Ever since the passage of the so-called Social Security Fairness Act I’ve been receiving a lot of questions from Colorado PERA members (and occasionally from educators in other states who have non-covered pensions) about decisions they should make around Social Security benefits.
To be perfectly clear, I’m not an expert on Social Security. I highly recommend the short and accessible Social Security Made Simple by Mike Piper as well his free calculator online. But there are some commonalities among the questions I’ve been receiving that I thought I could address here.
First, it’s important to understand that there are two main types of Social Security benefits that educators with non-covered pensions (meaning they contributed to their pension but not Social Security during their teaching career; this applies to about 15 states) can receive: benefits based on their own earnings and benefits based on a spouse’s (or ex-spouse’s) earnings.
In order to qualify for Social Security benefits on your own earnings, you have to have at least 40 quarters (10 years) of substantial earnings. Even though educators with non-covered pensions didn’t pay into Social Security while they were teaching, many of them will have at least 40 quarters due to jobs they worked in high school and college, perhaps a job before they became a teacher, perhaps a second job or self-employment income while they were teaching, or working after retiring from teaching.
A fairly frequent question I get is, “What if someone is a few credits short of 40, should they go out and get a part-time job for a while to get to 40 credits?” As always, personal finance is “personal”, so it depends. Let’s look at an example of someone who has 32 credits, so they need an additional 8 credits (two years of work). There are two main (financial) factors to consider when making this decision.
First, how much they can earn during those two years relative to their eventual Social Security benefit? While getting to 40 credits in order to get a Social Security benefit is definitely a positive financially, the trade off (in this case) is working two additional years. For almost every educator thinking about doing this, the financial benefits of working two more years in their current (pension-covered) job likely far outweighs the benefits of retiring and working two years in a Social Security-covered job. These benefits include two more years of much higher pay (probably), two more years of benefits, and two more years of service credit which will increase the eventual amount of their pension (the increase is likely more than the small Social Security benefit they would earn by working those two years elsewhere and getting to 40 credits). Of course a non-financial consideration is whether you are burned out at your current job and whether working two more years is good for your mental and physical health, in which case you may choose to do something else (just don’t expect it to be the optimal financial decision).
Second, if you are married (or are single but were previously married for at least 10 years), you need to consider your possible spousal benefits. Many educators have spouses (or ex-spouses) who worked in Social Security-covered jobs and earned much more than the educator did. If you start drawing at your Full Retirement Age (FRA, 67 for almost everyone now) you can receive 50% of your spouse’s (or ex-spouse’s) full Social Security benefit (if this is higher than your benefit you will get this amount instead of your own). This is often more than the benefit you would receive on your own earnings, which would make working to get those additional credits totally unnecessary.
Note: There is a situation where it could still make sense to get the 40 credits. Get the 40 credits and claim on your own earnings early at age 62 (so a reduced benefit). Then at FRA of 67 “switch” to spousal benefits (so you get an additional 5 years of benefits from your own earnings then your full spousal benefits at FRA). The things to be careful about here are that as soon as your spouse claims it switches, even if you are not yet 67 (and therefore will receive a lower spousal benefit forever), or if your spouse is younger and/or doesn’t claim for a while you might not switch to the higher benefit until much later.
Note that if you claim before your FRA of age 67 you will receive less than 50%. It’s also important to realize that if your spouse (or ex-spouse) predeceases you, you will receive a survivor’s benefit of 100% of their benefit (if you claim at FRA or later and it’s larger than the benefit you receive on your own earnings).
You’re probably aware of the debates people have about when to take Social Security, with some arguing for taking it at age 62 and some saying wait until age 70 (again, Mike Piper’s calculator can help with this). Again, it depends on your individual situation, and having a pension is a big piece of that decision. While I don’t think the decision-tree for this is particularly complicated, you do have to think through your specific situation to come up with the best decision for you.
For example, here’s my specific situation. Both my wife and I taught in Colorado which has a non-covered pension. I have over 40 credits of Social Security from other work but she does not. I am two months older than her. Absent the spousal benefit, I would likely wait until age 70 to claim my benefit to get the largest benefit possible as a form of longevity insurance (especially because we don’t need the money now). But because a married spouse can’t claim a spousal benefit unless their spouse is already claiming, and because she can’t get a benefit based on her own earnings, the best time for me to claim is at age 67 and 2 months (which is when she turns 67). I will be 2 months past my FRA, so will get slightly more than my “full” benefit. This is less than I would get if I waited until age 70, but because it enables my wife to begin drawing 50% of my FRA benefit right away it’s the better option. (If I waited until 70 I would get a higher benefit, but we would lose out on three years of her receiving her spousal benefit). This wasn’t particularly difficult to figure out, but we did have to consider our individual circumstances (and Mike Piper’s calculator thankfully agrees). There are additional considerations of course (taxes, life expectancy, spending needs, RMDs, Roth Conversions, IRMAA, etc.), but these are the main items for most people to consider.
So start by gathering your Social Security information for yourself (and spouse if applicable) at ssa.gov/myaccount. If you have an ex-spouse who you were married to for at least 10 years and you haven’t remarried before age 60, it would be helpful to have their information as well. (If the relationship is bad enough that you can’t get the information, the IRS can give you an estimate of what your spousal benefit would be.) If you need additional credits to get to 40, do the math to figure out if the benefit you would get on your own earnings if you did that would end up being more than 50% of what your spousal benefit already would be. Also factor in whether simply continuing to work in your current job for the additional time it would take to get those credits might actually be more worthwhile anyway. The potential income from Social Security for those with non-covered pensions now that the WEP and GPO (especially the GPO, as the spousal/survivor benefit is the much bigger potential impact) has been repealed can be a welcome addition to your retirement security.
Fisch Financial 