Tuesday, May 6, 2008

Adjustment of Reduction Factors at Full Retirement Age

QUESTION:
Enjoyed your online book very much. Talk about easy to read!
I will turn 62 at year end, and plan on continuing work and applying for benifits. Based on my expected income, I will probably be penalized approximatly $8900 annually. I don't know where I got this idea, but somewhere I thought I read that this penalty eventually comes back to the recipent after full retirement age is reached (66 in my case). Could not find a reference to this in your book. Am I correct in this?
Thanks in advance, and thanks for the excellent work in this book.
Regards,
Tony from Tennessee



ANSWER:

Thanks for the compliment, flattery gets you everywhere!

Sorry, but the "penalty" you refer to does not come back to you. That's the bad news. The good news (and what you were probably thinking about) is that the number of reduction months used to figure your benefit amount before Full Retirement Age gets readjusted when you reach 66 to exclude any months which were used to withold benefits for the "penalty." They call this an "ARF" (one of the more memorable acronyms).


The benefit amount before Full Retirement Age is reduced by a fraction for each month under 66 as of when you first become entitled. The legal reduction factor is 5/9 of 1% of the primary insurance amount for each month of the first 36 months and for each month more than 36 months the factor is 5/12 of 1 percent.

If you start benefits at 62, that would be 48 months of reduction. That comes to 25% off the full benefit. If you have excess earnings that require witholding of some monthly benefits (the "penalty" you referred to), then the months come out of the reduction at age 66. So for example if at age 66 it turns out that you only received 36 full monthly benefits, then the reduction factor is readjusted to only a 20% reduction, for all benefits beginning with the month you reach Full Retirement Age. This is done automatically without you having to make any application for this readjustment.

2 comments:

Bob Stevens said...

This seems counter to what is stated in SSA Publication "How Work Affects Your Benefits":

"If some of your retirement
benefits are withheld because of your
earnings, your monthly benefit will
increase starting at your full retirement
age to take into account those months
in which benefits were withheld."

Stanley Tomkiel said...

Thanks fo the comment Bob- but actually there is no difference in what is being said. Simply put, months before Full Retirement Age (FRA) for which no benefit was paid due to excess earnings are not counted as reduction months after FRA, and the benefit amount is recalculated to eliminate any reduction factor attributable to such a month, thereby increasing the benefit amount. I don't understand what you think is inconsistent.