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How Working Affects Social Security and Medicare Benefits

By Bruce D. Schobel
Vice President and Actuary, New York Life Insurance Co.

Most Americans know that by working in employment covered by Social Security and Medicare they earn "coverage credits" that guarantee the right to receive benefits from Social Security and Medicare when they reach certain ages. Social Security retired-worker benefits can begin as early as age 62, while Medicare benefits ordinarily begin at age 65. On the other hand, few people understand the complicated rules that apply to people who continue to work or return to work after becoming Social Security or Medicare beneficiaries.

For 60 years, Social Security has applied an "earnings test" to determine whether a worker can receive benefits, also. If a beneficiary earns too much, benefits are reduced, eventually to zero.

How the earnings test works: The retirement earnings test applies only to people below normal retirement age (NRA). Social Security withholds benefits if your earnings exceed a certain level, called a retirement earnings test exempt amount, and if you are under your NRA (Normal Retirement Age). One of two different exempt amounts apply, depending on the year you attain your NRA. These exempt amounts generally increase annually with increases in the national average wage index. For people attaining NRA after 2011, the annual exempt amount in 2011 is $14,160. For people attaining NRA in 2011, the annual exempt amount is $37,680. This higher exempt amount applies only to earnings made in months prior to the month of NRA attainment. $1 in benefits are withheld for every $2 of earnings in excess of the lower exempt amount.  $1 in benefits is withheld for every $3 of earnings in excess of the higher exempt amount. Earnings in or after the month you reach NRA do not count toward the retirement test.1

Social Security benefits are reduced for workers who choose to retire before they reach normal retirement age. The percentage reduction depends on how many months before NRA the benefits begin. For workers with NRA of 65, the reduction is 20 percent if benefits start at exact age 62. For workers with NRA of 66, the reduction is 25 percent if benefits start at 62. For workers with NRA of 67, the reduction is 30 percent if benefits start at exact age 62. These reductions are normally permanent, but not if benefits are lost because of the retirement earnings test. In that case, the benefit gets recomputed at the worker's NRA, restoring any reduction for months in which benefits were lost because of earnings.

Benefits are also recomputed annually to reflect the effects of additional earnings. For workers born after 1928, retired-worker benefits are based on the best 35 years of lifetime earnings, after adjusting for wage inflation. If a new year of earnings is higher than an old year that was used to compute the benefit, then the new year is substituted for the old year, as long as it increases the monthly benefit by at least $1. Finally, workers who delay filing for Social Security benefits until after NRA get delayed-retirement increases ranging up to 8 percent per year of delay, depending on year of birth (and not beyond age 70), in addition to annual recomputations based on their earnings.

Medicare benefits are not lost because of working, but work does affect whether Medicare pays before or after any employer-provided health insurance. Generally, if a Medicare beneficiary is covered by employer-provided health insurance as an active worker or spouse of an active worker, then that plan pays first and Medicare pays second. If a Medicare beneficiary is covered by employer-provided health insurance as a retiree or spouse of a retiree and is not actively working for that employer, then Medicare pays first and the employer-provided plan pays second.

Also, workers who enroll in Medicare Part B (Supplementary Medical Insurance) more than 3 months after their 65th birthday ordinarily must pay higher monthly premiums than people who enrolled at age 65. This late-enrollment penalty is waived, however, if late enrollment is due to being covered by employer-provided health insurance as an active worker.

1Exempt Amount Under the Earnings Test:http://www.ssa.gov/OACT/COLA/rtea.html

Last updated date 11/02/2010

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