separate pension may have what is perceived as an unfair advantage in their benefits.