Some things seem to get more confusing the more you try to understand them.
Social Security, with its thousands of convoluted and intertwined rules, is a perfect example and a reason some people should be niche advisors serving specialty clients, according to Joe Elsasser, founder and president of Covisum, a software and consulting firm for the financial services industry.
For instance, most people know their birthdays, but the Social Security Administration may dispute the date, at least for its own purposes. The administration also may say a person gets less money for being born at the end of the year instead of at the beginning. Or it can say some people have to pay more for Medicare than others.
After a recent webinar on the ins and outs of Social Security, Elsasser said advisors who want to help people transition to retirement would do well to learn all they can about the benefits. "As an alternative, the advisor can rely on outside experts or he or she can use good, professional software that has tools built in to compensate for all the quirks," he said. "We get calls from advisors all the time when they run across rules that are complex and challenging and sometimes do not seem to make sense.”
The following are some of the rules that seem to go against logic or even seem to contradict one another, Elsasser said.
10. Coordination With Railroad Retirement Benefits
Most people who follow Social Security changes think the ability to switch strategies was recently eliminated. "Switch strategies" refer to your ability to elect to switch from one benefit, perhaps a limited one, to a bigger one later. But these strategies continue to exist for those in a household that has one member eligible for railroad retirement benefits. The time when switching benefit strategies is allowed is, like everything else about Social Security, complex.
9. Hold Harmless Rules
Some beneficiaries are given an extra bonus because of the intertwining of Social Security and Medicare. Most Social Security beneficiaries have the cost of Medicare Part B taken out of their Social Security benefit. If the cost of Medicare goes up more than the cost of living increase for Social Security in a given year, the beneficiary pays only up to the COLA increase amount for Medicare. This is called the "hold harmless" rule.
8. The "Notch Year"
Some rules apply to a very narrow group of beneficiaries. Because of an idiosyncrasy in the benefit calculations, individuals born in 1947, for instance, were subject to inflation in 2008 but did not receive the 5.8% “windfall COLA” paid to most beneficiaries in January 2009.
7. The Widow Limit
Normally, benefits increase the longer the beneficiary waits to claim. However, for some people collecting benefits on a dead spouse’s earnings record, it doesn’t make sense for the survivor to delay benefits beyond age 63 and 1 month.
6. Annual Earnings Test In One's Full Retirement Year
For 2019, a beneficiary can earn up to $46,920 in the calendar year that the beneficiary reaches full retirement age. You may earn up to that amount in the months before retirement without affecting monthly benefits for the rest of the year. But that means those born earlier in the year end up with more months of full benefits than those born later in the year.
5. Monthly Earnings Test
For people claiming benefits before they retire, the Social Security Administration has earnings test to decide benefits. These include monthly and annual earnings tests. For one year only, a new beneficiary can use a monthly earnings test rather than a yearly one, which may allow the beneficiary to collect checks for the months that the earnings are below 1/12 of the annual earnings test amount.
4. Annual Earnings Test
The annual earnings test is like a cliff: Go over a certain amount and benefits can be reduced until the point where no benefits are paid. (For 2018, the beneficiary loses $1 in earnings for every $2 earned above $17,040.) But in some instances it pays to file. The beneficiary may forfeit a few checks at the beginning of the year, but will receive checks for some later months.
3. Continued Work And Statement Assumptions
Even Social Security’s own estimations can be wrong. If a person retires early, the calculations for what benefits will be later in retirement may be off because Social Security assumes, at first, that the beneficiary will continue to make his full salary for longer than he actually did and future estimated benefits are reduced.
2. Attained Age
Social Security relies on English common law for determining when a person “attains” a particular age. For example, if a person is born on January 1, 1955, Social Security treats them as if they were born in 1954. This can make a difference for other rules that have deadlines.
1. Initial Eligibility
For those people applying for benefits at age 62, only people born on the second of the month can actually claim Social Security at age 62. Everyone else is actually claiming at 62 and one month.
