Continued Work and Social Security Claiming Decisions

Posted Wednesday, January 22nd, 2014  | Comments Off on Continued Work and Social Security Claiming Decisions rule

Philip Moeller

Author, book on Social Security, under contract with Simon & Schuster
Speaker, on retirement and successful aging
Journalist and Editor, American History of Business Journalism
Research Fellow, Sloan Center on Aging & Work, Boston College

It is increasingly commonplace for people to work into their late 60s and even 70s. The percentage of people in these age groups who continue to view themselves as part of the work force has continued climbing for more than 20 years. The deep recession has been widely cited as forcing many older Americans to stay on the job and defer retirement, but the trend was well established before the downturn and is expected to continue even as the economy recovers.

This shift has been well documented and the details are nothing short of extraordinary. Here are the labor force participation rates for different groups of older Americans, as reported last month by the U.S. Bureau of Labor Statistics:

We are witnessing a statistically and socially significant shift toward continued work and extended careers for older Americans. For their part, employers are responding to graying work forces. Over time, and especially as the economy recovers, we can expect expanded employer accommodation efforts—more training, intergeneration communication and sensitization programs, and redesigned jobs reflecting age-appropriate roles for employees.

At the same time, however, employers should consider how continued employment in later age is altering retirement plans for millions of Americans. There is a solid opportunity and need here for human resource departments to better understand these issues and provide appropriate employee communications and training resources to older employees.

Work-based retirement programs such as 401(k) are an obvious focus for such efforts. The retirement assets of most people aged 55 and older fall far short of funding even modestly comfortable retirements. Encouraging and helping older employees to take full advantage of tax incentives and employer matches thus becomes a must.

As more 65-and-older employees stay on payrolls, Medicare options increasingly will enter the mix of health care considerations. There will be a growing appeal for hybrid solutions that permit employees, employers, insurers and Medicare officials to craft mutually helpful and innovative packages that represent better deals for all parties.

Less obvious, perhaps, is the changing role that Social Security can play in the retirement plans of older employees, and in the thinking of employers and human resource managers. For most Americans, the decisions about when and how to claim their Social Security benefits are far and away the most important retirement decisions of their lives and, in many cases, of the lives of their spouses and other family members.

Very few older Americans have even $100,000 set aside for their retirements. A typical Social Security benefit, by comparison, is akin to a guaranteed monthly annuity that would require a nest egg well in excess of $1 million to fund. That’s how important Social Security is to successful retirements, and it’s important even to people who earn a lot of money.

Every person participating in Social Security (some government employees and railroad workers have separate retirement programs) pays the same amount of taxes each year—in 2014, the rate is 6.2 percent of the first $117,000 in wage income. Employers also pay 6.2 percent and self-employed persons are on the hook for 12.4 percent of their earnings up to the $117,000 ceiling.

(There is a similar Medicare payroll tax—1.45 for employees and employers; 2.9 percent for self-employed persons—and this tax is applied to all wage earnings. Under Obamacare, there are additional Medicare taxes due from wealthier individuals.)

However, while contribution rates may be the same, the benefits available from Social Security are in no way the same for everyone. Social Security benefits have long been promoted as a common benefit—a “we’re all in this together” program. But its benefit provisions can vary greatly, and reflect complex choices that can make a huge difference to people. Social Security claiming decisions thus can play a major role in the retirement prospects of older employees and in the support and advice they need from employers.

People can begin claiming Social Security benefits as soon as their 62nd birthday. Or, they can defer their benefits and watch them increase in value each year by about 8 percent a year PLUS the rate of inflation. After the age of 70, benefits do not increase except for an annual cost of living adjustment (except they will increase for many people who keep working, and I’ll get to that shortly).

People are eligible for Medicare at the age of 65 and usually must sign up for the program unless they have private health insurance from an employer. But they do not have to sign up for Social Security at this time. And by waiting until they are 70, their monthly benefits—for the rest of their life—are 76 percent higher than if they began claiming at 62.

One of the additional core components of Social Security involves what happens to benefits when a person reaches what the Social Security Administration has called “full retirement age.” This is a confusing concept, made more so because the agency also calls it “normal retirement age.”

Now, because benefits can increase every year until age 70, you might think 70 is the full or normal retirement age. No, it isn’t.

Or, because Medicare benefits begin at age 65, you might think this is the full retirement age. No, again, although 65 used to be the program’s full retirement age before changes to the law raised this age. It is now 66 for people born between 1943 and 1954, and will rise by two months a year for those born between 1955 and 1960, reaching 67 for people born in 1960 and later years.

Reaching full retirement age has some enormous potential impacts on Social Security benefits. Prior to reaching full retirement age, anyone receiving basic Social Security retirement benefits can have those benefits temporarily reduced should their outside wage earnings exceed an annual minimum; in 2014, that minimum is $15,480. The ceiling on exempt outside earnings is higher for those reaching full retirement age in the current year; for anyone turning 66 in 2014, the exempt amount of outside earnings is $41,400.

For people receiving Social Security benefits who are aged 62 to 65 and earn more than $15,480, the agency will withhold $1 in benefits for every $2 of outside earnings; for those turning 66 who earn more than $41,400, $1 in benefits will be withheld for every $3 in outside earnings. This can make a big difference to older employees who have already started claiming Social Security (and while waiting until 70 can produce big monthly payment gains, nearly no one waits this long; 62 is the most popular claiming age).

Beyond withholding benefits, the way the agency does this can play havoc with an employee’s financial planning. If benefits are withheld, the withholding is not proportional or pro-rated during the year but happens all at once. A person receives $0 benefits every month until the amount of withheld benefits has been satisfied. Monthly benefits are then restored.

When a person reaches full retirement age, there is no penalty for outside earnings. In addition, the agency will restore any benefits that were withheld earlier because of outside earnings prior to reaching full retirement age. There are other significant implications of reaching full retirement age, particularly how it can affect decisions to take spousal, divorce and survivor benefits.

Lastly, older employees who continue working into their 60s and beyond can actually raise their Social Security benefits by continuing to work. A minimum of 40 quarters of work on which payroll taxes have been paid is needed to qualify to receive Social Security. But the agency bases an individual’s benefit entitlements on his or her 35 years of highest earnings.

An older employee who already has 35 years of covered earnings can boost his or her Social Security benefit if the amount earned in 2014 is large enough to become one of the top 35 earning years. The agency will automatically recalculate a higher lifetime benefit. Even people already claiming Social Security will see their benefit increase, and it will increase again for each and every year their future wage income is large enough to be one of their 35 top earnings years.

The agency adjusts annual wage earnings each year to reflect the impact of inflation. So, a year of wages earned in 1990 might be worth more than you’d think when compared to earnings in a more recent year. But when a person reaches the age of 60, the agency’s rules say that their wage earnings are no longer adjusted for inflation. So it’s very likely these later-year earnings by older employees will be included in their top 35 earnings years, and thus boost their Social Security benefits.

Few employees know about or understand these Social Security provisions. The same probably can be said about human resource managers. Yet the retirement prospects of older employees can be greatly affected—for better or worse—by their Social Security claiming decisions. As more and more retirement-age employees remain on the job, these decisions will grow in importance for employers as well.

Research Fellow and journalist Philip Moeller is the co-author of “How to Live to 100” and is now working on a book about Social Security, to be published by Simon & Schuster.

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The Fountain of Wisdom

Posted Wednesday, January 8th, 2014  | Comments (6) rule
Companies need look no further than their own employees to solve the problems of an aging workforce
Jeffrey Beeson & Patricia Munro's photos
Jeffrey Beeson
Board Member, World Café Europe
Patricia Munro
Board Member, World Café Europe

Pushed by the aging of the workforce, businesses are scrambling to find consultants to help them restructure and find innovative ways to make the most of the assets of their older employees. However, a project conducted last year in six cities (Bilbao, Bologna, Bonn, London, Prague, and Strasbourg) demonstrated the surprising truth that businesses already have the answers. To discover them, they just need to tap into the collective wisdom of their own staff.

The European Voices for Active Ageing (EVAA) project was an initiative funded by the European Union’s Europe for Citizens program. The project was led by World Café Europe—a nonprofit organization that specializes in dialogues engaging as few as 50 and as many as 1,000 people. During these dialogues, everyone participates. The EVAA project was designed to give adults in later life a voice about issues that matter to them today. In each city a different topic was discussed. In Bologna, the topic was “Work after 50.”

Wisdom of the ages

Ninety adults participated in the Bologna dialogue. Of this group, 71 percent were white- and blue-collar workers between the ages of 50 and 70; 16 percent were white- and blue-collar workers younger than 50; and the remaining 13 percent were retired workers over the age of 70. The purpose of the Bologna dialogue was to explore what change is necessary in today’s workplace in order to unleash the talent and potential of an aging workforce.

The dialogue’s results were remarkable. In four hours, the participants pinpointed nine key issues: knowledge transfer, lifelong learning, new challenges for workers over 50, intergenerational issues, new work structures, an age-friendly organizational culture, the attitudes both of older and younger workers, ageism in the workplace, and opportunities for government legislation to promote workplaces free of age-bias.

The participants made specific suggestions of ways businesses should respond to each of these issues. For example, the participants concluded that businesses needed to encourage older workers to reconsider some of their own negative attitudes, such as “too old to learn,” “resistance to change,” and “unwillingness to share.” They also strongly advocated a gradual retirement process enriched by a cross-generational program of courses, coaching, and mentoring on retirement planning. Mandatory retirement would be abolished. In another inspired moment, they came up with seven ways in which employees over 50 could heighten their engagement in their work: for example, within companies as communicators of organizational knowledge and, in paid early retirement, as consultants or contributors of socially useful work. (For an overview of the Bologna dialogue, click here.)

Willingness to act

EVAA was conceived as a dialogue by older adults for older adults. In preparation, facilitators over the age of 50 were coached and mentored to lead the conversation. Bologna had two facilitators: a union worker and a university professor.
At the end of the session, the participants were asked to fill out an evaluation sheet. One question asked them to rate their level of personal motivation as a result of the dialogue. An overwhelming majority—89 percent—said they were motivated to continue their engagement with the issues involved in “Work after 50.” Of this group, 25 percent said they were “extremely motivated” to continue their engagement. (For detailed recommendations and evaluation results, click here.)

All of these results point to an interesting question: What if businesses were willing to engage their employees in a highly participatory way about issues that matter to them and to their company? What happened in Bologna suggests that they would find a fountain of wisdom waiting to be discovered. As a bonus, companies would also identify “extremely motivated” employees who are eager to become part of the solution.

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