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Many older workers may be facing income challenges due to the economic downturn created by the coronavirus pandemic, changing economic times, or changes in lifetime circumstances. If and when that happens an old and often forgotten Social Security tactic — voluntary suspension — could help.
How? First, here is a basic review of how Social Security works.
Social Security basics
To qualify for retirement benefits, workers pay 6.2 percent of their income, up to the federally-set wage base ($160,200 in 2023), 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 based on highest 35 years of contributions.
At their full retirement age (FRA), workers can collect 100 percent of their primary insurance amount (PIA).
- For workers born in 1960 or later, full retirement age is 67.
- For workers born before 1960, full retirement age can range between 66 years and 2 months, to 66 years and 10 months.
However, if workers 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 should never delay filing past age 70.
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.
Job loss?
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 new economic circumstances? For this worker, lower income now could very well be more important than higher income later.
This is when knowing about voluntary suspension can help. A qualifying worker can collect Social Security income now, even if he or she originally intended to wait for full retirement age or later to maximize their benefit amount. Later, when perhaps the need for immediate income is gone, that same worker can voluntarily suspend Social Security payments and make up for some — if not almost all — of the early-filing reductions in benefits.
How voluntary suspension would work
Let’s consider this hypothetical case study example. Bob was born January 2, 1960. His age is 63. His full retirement age is 67. Bob’s benefit at his full retirement age will be $3,000 a month.
But perhaps Bob loses his job or other income source due to problems in the economy and corporate cutbacks. Bob needs income now and files for Social Security retirement benefits. The result of this early filing event reduces his monthly benefit to $2,250. This is an actuarial reduction of $750 per month. However, the $2,250 Social Security benefit helps provide Bob relief from the unexpected income loss.
But hopefully on a happy note, after time has passed, 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 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 a year of suspension, when Bob is age 68, he asks the Social Security Administration to restart his payments. The delayed retirement credits add 8 percent to his monthly payment. The net result is that the voluntary suspension has increased his benefit for the rest of his life. If Bob continues the voluntary suspension, it could add up to 24 percent more to his retirement income check.
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 difficult times for those who qualify and need help.
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