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Social Security: Making Sense of Alphabet Soup

How PIA, FRA, QC and other terms affect your benefit

Social Security Mailbox: Alphabet Soup

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Without expert explanation, Social Security lingo such as PIA, FRA and QC becomes acronym alphabet soup.

En español |  Q: I've been reading up on Social Security, but I keep running into abbreviations, phrases and terms that I don't understand. When I try to understand how my retirement benefit would be calculated, I'm confronted with "PIA," "FRA" and "QC." And what in the world are "bend points"? Please help.

A: Like so many areas of business and government, Social Security has its own special lingo. Understanding it will help you navigate through the agency's rules and regulations.

Here are some of the most important terms and acronyms to know for retirement:

FICA, Federal Insurance Contributions Act. You've probably seen those initials on your paycheck next to the amount of federal tax that's been deducted to pay for Social Security and Medicare. Benefits are ultimately based on your lifetime earnings, and the taxes you pay on them are collected under the legal authority of this law.

QC, Quarter of Coverage. To be eligible for Social Security benefits, you generally need 40 quarters (10 years) of gainful employment in your work record. In 2015 you will have to make at least $1,220 in a quarter for it to count toward the 40 that you need.

PIA, Primary Insurance Amount. When you file for retirement benefits, Social Security reviews your earnings record, with an emphasis on the highest-paid 35 years. After applying various formulas and adjustments, computers come up with your PIA, which will be the benchmark figure for determining your actual monthly payment.

AIME, Average Indexed Monthly Earnings. This is one of the numbers that affects the size of your PIA. Essentially, Social Security adjusts your earnings over your career so that you don't lose the value of long-ago lower pay when the dollar was worth much more.

Bend Points. Trying to understand these won't give you "the bends" that deep-sea divers sometimes get, though the process may seem as painful. The PIA is, in fact, the sum of percentages of three separate portions of your AIME. The portions are called bend points.

In 2015 you, as a retiree, will get 90 percent of the first $826 of your AIME, plus 32 percent of any AIME dollars between $826 and $4,980, plus 15 percent of AIME amounts above $4,980. The effect of these calculations is that a Social Security benefit "replaces" relatively more of the income of lower earners and relatively less of the income of the better off.

See also: Why is my Social Security check smaller than someone who earned a similar wage?

FRA, Full Retirement Age. Your full retirement age depends on the year of your birth. For instance, 66 is your FRA if you were born between 1943 and 1954. If you begin collecting your benefits at full retirement age, the amount you will receive will be equal to your PIA.

DRC, Delayed Retirement Credit. If you hold off on taking benefits at your full retirement age, you'll earn DRCs at the rate of 8 percent a year, or a 32 percent bonus for the four years between ages 66 and 70. When you finally take benefits, you'll get your PIA plus the markup resulting from the credits you've accumulated. Your PIA is also the benchmark for calculations if you opt for "early" benefits, which you can do starting at 62. Your payment will be marked down from your PIA by as much as 25 percent.

Sorry, but it's hard to discuss details like these without using the jargon.

Q: There are a lot of other confusing Social Security labels, including WEP and GPO. And what is the Red Book?

A: WEP (Windfall Elimination Provision) and GPO (Government Pension Offset). Both rules may affect you if you receive Social Security and a pension from a job in which there was no requirement that Social Security taxes be paid. These rules have often affected teachers, police officers and firefighters whose main jobs weren't covered by Social Security, yet over their careers held other jobs that were. Under WEP, your retirement or disability benefits from Social Security can be reduced.

The GPO is similar, but it applies to spouses, widows and widowers who are receiving pensions based on work by someone else for which no Social Security taxes were paid. Their Social Security benefits can be decreased by up to two-thirds.

The rules are complicated—no surprise—but more information is available at special WEP (PDF) and GPO (PDF) websites that Social Security maintains.

See also: Going online with Social Security

The Red Book, meanwhile, is a comprehensive guide to employment opportunities open to people with disabilities who are receiving benefits under the Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs. You can find the guide on this Web page.

Q: I've got one more. What is the Earnings Test?

A: Basically, the earnings test is a gauge that Social Security applies to the income of people who take their retirement benefits early but continue to work. In 2015 they will face an earnings limit of $15,720 a year. For every $2 of earnings above that limit, one dollar in retirement benefits will be held back from their monthly payments.

In the year in which the worker reaches full retirement age, a different limit applies. At that point, $1 in benefits will be cut for every $3 the worker earns above a certain limit, which will be $41,880 in 2015.a year. However, Social Security counts earnings only in the months before the worker reaches full retirement age. After that, the earning test goes away and people can earn as much as they want. The good news is that the money they didn't get will eventually be restored in the form of a higher monthly benefit.

Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question? Check out the AARP Social Security Question and Answer Tool.

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