Monday, February 27, 2006

Social Security early retirement: infrequently asked questions

By John W. Boushka (aka "Bill Boushka")

Early retirement brings up some questions in arcane areas for which it is not always easy to find definite answers. I’ll try to anticipate some of mine, but these are from my research. I am not a lawyer. If you have detailed questions about a complicated individual situation, see an attorney or certified financial planner for the most definitive answer possible. You can do detailed searches at

Of course, this is a difficult subject and I welcome comments. I've tried to figure out the answers to these scenario questions based on the SSA's own regulations (online) and published literature.

Q. I know that income from wages is counted when it is earned. Does this rule apply month by month during the grace year?

A. Apparently so. It is difficult to find an absolutely definitive statement on the SSA website or in Tomkiel. But the intention is to base earnings from wages on the time perioid that the wages were actually earned by work. You should keep detailed records of the days you actually worked as well as pay stubs. If you go over the annual earnings limit during the Grace Year but believe that each month after age 62 was a non-service month, you must submit a detailed report explaining this (from your work records) before April 15 of the next year. A spreadsheet showing when you worked is a good idea. The best web reference that I can find is this from POMS. Here is a reference for teachers that seems to reinforce this idea. (Look at the example of the teaching contract at the end.)

Q. I know that the Annual Earnings Test is supposed to count only income from work. Is income from a 401K distribution excluded from the test?

A. Yes; here is the reference, though it is hard to find. The philosophy, again, is to count earnings when they were earned, that is, when FICA taxes were paid. The Social Security Administration is required by law to inform the beneficiary of any “deferred vested benefits” from employers at the time that the beneficiary requests benefits, but this has nothing to do with the actual benefits themselves. (The form is called “Potential Private Pension Benefit Information” and is a bit of a misnomer.). This has nothing to do with the Earnings Test, however.

Q. I do a little freelance writing that produces very little income, and I have a website in which I give away a lot of free content. Could this hinder my receiving benefits?

A. I can’t find anything definitive on this. Generally, the Earnings Test and definition of “retirement” is based on what you actually did for income before retirement, that is, activity on which you paid FICA taxes. If you have actually stopped working in the job that paid this income (and don’t provide substantial services to your prior employer or clients), you’re probably OK, I think. What you do now would not count if it did not provide significant FICA income before (although you should be able to prove that with records, especially income tax records). I believe that Social Security would regard the new activity as a “hobby” until it produced significant income; once it did so, however, the earnings from it would apply to the Earnings Test (and if it essentially became self-employment, it would be based on when payments were received.) Here is the best reference on hobbies that I can find. Social Security does ask about self-employment on the online application, and a negative response will produce an entry like "you are not a member of a family corporation or other closely held corporation from which you receive earnings." Presumably, SSA means "significant earnings" that contributed FICA wages in the relatively recent past.

Social security has a "Self-Employment/Corporate Officer Questionaire," a five-page pdf form that it sometimes asks claimants to fill out. If you study the form, you see very clearly that a major concern is a major drop in earnings from self-employment or an owned business coincidental with filing. As a practical matter, if an early retiree is able to make moderate income from an owned business (enough to exceed earnings limits) it may well be more prudent to keep it and delay starting social security until full retirement age is reached, of possible.

Philosophically, the practice of offering free content on web domains to attract attention and become known might prove troubling to some people, as it might be viewed as driving others out of business and, therefore, "subsidizing" it with benefits could become bad public policy. That’s probably a red herring. However, webmasters often register assumed names and DBA names to protect their domain names from trademark claims, and this practice might eventually come to be viewed as abusive. But so far I have not seen evidence of this. Social Security tends to follow the rules in POMS to the letter. It is a good idea, however, if you have a hobby that attracts attention to make good faith efforts to get it into generating “measurable” revenue. That only make sense anyway in a free market.

Q. I am living rent free to help care for another family member while I collect benefits, but we file totally separate returns and neither one of us claims support on IRS returns. Does this affect benefits?

A. I can find no evidence that it does. It would with other situations (disability income, and particularly SSI, where free rent would be considered income based on fair market value). Family and dependent claims usually deal with a situation where there is just one wage earner's account, where that wage earner has supported other family members. The underlying concept seems to be "NH" -- number holder. If the beneficiary has his or her own account based on own earnings (and is not filing disability or SSA) it seems that domestic situations have no effect.

Social Security: Early retirement and the Annual Earnings Test

Social Security law allows retirees to start collecting benefits for the first full month after the 62nd birthday. The actual payment is not actually made until the month following that, so effectively social security is available at age 62 plus two months. The benefit is less by an actuarially determined amount based on life expectancy. The reduced benefit continues after reaching full retirement age because of the actuarial calculations. Retirees without pensions or whose pensions are reduced by a social security offset (below) may feel financially pressured to start Social Security benefits early; corporate retirement policies often seem to be predicated on the assumption that they will.

Between age 62 and full retirement age, which keeps creeping up according to birth year (it is 66 for me), Social Security applies an Annual Earnings Test, which reduces benefits once wages from continuing to work go over a certain amount, by one dollar for every two dollars of overage until benefits go to zero. If a person gets a good job and stops benefits, the benefits will be mathematically more than they would have been once the person reaches full retirement age. Because a good job would probably improve the earnings and FICA contributions record (the best 35 years), the benefit after full retirement will usually improve further.

Great complexity goes into administering the Annual Earnings Test. One area is the grace year, which most often (not always) is the first year of benefits when the Earnings Test is applied over a partial year. In general, the earnings test is broken down per month and benefits are paid for each “non service” month during the grace year, where a non-service month is defined as a month in which earnings are less than a montly maximum and time spent in self-employment is less than a certain number of hours, based on previous occupation. Only wages (or bona fide self-employment earnings) count toward the Earnings Test, not pensions or investment income or most rental income (except when it is closely associated with an occupation).

Social security goes to some length to make sure that someone before full retirement age is fully “retired” and, if he or she had received substantial income from self-employment, is not hiding income from self-employment with other compensation, especially to other family members. This gets to be an arcane subject. Here is the major descriptive SSA reference.

The good question is, why does Social Security go to such excruciating pains to enforce earnings limits before full retirement? If the retiree paid his FICA taxes and is willing to take out less by starting earlier, why is that not his or her own decision? Good question. The reason seems to be ideological. Social Security was started during the New Deal and is conceived of as a welfare program even if funded by separate payroll taxes. During the years from 62 to full retirement, it is viewed more as a kind of unemployment insurance. President Bush's plans for social security would suggest the president's own philosophical disagreement with this more socialistic view of Social Security retirement "insurance"; he wants the retiree to have complete control of his own well being.

The most important link giving SSA’s own account of the rules in consumer language is at this link.
The chart giving the specific monthly and annual maximums by year is at this link.

Social Security retirement benefits: General Introduction

The main purpose of the next few blog entries is to address some practical concerns of retirees drawing Social Security benefits, particularly of those who start drawing retirement benefits before full retirement age, which is gradually increasing.

Right here, I’m not going into the ideological debate over the future of social security, or its solvency (I may later).

The Social Security Trust Fund covers a number of programs, such as Retirement Benefits (“Old Age Insurance Benefits” “Retirement Insurance Benefits”); Disability Benefits (“Disability Insurance Benefits” “Disabled Worker Benefits”), and various spousal and dependent child benefits, including parental benefits when parents have been dependents on an adult child who dies. Spousal benefits, of course, trigger ideological debates about marriage that I take up on other web pages. Most of the regulations about spousal and dependent benefits (including the "family maximum") have to do with payments based on one worker's account.

The Social Security Office also administers a welfare program, SSI, or Suplemental Security Income), a welfare program not covered by the Trust Fund, and Black Lung Benefits, and is connected to Medicare, which comes from a separate fund and separate payroll tax. Social Security is regarded as an "entitlement" which means that it is paid regardless of outside income (with the exception of wages limits during early retirement years, as in the next post). The same is true of Medicare. SSI is a welfare payment based on need. (Disability benefits are a bit of a hybrid.)

The main focus here for now is retirement benefits. Generally, one must have worked forty covered quarters (with wages or imcome out of which one paid FICA tax) to receive benefits.

Social Security payments are partially taxable under federal tax law. If your total income (including non-work income and even including taxable distributions) is below a certain level, benefits are not taxed. Within a certain range, the percentage of social security income that is taxable raises from 50% to 85%. It is never more than 85%. Some states do not tax social security benefits. Here is an IRS reference.

You do not have to have taxes withheld, but it is advisable to make estimated tax payments to the IRS, particularly if you would owe more than $1000 at tax time.

Former federal, state or local government employees need to take special care about government pension offsets. An employee who worked for a government for a time and did not make FICA contributions during that employment would not get credit for them in the computation of benefits.

Medicare benefits become available at 65. Apparently social security retirement recipients must enroll for Medicare at 65. Many companies are cutting retirement health insurance benefits, and many may stop them at 65. Thomas Sowell discusses the mandatory participation in these programs (from a libertarian political perspective) in the Baltimore Sun, March 2, 2006, "Boomers may be surprised to find 'something for nothing' doesn't add up."

A good definitive web reference for Social Security is POMS, the Program Operations Manual System, which spells out the rules for claims administration in specific scripts.

A good reference book is Stanley A. Tomkiel III, Attorney at Law, The Social Security Benefits Handbook (4th Edition). Sphinx: Chicago, 2004. ISBN 1572483954, which I review at this link.

Update: Nov. 15, 2007

NBC Today mentioned that when someone divorces before ten years, he or she loses access to the spouse's social security credits. So if near the ten year mark and divorce is contemplated, it's good to wait.

Private Defined Benefit Pensions and Social Security Offset

Many companies reduced payments by a portion of the pensioner’s expected social security benefits once the pensioner reaches social security eligibility age. The age at which this happens may be as early as 62, or may not happen until full retirement age. Sometimes after several mergers or acquisitions and employee may find that his pension is the sum of different pieces or purchased companies and the offset rules and ages can vary among these components. Sometimes the term “social security bridge” is used. The theory behind the offset is that the employer has made matching contributions towards the recipient’s social security tax. The practice has generated anger among many retirees who regard it as unfair.

A person’s basic pension amount is typically about 1.5 to 2% of each income for each year of Credited Service (up to some maximum). This may be limited by the pension’s becoming frozen (this became common with many companies in the late 1990s as they switched to a strategy of greater matching 401K contributions). The offset is typically 2% of the person’s expected Primary Social Security Benefit (not including survivor or dependent benefits) per year of credited service (which may be a lower number if the pension was frozen). It is often limited to a maximum reduction of benefit at some percent (like 50% of social security benefit). The offset is also reduced by a mathematical proportion of the person terminated employment (or, likely, had his or her pension frozen) before reaching the age at which the offset goes into effect, so a shorter period of employment some years before retirement will result in a much lower offset. It would not be uncommon for the offset to be between 10 and 30% of a person’s original pension in many situations. For a person concerned about financial stability, the offset does represent a significant issue and might encourage the person to start social security earlier, as the offset is often applied even if the person does not elect to start receiving social security benefits.

For public employees, the following legislation is interesting:

Other interesting references:

Much of the discussion about social security offset bills and litigation concerns public employees and workman’s compensation.

Update: July 1, 2007

I've distinguished the concepts "social security offset" and "social security bridge" in a newer posting, here.

Defined Contribution Plans: 401K's and IRA's

Some companies have attracted public notoriety by not allowing employees to sell shares of company stock in their 401Ks, a factor in the tremendous losses suffered by some employees in a few corporate scandals and collapses.

Generally, one can start 401K withdrawals without penalty after age 59-1/2. However, if one wants a periodic “systematic withdrawal option” many times the periods are limited to rather long payouts, either five or ten years. One can often roll over the fund into a pension IRA which is likely to offer a faster withdrawal (such as three years). Once the withdrawal is started, it may not be possible to stop it. This could lead to higher tax brackets for the retiree if he or she (perhaps unexpectedly) finds a high paying job or other major taxable income sources in the immediately following years. This would also effectively raise the tax rate on social security payments should they be started early (up to the maximum 85%) since the withdrawal income would be added to the social security income before determining the rate.

For a retiree with no work income, the amount of withdrawal might matter to retirees who need to demonstrate “income,” for example, in qualifying for an apartment. Property managers vary in their attitudes towards seniors who may have varying saved asset amounts but limited ability to earn more money through conventional work.

Private Defined Benefit Pension Stability

The first major topic for many early retirees is the stability of their pensions.

Most defined benefit pensions are single life annuities (they terminate at the death of the employee) or single life with survivorship (which pays out beneficiaries but results in a lower pension) or sometimes with survivorship with period certain (often five years).

The most critical topic for many retires is the stability of their former employers. A large amount of protection for pensions still exists with the Pension Benefit Guaranty Corporation, but there are long term concerns about its solvency. If your company goes bankrupt or gets into financial difficulty, it might terminate your plan, in which case the PBGC would cover part of your pension.


Jobs for the recently retired

I had a career in information technology that had started in Feb. 1970 and lasted until December 2001, after getting out of the Army after my two-year hitch as a pseudo “draftee”. I was laid off only once, in Feb. 1971, after my “first” job. I was continuously employed for almost thirty-two years without disruption. I was usually an individual contributor and worked largely on mainframe business application with conventional IBM skills, like COBOL, JCL, CICS, and databases like IMS, IDMS, and DB2. The last twelve years were spent in a life insurance and annuities company that got bought twice. I benefited from the first merger, but was laid off sixteen months after the second one.

For a variety of reasons I tended to eschew competing for conventional promotions, and that might be off the subject here. I did have direct reports once, in 1988.

I want to hit the point that jobs for individual contributors, which tend to appeal more to introverted souls like me, have become more vulnerable to offshoring than jobs that place a heavy emphasis on interpersonal interaction and direct salesmanship. It’s easy to see why. Contributor jobs tend to become more automatable. Sales jobs only pay when the person sells, so they are easier to create.

So you can see the kinds of jobs that conventional wisdom might have encouraged me to pursue. Here are some examples:

(1) Become a financial planner or life insurance agent. That would be related to the fact that during my last job I did obtain a FLMI certificate from LOMA, the Life Office Management Association, by passing ten multiple choice exams. Then why not take advantage of this? I have been contacted by three companies, and one of them would have paid for all training (life insurance licenses are relatively quick to get, but selling other financial services requires a long commitment to training and many SEC licenses), and even offered training bonuses for a commission-only job.

What’s wrong will all of this? Some of the business would consist of trying to encourage a lot of people holding whole or universal life insurance policies to convert to term, and there is a big push in the life business now for this. Now doing something like this requires a lot of socialiability and social networking that typically comes from marriage and family, something that as a gay person in thirty year urban exile is inappropriate for me. In fact, one of the companies had a project where the trainee has to generate two hundred sales leads! I also have philosophical bias against making a living by peddling or hucksterizing other people’s products when I had nothing to do with them.

Furthermore, some life companies prohibit agents from having any outside income during their first few years. They say this is a legal requirement to prevent conflicts of interest and comply with new SEC rules. I have some doubts about this. Remember, until you sell, you earn zero when you have a commission-only job.

Consumers can certainly execute some simpler financial services transactions, especially term life insurance purchases, on their own without paying extra money to agents. There are plenty of websites offering comparisons. A family provider may save some money by doing his own Web research. As in many fields, the Web is certainly changing the business models for agents and requiring them to become more focused.

There are some niche markets in financial planning, however, that can be interesting, such as estate planning for same-sex couples, as recently outlined in the Feb, 2006 Robb Report Worth in an article by Frederick P. Garbiel-Deveau.

(2) Sell software. I did have a lot of experience toward the end with National Change of Address, so why not try to switch over to a sales career with a company that specializes in mailing software? Again, I’m not a peddler. That’s a whole lifestyle.

(3) Sell other things. We all know that a lot of people have tried career changes to real estate, for example, given the hot market. That’s not so bad. But I got burned by a condo in Texas in the late 1980s and have never returned to home ownership. That may have been a mistake.

(4) Teach. I did some substitute teaching in northern Virginia school systems in for eighteen months. I enjoyed many of the more mature (advanced placement and honors) high school classes in subjects like calculus, chemistry, English and social studies. I think it is useful for high school students to have some exposure to persons from the "real world" of work so that they get a more balanced view of the workplace that they will soon enter. I do believe that my mathematics background is in demand and I did pass the dreaded Praxis II exam given by the Educational Testing Service (ETS). There is, however, a big caveat for me. The greatest demand for career teachers (particularly from "career switcher" programs) is in working with younger and with disadvantaged students, particularly in special education. The job requires building appropriate emotional bonds with kids. It also requires a $4000 investment in 180 clock hours of education courses, in a state (Virginia) known to be hostile to gays and lesbians around children. This is problematical for someone who spent thirty years outside the social world of marriage and kids. This may sound like a brutal thing to say, but it is the truth.

Another variation of this could be writing examination multiple-choice questions (I have already done this once), probably this time in mathematics, or even grading free response answers.

(5) Homework ("les devoirs; la tarea"). We all know that a lot of these things are scams. Many of them require a sizable cash investments for materials and “classes” in various local hotels. One good example could be the cash flow business. This could be OK if checked out carefully enough.

(6)Keep on as an individual contributor in information technology. This is very difficult for older IT persons. You have to specialize in some very specific areas and keep up. There is a small market demand for mainframe professionals with some very specific skills, including extensive DB2 experience with certain utilities, Case tools, IMS/DC, and particularly Medicaid MMIS systems (which saw a sudden increase in 2002/2003 because of HIPAA), as well as data warehousing. Typically one needs a minimum number of years in specific skill sets. One paradoxical reason for this market is that programmers abandoned these skills and moved on, leaving a small niche for those "committed" professionals who remained. Many older professionals made an incomplete transition to client-server and were not able to get enough specialized experience (with various modern technologies like various OOP issues and Microsoft SQL Server and Visual Studio .NET) quickly enough to remain markeable in a very "pragmatic," numbers-driven gloabl job market. Many older individual contributor mainframe jobs went off-shore to places like India. An interesting situation could arise if companies decide to take mainframe operations and maintenance back, because then many of the people with available skills would be in their 50s and 60s. I don't see real evidence (in talking to recuiters) that this is likely, but it can't be ruled out. If it did happen, the length of time that former mainframe professionals had been out of the market would become an issue. But history can surprise us.

(7) Headhunt. With thirty-plus years in information technology, this would be a logical idea, to recruit employees, particularly for short-term W-2 contracts with mainframe emphasis. Recruiters do call and pressure for immediate resumes, but the openings never work out because they are not exact matches. I do think I could bring more sanity and professionalism to the information technology "headhunting" business. Doing more pre-testing and technical assessment (maybe with the help of companies like Brainbench) sounds like a good idea.

(8) Write and blog your way out. Elsewhere on links I give you can check out my books and story, and my involvement with several hot button issues such as the “don’t ask don’t tell” policy for the military. All of this material suggests adaptation for motion picture screenplays, and that is an opportunity that I am pursuing. But the other major opportunity would be to become a player in solving some of the subtle problems that have occurred as newbies like me try to take advantage of the “self-promotional” opportunities offered by the Internet. The possibility of future regulation to address such issues as spam, viruses, copyright infringement, trademark, and particularly unwanted publicity for others (associated with search engines) spurs the need for large corporate players to look for individuals like me to help them figure out how to reign in on these problems and limit future regulation. This ties back to education, because one large customer of a safer Internet would be school systems and universities. That is an area that I am actively pursuing.

The perception of aging and retirement is changing. Throughout the last three decades of the Twentieth Century, the media provided increasing reports of companies encouraging people in their fifties to take early retirement, as companies did not want to bear the risk of health care costs and as they perceived older works as too inflexible and not agile enough to maintain competitiveness. That tide is certainly changing. As people live longer it is no longer economically feasible to expect them to stop earning wages in their fifties or even sixties. Furthermore, globalization and huge paradigm shifts in business associated with technology (centering around the Internet, to an extent probably not anticipated even fifteen years ago) requires workers and professionals with a wide range of life experiences associated with older ways of relating and doing business. Considerable social and practical judgment, as well as hard technical skills so much the rage ten years ago, are required to deal with the subtle problems that companies face today.

My own resume (under revision) is at this link, as well as on Dice.

Bill Boushka retires

At age 58, I took a quasi-mandatory severance and retirement package from my corporate employer 92 days after the 9/11 catastrophe. While trying to develop my writing scope and websites, I have held a few interim jobs, including telefunding (distinct from telemarketing), debt collection, and substitute teaching.

I am starting this blog in order to share some practical thoughts with other persons who find themselves into “pseudo retirement” while they retool themselves.

You can see my other blog at and my main domain is
My blog on safer Internet practices is at