Reg Jones Expert's View

Social Security COLAs, like federal retirement COLAs, are based on annual changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. However, unlike federal retirement COLAs, where there are differences in eligibility policies and levels of payments between FERS and CSRS, all Social Security beneficiaries get the same percentage increase, and they get it at the same time. In 2012 that increase is 3.6 percent. If you’re eligible for that increase, you should have already received it in your January 2012 Social Security payment.

Also, under Social Security a full COLA is paid to all beneficiaries; in contrast, federal retirement COLAs are prorated for those who have been on the annuity rolls less than a year at the time of the COLA.

Social Security also has another feature not part of the federal retirement program: a “full” or “normal” retirement age. That varies depending on the year in which you were born, and ranges between 65 and 67. Although you can sign up for a Social Security benefit as early as 62, the earlier you begin receiving it the smaller that benefit will be.

For example, if your full retirement age was 65 (meaning you were born in 1935 or earlier) and you signed up for a Social Security benefit at age 62, the reduction was 20 percent. Currently, the full retirement age is 66 and drawing benefits at age 62 will cause a 25 percent reduction. For those born in 1955 and later, the full retirement age will begin phasing up again, to age 67 for those born in 1960 and later; for them, the reduction will be 30 percent.

Whether it’s better to apply early and receive less or wait and apply later and get more depends, in part, on how long you expect to live. If you are a FERS retiree, it also depends on whether you can stand a drop in income when your special retirement supplement ends at age 62. The SRS approximates the amount of Social Security benefit you earned while a FERS employee.

If you are a CSRS retiree, you have a different consideration to keep in mind. If you have fewer than 30 years of substantial earnings under Social Security, you will be subject to the windfall elimination provision. The WEP will reduce – but not eliminate – that Social Security benefit.

If you are under full retirement age and continue working when you apply for a Social Security benefit, your benefit may be reduced or eliminated. That’s because there’s a Social Security earnings limit. In 2012 the limit is $14,640 ($14,160 in 2011). If you exceed that limit, your Social Security benefit will be reduced by $1 for every $2 you earn from wages or self-employment. That reduction continues until the year in which you reach your full retirement age. In 2012, the earnings limit is $38,800 ($37,680 in 2011). The limit no longer applies beginning with the month in which you reach your full retirement age.

Whether or not you are affected by the Social Security earnings limit while working, the contributions you make to the Social Security system through payroll deduction or self-employment will be credited to you and result in an increase in tour Social Security benefit.

One final point, if you haven’t retired and are still working: The Social Security maximum taxable wage base for 2012 is $110,100, an increase of $3,300 from 2011. If you earn more than that, your take-home pay will increase. That’s because Social Security taxes aren’t deducted after you reach that maximum point. However, Medicare taxes will still be deducted, no matter how much you earn.

The Social Security tax normally is 6.2 percent of salary up to the cutoff. It was temporarily reduced to 4.2 percent for 2011, and that lower rate was extended through February 2012. It will be up to Congress and the White House to decide if that lower rate will continue through the calendar year and if so, how to pay for the cost in lost revenue to the Social Security fund.