Many older workers may be facing income challenges due to the economic downturn created by the coronavirus pandemic. An old Social Security tactic — voluntary suspension — could help some of them.
How? First, here is a basic review of how Social Security works.
To qualify for retirement benefits, workers pay 6.2 percent of their income, up to the federally-set wage base ($137,700 in 2020), into the Social Security system for a minimum of 10 years. Their employers match these payments. The result of these payments, for many people, is a very significant source of Social Security income in retirement.
At their full retirement age (FRA), workers can collect 100 percent of their primary insurance amount (PIA). However, if they elect to start their benefits before their full retirement age, the benefits are reduced for early filing. Workers can start collecting Social Security retirement benefits as early as age 62.
But if they elect to start their benefits after their full retirement age, they earn delayed retirement credits of 8 percent in simple interest each year up until age 70. That means a larger Social Security payment. That’s why some workers opt to delay collecting Social Security as long as possible. (Related: Filing for Social Security retirement benefits)
What happens if a worker between age 62 and 67, who has always expected to start benefits at full retirement age or later, is furloughed or laid off from his or her job because of COVID-19? For this worker, income now is more important than income later.
This is when knowing about voluntary suspension can help. A qualifying worker can get Social Security income now, even if he or she originally intended to wait for full retirement age or later to maximize the benefit amount. But later, when the need for immediate income is gone, that worker can voluntarily suspend Social Security payments and make up for some of the early-filing reduction in benefits.
How it would work
Let’s consider this hypothetical case study example. Bob was born March 2, 1955, so he is age 65 in 2020. His full retirement age is 66 years and 2 months. Bob’s benefit at his full retirement age will be $2,400 a month.
But perhaps Bob loses his job or other income source due to the COVID-19 crisis. Bob needs income now and so files for Social Security retirement benefits. The result of this early filing event reduces his monthly benefit to $2,213. This is an actuarial reduction of $187 per month. However, the $2,213 Social Security benefit helps provide relief from the COVID-19 income loss.
But hopefully on a happy note, after a year, Bob thankfully is back at work and no longer needs his Social Security benefits. He would like to restore the buying power of his Social Security for the later years of his retirement. Bob, now at full retirement age, can take advantage of voluntary suspension.
Bob, now one year older and at full retirement age, asks the Social Security Administration to stop sending his benefit check. While the checks are suspended, Bob earns delayed retirement credits of two-thirds of 1 percent a month or 8 percent simple interest per year.
After another year, when Bob is age 67 years and 2 months, he asks the Social Security Administration to restart his payments. The delayed retirement credits add $177 a month to his initial payment of $2,213. The net result of the voluntary suspension has increased his benefit to $2,390. That is just $10 less than his benefit at full retirement age of $2,400 that he would've had if he didn't take early payments and retired a year earlier.
Bob should remember that during the voluntary suspension period, if he is paying for Medicare benefits via his Social Security check, he will now have to pay the Medicare premiums each quarter by check. He should also remember that if others in his family are attached to his record, like a spouse or dependent child, those benefits will also be suspended.
The details of voluntary suspension are available at the Social Security Administration website .
Voluntary suspension, although not for everyone, could be real life saver in these difficult time for those who qualify.
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