The answer to a common question about Social Security and Medicare.
Over the years, I have frequently received a question from from employees who have worked past their full retirement age for Social Security benefits and from those who are over 65 and eligible for Medicare. They ask why Social Security (FICA) and Medicare taxes continue to be deducted from wages when a worker is eligible to receive Social Security and Medicare benefits.
Here’s a variation on the question that I recently got in an email from a reader:
I am a current civilian federal employee who retired from active duty military service after 21 years. I was recently informed that I must sign up for Medicare parts A (hospital insurance) and B (outpatient/doctors coverage) when I reach age 65 in order to keep my TRICARE medical insurance. … Additionally, I contacted the Social Security Administration and learned that even though I will be enrolled in Medicare, I will continue to pay the Medicare hospital insurance tax (1.45%), since I am still employed as a federal civilian employee. Based on my salary of almost $135,000, I will pay $1,950 in Medicare tax for 2020 that will be matched by my employer, the Department of Defense. That is a total of $3,900 combined contributions per year. Why should I be required to pay the Medicare tax when I will be enrolled and receiving Medicare benefits after I reach age 65 in March 2020?
Here’s my response: As long as you’re employed, you’re required to pay the FICA and Medicare taxes. These are payroll taxes that don't really have anything to do with whether you are enrolled in Medicare or collecting Social Security retirement. Although these taxes may add up to a substantial withholding from your earnings, they ensure that the Medicare and Social Security programs have enough funding.
There is, however, a possible solution to the dilemma regarding Medicare and TRICARE for Life: You can delay Medicare Part B and TRICARE for Life enrollment and use the Federal Employees Health Benefits Program for your medical insurance while you’re currently working as a civilian federal employee. When you retire from your federal career, you can enroll in Part B and re-enroll in TRICARE.
You also can delay receiving Social Security retirement benefits and earn delayed retirement credits up to age 70.
On the bright side, although you will continue to pay Social Security taxes if you continue to work, it is good to know that you can receive Social Security retirement benefits even if you’re not retired. There is no longer an earnings test applied once you have reached your full retirement age for Social Security. And you also can delay enrollment in Medicare Part B until after you retire and not have to pay a late enrollment penalty.
Happy Birthday, CSRS
In other news, did you know that 2020 marks the 100th anniversary of the Civil Service Retirement System? According to the Society of Actuaries, CSRS was created in 1920 to give the government an acceptable way to end the employment of workers too old or too disabled to provide satisfactory service. Congress passed the CSRS Act, stipulating that federal employees who had served for 15 years and had reached their 70th birthday would be required to retire.
Those with 30 years of service would receive 60 percent of their average salary over their last 10 years of employment (but no more than $720 per year and no less than $360). CSRS required substantial employee contributions (initially 2.5 percent of basic pay), which were more than enough to pay benefits in the plan's initial years.
From 1942 to 1969, CSRS benefits steadily increased. After 1969, public attitudes began to change, and cost-of-living adjustments that sometimes had exceeded the increase in Consumer Price Index were trimmed.
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